- The Washington Times - Thursday, October 18, 2001

The terrorist attacks have reduced the economy's capacity to grow rapidly with low inflation by increasing the cost of security, travel, insurance and other necessities, Federal Reserve Chairman Alan Greenspan said yesterday.
Comparing the nation's "war on terrorism" to the Cold War of the last century, Mr. Greenspan said consumers and businesses are making major adjustments to the increased risk of attacks and are fortifying themselves in ways that, while necessary, are raising costs and reducing the efficiency and productivity of the economy.
He said the massive adjustment now under way is a one-time event that is not likely to be as costly as the Cold War military buildup, however.
"We in the United States have assumed ourselves to be fairly well-insulated from terrorism," he said in testimony before the Joint Economic Committee. "The shock of the tragedies at the World Trade Center and the Pentagon has reshaped those assessments of risk and required an abrupt realignment of prices in many markets to reflect the expected costs of operating in what we now recognize as a more hostile world."
Mr. Greenspan's remarks came as White House economic adviser Lawrence Lindsey said the economy probably is a recession lasting through the end of the year. The Fed chairman's downbeat assessment of damage to the economy over the long run dampened stock prices, sending the Dow Jones Industrial Average down by 151 points.
The rise in insurance costs for airlines and other businesses has been particularly acute since the Sept. 11 attacks, said Mr. Greenspan, who endorsed creating a new role for the government as insurer of last resort against terrorist attacks to help absorb what could otherwise be prohibitive costs for many businesses.
But the costs are also weighing on the economy in less obvious ways, he said, such as increasing the need for more backup facilities, delaying the delivery of critical supply shipments and forcing businesses to increase their stockpiles of goods to take into the account the risk of major supply disruptions caused by terrorist attacks in the future.
The fear of supply disruptions like those experienced by the automakers at Canadian border crossings right after the attacks has damaged the "just in time" inventory system that was widely credited with increasing the productivity rates of the American economy in the 1990s, enabling it to grow at rates above 4 percent for the five years from 1995 to 1999.
"It does reverse part of what we have succeeded in doing," Mr. Greenspan said, although he added that the reversal is "partial but by no means full." Improvements in productivity generated by the nation's entrepreneurial technology companies will no doubt continue in future years, though they probably will not enable the economy to achieve the growth levels seen in the late 1990s, he said.
Mr. Greenspan did not say the economy has fallen into recession, as Mr. Lindsey did in remarks before a Schwab Capital Markets symposium here.
He said it is too soon to tell how quickly the economy will recover from the initial blow dealt by the attacks.
"As the initial shock began to wear off, economic activity recovered somewhat from the depressed levels that immediately followed the attacks, though the recovery has been uneven," he said. Auto sales rebounded strongly thanks to zero-interest rate loans being offered by car dealers, but other retailers "have only partially retraced steep drops that occurred in mid-September."
A housing report from the Commerce Department reflected the mixed news yesterday, with housing construction starts rising by 1.7 percent last month but permits for new home-building falling by 3 percent.
Air freight shipments have returned to normal, Mr. Greenspan said, but airlines, hotels and restaurants in tourist areas report that business is still off considerably from pre-attack levels.
"Nobody has the capacity to fathom fully how the effects of the tragedy of Sept. 11 will play out in the economy," he said. But Mr. Greenspan appeared to concede that recession is likely when he later said neither the Fed nor Congress has the power to prevent the excesses of human nature that cause booms and busts in the economy.
Mr. Greenspan said there is no guarantee that any of the $100 billion of tax cuts and spending initiatives Congress is considering to stimulate the economy will succeed. He noted that the $40 billion of tax rebates already sent out this summer have largely gone unspent. Congress is considering a second round of rebates, this time aimed at lower-income consumers.
The capital-gains-tax reductions championed by House Republicans are unlikely to spur growth in the short run, though they may improve the economy's performance in the long run, he said. And increased spending on infrastructure advocated by Democrats is unlikely to spur construction activity quickly enough to lift the economy out of the current slump, he said.
Mr. Greenspan defended the business-investment-tax breaks pushed by Republicans, however, contending that they are among the most proven ways to stimulate business spending on technology. Companies will not use them right now to expand production because they already have too much excess capacity, he said, but they will use them to buy cost-saving equipment.

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