> http://www.latimes.com/news/printedition/asection/la-000076318sep23.story > Sept. 23 > THE FINANCIAL FALLOUT > 'New Economy' Is a Thing of the Past > By PETER G. GOSSELIN and JUBE SHIVER JR., TIMES STAFF > WRITERS > > WASHINGTON -- For a little over a decade > following the fall of the Berlin Wall, America lived > without serious threat. The result was a U.S. > economy that could devote itself single-mindedly to > churning out better video games, bigger houses, > wild start-ups and improved lives. > > But a growing number of economists have > concluded that much about those happy times will > prove to be casualties of the mid-September airliner > attacks on New York and the Pentagon. > > The "new economy," already tattered before the > assaults, is dying. In its place will emerge a shadow > war economy. Many of these analysts see government, whose > role waned in > the last decade, returning with a vengeance as warrior, > regulator, economic > manager, big spender. The private sector, whose > entrepreneurial enthusiasms > defined the passing age, will become more corporate and > controlled. And the > new economy--the deregulated, wired, just-in-time, > globalized new economy > of the '90s--will be gone. > > "We were blessed for 10 years; we lived in a world without > bad guys," said > Neal Soss, a former senior Federal Reserve official who is > chief economist with > Credit Suisse First Boston Corp. in New York. "Now the bad > guys have found > us, we're going to have to spend an awful lot of money to > guard against them. > > "It's necessary," Soss said. "But it's dead weight on the > economy." > > Such views are substantially different--and darker--than > those heard in the first > days following the Sept. 11 attacks. Then, most analysts > compared the terrorist > assaults to natural disasters such as the Northridge > earthquake: terrible in their > human toll, but of only minimal cost to the overall > economy. > > Most assessments were cast in the up-or-down language that > represents > economic business-as-usual: Would the stock market tank or > bounce? Would > consumers buy more or less? Would the economy shrink or > expand? > > The pressing question confronting government was how much > of its fiscal and > monetary power it would employ to ensure growth continued, > and especially > whether it might be willing to go back to deficit spending > to prop up the nation's > faltering expansion. > > But all this was before the full extent of the calamity > became clear, and before > President Bush called the nation to arms. The president's > decisive action will do > more than simply push the economy up or down; it will send > it off in a > drastically different direction than the bubbling, > borderless, consumerist one in > which it once had been headed. > > "It's going to cause some pretty serious structural > changes," said William C. > Dudley, chief U.S. economist with Goldman Sachs & Co. in > New York. > > The full sweep of these changes are unknown, but such > powerful players as the > president and Federal Reserve Chairman Alan Greenspan > recently have > insisted they need not be large or unsettling. > > But many independent analysts discount these official > assessments as little more > than economic cheerleading and predict that the changes > will be both > deep-running and deeply felt by average Americans. > > "Greenspan is totally wrong that this will have no effect > on long-term > prospects," said Roger M. Kubarych, a former Fed official > who is now senior > economic advisor to HVB Americas Inc., the U.S. arm of > Germany's > HypoVereinsbank. > > "The costs of moving from a peacetime economy to war > footing alone will kill > productivity," Kubarych predicted of the key measure of an > economy's ability > to provide rising living standards. > > Less than two weeks after the attacks, signs of big > economic change abound. > > Toyota Motor Corp. was forced to shut its huge Georgetown, > Ky., car factory > and two other U.S. facilities after supplies that are > usually shipped overnight > from Canada became snarled at the border because of a jump > in security > checks. Major U.S. car makers General Motors Corp. and Ford > Motor Co. > temporarily shut plants in the U.S., Canada and Mexico for > similar reasons. > > Cell phone giants such as Cingular Wireless warned they may > not be able to > gain control of airwaves now held by the military and > considered crucial for the > next generation of wireless devices, and may not be able to > raise the money > needed to roll out the new technology. > > Major air carriers warned they could be forced to seek > bankruptcy protection > because of the shutdown of air travel after the attacks, a > sharp drop in ridership > and possible liability lawsuits. The president is backing a > huge bailout of the > industry. > > Many analysts say developments such as these could send an > already > depressed stock market still lower and nudge the economy > into recession. > > The Dow Jones industrial average finished its worst week in > almost 70 years > Friday as investors slashed it by 1,369.70 points, or > 14.3%, in five days of > trading. That was the index's worst weekly decline since > 1933. > > Analysts say the economy probably already was shrinking > last spring, > something that will become clear when the government issues > its revised gross > domestic product figures for the second quarter Friday. > > With the unemployment rate up in August and industrial > production and > consumer confidence down, many say it also was shrinking > this quarter even in > advance of the attacks. Many predict it will continue > shrinking through year end > and at least into the early part of next year. > > What happens next--and why--are matters of deep dispute > among economists, > with some predicting the country will roar back by spring > because of Fed > interest rate cuts, expected tax cuts and new federal > spending, while others see > no clear comeback in sight. Whoever turns out to be > correct, the economy that > finally does emerge from recession could well be very > different from the one > that went in. > > Deregulation > > A couple of years ago, when it looked as if the economy > would grow > indefinitely, many economists sought to explain why by > pointing to a > two-decade-old effort by the federal government to get out > of the way of the > private sector. > > First in airlines, trucking, rail and finance, and later in > telecommunications and > energy, Washington and the states sought to pare their > regulations and leave > private participants to choose the rules under which they > would operate. > > The pendulum already had begun to swing back before Sept. > 11 because of > California's disastrous experience with electricity > deregulation. But some > economists believe that what had been a small shift could > turn into a rout. "The > idea that private industries can regulate themselves when > it comes to public > goods like airport security is going to come in for > considerable scrutiny," > Goldman Sachs' Dudley said. "The whole movement toward > deregulation is in > for big change." > > In the case of the airlines, much of the pressure for > greater government > involvement is coming from the industry itself. Major > carriers want Washington > to assume responsibility for security, and to permit them > to reduce both flights > and competition to cope with huge financial losses. > > Many analysts expect at least some re-regulation of > airlines, trucking, financial > services, telecommunications and energy to occur. And that > may prove to be > the least of the expansion in Washington's powers. > > Government spending, which shrank substantially in the > 1990s on everything > besides benefit transfers such as Social Security and > Medicare, probably will > expand in the coming decade. Certainly, defense spending > will, after having > contracted to less than 3% of gross domestic output in 2000 > from 5.2% in > 1990. > > With it probably will come a shift in the balance of power > between the public > and private sectors, this time in favor of the public. > > Wired > > Of all the economic changes credited for the spectacular > growth of the 1990s, > none has gained greater praise--or produced more hype--than > the > telecommunications and information technology revolutions. > > Economists have treated the combination of the Internet, > cell phones and > fiber-optic networks as the "x" factor that prodded the > country into operating > more productively after decades of stubbornly refusing to > do so. And they have > attributed most of the technological innovation to > entrepreneurs. > > No one is suggesting the end of innovation with the coming > of a shadow war > economy. The siege on terror envisioned by the president > could produce an > entirely new generation of high technology, from > nano-cameras to > communications-tracing computer software. > > But the principal technological actors and their primary > aims could get turned > on their heads. The upshot would be an economy that looks a > lot more like the > Cold War '50s than the new economy '90s. > > One result, according to Philip L. Verveer, the former > Justice Department > lawyer who spearheaded the government's breakup of the AT&T > telephone > monopoly, will be a reemergence of the "bigger-is-better > argument." > > Verveer said that both AT&T and the Pentagon argued > Washington could > better protect national security through one large phone > company than scores > of smaller, competing ones. > > Just-in-Time > > The just-in-time distribution practices adopted by U.S. > business over the last > two decades seem to be about little more than how big a > backlog of parts and > products a company must keep. > > But they have turned out to be much more important than > that. They have > goaded companies to run more efficiently and forced the > economy as a whole > to operate in greater sync. > > "The whole concept of just-in-time delivery is going to > have to be reevaluated," > said transportation specialist Satish Jindel, president of > SJ Consulting Group > Inc. in Pittsburgh. From auto makers to supermarkets, no > one can be sure of > on-time deliveries after the attacks. "There is just > unpredictability," he said. > > One result is likely to be that companies build more > warehouses and stockpile > more goods on the chance of new disruptions. Another is > that they become > more reluctant to rely on foreign, and often > less-expensive, suppliers for fear of > border closings. > > "Just-in-time," said Soss, the Credit Suisse First Boston > economist, is going to > become "just-in-case" as companies grow more cautious in > the wake of the > attacks. > > Globalization > > Nothing so captured American confidence in the wake of > Communism's > collapse as the expansion of global trade and the flood of > U.S. investment into > developing nations in the '90s. And nothing may dry up so > quickly in the wake > of the attacks. > > A report out last week predicted that the flow of private > funds from the U.S. > and other developed nations to Latin America, Asia, Eastern > Europe, the > Middle East and Africa will fall by more than a third this > year. And in the 10 > days after the attacks, the market value of stocks in > non-U.S. markets plunged > about $1.5 trillion. > > The turmoil is still largely invisible to Americans, whose > attention has been > consumed by the attacks and their tragic aftermath. But it > is unlikely to remain > so as the U.S. seeks international allies and prepares for > military action. > > "The administration's strategy is having a tremendous > effect on the rest of the > world," Harvard economist Jeffrey D. Sachs said. "It's > causing a calamitous > loss of confidence in the global economic framework." > > But such reverberations are what's to be expected in a > globalized economy > whose creation was, at least until recently, considered one > of the crowning > achievements of the last decade's growth. > > ================================================
