Economists see slowdown because of attacks

Five Princeton economists agreed Thursday that the terrorist attacks of Sept. 11 are likely to depress the weak American economy, although the length and severity of the downturn are unclear because of uncertainty about consumer response and government action.

In an panel discussion before about 400 people in McCosh 50, economists Alan Blinder, Paul Krugman, Jose Scheinkman, Alan Krueger and Peter Kenen generally agreed that the attacks would adversely affect consumer spending and the airline industry. The effect on oil prices is ambiguous, they said.

Blinder, a former Federal Reserve governor, said the attacks would harm the economy by slowing consumer spending, which comprises 73 percent of the U.S. economy. "The Atlas that was holding up this economic world was the American consumer," he said. Americans are likely to spend less because they are uncertain about the future, said Blinder, who served on the President's Council of Economic Advisors from 1994 to 1996.

For example, a 3 percent drop in consumer spending in the current quarter would result in an annualized drop of 8 percent in Gross Domestic Product, the measure of all goods and services produced in the country, said Blinder, the panel moderator. "That doesn't seem like an untoward or wild or crazy prediction," he said, noting that a dip of similar magnitude occurred in 1980 when then-President Jimmy Carter asked Americans to stop spending.

The airlines will be especially hard hit, Krueger said, as Americans will perceive a greater risk in flying. But fear of flying is likely to have other effects as well, the economists noted.

Krugman suggested that consumer spending will fall because Americans will spend less on travel in coming months. Blinder theorized that increased security measures and scrutiny at airports may harm productivity by disrupting supply chains and delaying shipments.

Oil prices, which have a direct impact on economic health, also are likely to be affected. Scheinkman said prices would rise if U.S. military action disrupted supplies from the Middle East, as during the Gulf War in 1991.

Kenen suggested that reduced travel would alleviate possible price spikes by lowering the demand for oil. But he noted, "We just don't know where oil prices will go, but they're unlikely to stay where they are."

Despite the challenges, the economists suggested several policy actions that would aid in recovery. The Federal Reserve already has lowered the rate it charges banks on day-to-day loans, a move Blinder applauded and said he expects to see again. The federal government also has approved $40 billion in new public spending, although Krugman said he expects the bill to top $100 billion in the end. Both actions buoy the economy by injecting it with money, but it takes months for such moves to increase economic activity.

Among other ideas, Blinder and Krueger suggested that the 10-year, $1.3-trillion tax cut be reduced, but that it be returned to taxpayers immediately and be targeted to low-income families to boost spending.

Scheinkman recommended that government take responsibility for airport security, which would reassure consumers and encourage them to fly. Krueger was concerned about whether the unemployment insurance funds, especially in New York, have adequate cash to provide a sufficient stabilizing effect.

Blinder was optimistic that although the coming downturn might be both sharp and global, the American economy would rebound quickly. There is "better than a 50-50 bet that, after a contraction of some magnitude, we come back quite strongly," he said.

Krugman agreed, saying he was "cautiously optimistic," not for the next quarter, but for the longer term.