The Timeshare Beat: Potomac Crossings; Terrorist Economics

Terrorist Economics

Intelligence experts are divided on the question of whether or not the bin Laden organization understood in advance the effect of their attack on the global economy. Whether they did or not, they sure do now. The chief economist of the Organization of Economic Cooperation and Development (OECD), a group of the 30 richest nations, predicts that the 9/11 attack will slide the United States into recession and that, in turn, will lead the world into an economic slump that will last until next spring. The World Bank issued a report on Monday that such an economic slump would cause the death of 40,000 third world children and throw 10 million further into poverty.

Within the timeshare industry, locations that draw automobile business seem steady and those that depend on air traffic for prospects are at a loss. Experts predict that the travel industry will be at the epicenter of unemployment for the next 2-3 quarters. State governments now have National Guard troops at 422 airports with an additional 5,000 troops being trained for deployment next week.

The emergency measures in place include air marshals on random domestic flights, strengthened cockpit doors, transponders that can’t be switched off, improved equipment and armed patrols. Limited curbside check in has resumed. Passengers have been reported as agreeable to whatever has been asked and industry officials have estimated that 80 percent of scheduled flights have resumed with occupancy rates in the mid-40’s (compared to a normal 70%). The current thinking is that with these measures in place at major airports, terrorists may target general aviation, air charter and small regional airlines instead. On Wednesday the Bush administration announced that they would not object to legislation federalizing the security check in labor force.

The Travel Industry Association of America announced that it expected domestic air travel to drop significantly in the fourth quarter and continue down through the first half of next year. A more precise prediction from the Air Transport Association called for a 39 % decline in the fourth quarter followed by 23 % and 13 % decline in the first two quarters of next year. A National Business Travel Association survey found that 58% of corporations planned to reduce air travel. Partly the reductions would come from safety fears and partly from cost-cutting measures planned anyway. Economic revival is front and center in Washington.

When you ask Congress to “do something!” they always respond by spending lots of money quickly. The fear of delay overrides the fear of doing too much. They always figure that they can fix it later. Curing a recession takes three things: time, jobs and income.

Time. The most likely consensus move will be to make the delayed income tax reductions effective immediately. The phased in tax reduction schedule passed last year is way too feeble to do any good. Its psychological effect is debilitating because it tells the tax payer that Congress is more concerned with artificiality than with the real economy. The liberal redistribution agenda will again substitute for economic analysis and an effort will be made to add a tax rebate to people who don’t pay income taxes. The dilemma is that Keynesian theories are better suited to provide short-run stimulus and supply-side theories are better suited to supply long-term growth. The third view is that enough stimulus is already in the pipeline and we should all catch our breath. Nothing much in vigorous action will be apparent until the world sees exactly what the military response will be and how it is going and whether it provokes additional terrorist attacks.

Jobs. Nothing could be clearer than the strategies of the right and the left on employment. The left wants to devote funds to extending unemployment benefits and raising the minimum wage. The right wants to do things that create new jobs, now. Their focus is on reducing the cost of capital through lower taxes, higher depreciation schedules and reducing capital gains. The Democrat stalwart Clinton Treasury Secretary Robert Rubin meet with FED Chairman Alan Greenspan to establish the perimeters of the stimulus package. The problem is that Rubin has never understood that it is growth that creates surpluses, not surpluses that create growth. Business needs a capital infusion in order to create jobs. Small business creates most of the jobs. Saddling them with higher labor costs will not create more jobs nor more small businesses.

Income. Spendable discretionary income in the pockets of consumers is the cure. While there has been much media chatter about a “return to big government,” the truth is far different. The World War 3.0 tactics and strategy call for special ops strikes on selected targets, providing air cover for indigenous troops and coordinating the analysis of the massive amount of the intelligence data we already generate. None of this requires a high profile and expensive military buildup. Columnist Howard Gleekman, writing in BusinessWeek, points out that in World War II we spent 38 % of the GDP on the military effort. In Korea, we spent about 14%. President Reagan’s efforts to defeat the Soviet Union was a little over 6 % of GDP. Boosting the Pentagon’s budget by one third will only take spending to 4% of GDP. The surplus is disappearing not because of new spending but because revenues are falling by $36 billion over fiscal 2000. Federal infrastructure spending instead of tax reductions again raises the old political saw – government knows best.

Recession. This time, it is caused by a lack of business investment and huge inventories. There is none of the usual pent up demand for houses and automobiles. The world economy was in trouble long before September. What the attack has done is make economic forecasting even closer to impossible. The latest unemployment claims are at a nine-year high with more to come. The danger is that neither fiscal nor monetary actions may have any effect on restoring business and consumer confidence. Much like Vietnam, if the people sense that the war is being waged without a commitment to victory, all economic bets are off.

Bush has two wars to wage – against terrorism and a declining global economy. He can’t win one without the other. So far, the veteran Washington policymakers look timid and out-of-touch with reality. No new thoughts arise. Partisans are dusting off old plans that had previously been rejected and using the crisis to see if they can slip them through this time. The President needs to rally the nation with a war plan to end recession and re-ignite economic growth. Leaving it to Congress doesn’t seem quite enough.