- The Washington Times - Tuesday, July 9, 2002

The stock market moves on fear and greed, and fear now has the upper hand.But fear of what? The most fashionable explanation is the investors fear another accounting scandal or, more plausibly, an anti-business regulatory backlash from such scandals. But the stock market setback has affected too many industries and countries to be merely a reaction to covering-up losses in a handful of overly indebted telecom companies.

Another explanation is that investors have lost confidence in the government in general and particularly lost confidence in "homeland security" the only kind that matters. In mid-May, Dow stocks were still up for the year despite copious news about accounting tricks. Then we began hearing rumors that terrorists planned something awful for Independence Day. On June 30, Secretary of State of State Colin Powell gave investors a "sell" signal by saying, "There's been a variety of reports coming in, intelligence reports, that suggest we ought to be especially vigilant as we go into the Fourth of July season." Fear of unpredictable disasters always make people eager to hold cash (i.e., by liquidating stocks) and reluctant to make long-term investments.

The world was a more comfortable place while the United States was focused on finding al Qaeda terrorists throughout the world and "bringing them to justice." But then the government began to appear distracted by symbolic gestures.

One useless gesture was using colored lights to describe how alert (scared) we are supposed to be. That could never work. The color will always remain some shade of yellow, because raising it to red would cause panic and lowering it to green would be an invitation for terrorists to attack.

Verbal alerts are no better. We were warned of uncorroborated threats to blow up a nuclear power plant, as if we could do much about that. And we were even asked to keep an eye out for anyone carry-ing a shoulder-mounted rocket launcher, which does not require any extra alertness.

A particularly useless gesture involved nationalizing the screening of airport baggage. That was doomed to disappoint. The Transportation Security Administration reported that U.S government-approved screeners missed 24 percent of fake weapons in recent tests, 41 percent in Los Angeles.

On the fateful September 11, I was in my deserted Washington office writing about the urgency of fixing security on airplanes, not airports. Checking passengers and their bags should be only the first line of defense against hijacking, not the last.

Could September 11 have been prevented? Maybe so, but only by making commercial airplanes hijack-proof. That means secure cockpit doors, cameras that tell the pilot and ground crew what is going on, stun guns and mace for pilots, voice and photo identification for anyone flying a plane, and so on. Even now, very little has been done. Quit wasting our time asking silly questions about who handles our bags. Protect planes and pilots.

Al Qaeda is said to be active in 60 countries, but our government does not claim Iraq is one of those countries. Dictators like Saddam Hussein rarely tolerate rival dictator-wannabes like Osama bin Laden. Why allocate scarce intelligence and defense resources to the place where al Qaeda is least likely to be found? The official answer is that we are more concerned about undefined "weapons of mass destruction" than about mere terrorists, but that answer is not comforting.

Economists think differently than most people. We think in terms of "opportunity costs" the more money and manpower devoted to one task, the less left for another. If the CIA and Army are mainly used to disarm dictators, for example, then there must be fewer spies and soldiers left to fight terrorism.

Economists also think in incremental terms, as a little more of this or that, rather than the dramatic absolutes favored by politicians. The government recently spent half a billion to provide smallpox vaccine for every man, woman and child. The chance we would ever vaccinate everyone for smallpox is literally zero, because the vaccine is dangerous. Instead, the government wants to stockpile smallpox vaccine and never let anyone have it without its permission, just as they hoard the oil stockpile. Worrying about terrorists infecting you with smallpox strikes me as paranoid and technologically dubious, but you should be able to buy the vaccine if you want. That would surely be smarter than wasting tax dollars on an untouchable stockpile.

If we get past July 4 with little or no terrorist damage (which you will know by the time you read this) and if stocks then recover, that would be powerful evidence that homeland security has been the market's biggest concern. But fear of terrorist attacks will not vanish after Independence Day in any event. The only solution is to locate the terrorists that threaten this country, wherever they may be, and don't worry too much about Marquis of Queensbury rules.

Alan Reynolds is a senior fellow with the Cato Institute.

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