America slows down. Even before 11 September the US economy was slowing, and the terrorist attacks have kicked it further down. But the attacks are also leading to structural changes in the economy, which are slowing it physically now and may slow it further in the months to come.
A few days spent in New York last week were inspiring but also disturbing. I found the dogged efforts of New Yorkers to get their city back to some semblance of normality hugely impressive. But you can also see ways in which the combination of the shock and the changes in work practices are a great burden.
But first an update on the economic impact of the attack, for it is beginning to be possible to get this into some sort of perspective. Last week the IMF redid its forecasts for the world economy, suggesting that the US would escape recession. Few people think this is realistic. The outcome illustrated in the left-hand graph above, showing a dip into recession similar in magnitude and duration to the early 1990s, seems much more likely. This new forecast contrasts with an earlier one showing only a slowdown. It comes from ABN Amro, and I have chosen it because the bank's continental European base probably gives it the advantage of perspective over US houses.
The reasons for the revisions are widely appreciated. Half of the households in the US own shares in some form or other, and their wealth has collapsed as a result of the fall in share prices that started in the summer of last year. The right-hand graph shows the ratio of assets to income, which was remarkably stable for the 40 years between 1955 and 1995. The late 1990s were an odd time, for they saw an unpredicted surge in family wealth. But the higher they go, the harder they fall, or so it would seem. Assuming that share prices stay more or less flat to the end of the year and that house prices continue to creep upwards, the bank projects a fall in wealth to a little above the long-term average.
You could read this two different ways. One is to say that American households have seen the sharpest fall in their wealth for two generations. The other is to point out that they are still pretty rich: they are still richer, relative to income, than they were six years ago. Focus on the first and you see slump; focus on the second and you see recovery. And (back to the left-hand graph) it is quite possible that while the downturn will be deeper than expected, the recovery will be sharper.
One reason for this is the cuts in interest rates that have taken place. Another will be the rise in public spending. Initially the spending will be on anti-terrorist measures and on support for industries that have been hard hit, in particular the airlines. The additional demands on government in the moment of crisis may then lead to bigger government more generally. The US government is already heading back into deficit – that is not yet forecast but it seems inevitable – and Americans would seem unlikely to want to vote for the higher taxation to pay for higher spending in the years to come. Quite the reverse: the tax-cutting measures already in the pipeline will undermine the revenue base even further.
Bigger government, the return to fiscal deficits, more reliance by business on government support, more regulation: if all this happens, then it is quite plausible that the US economy will lose some of its vitality in the years ahead.
There are obvious practical changes now happening that will be a drag on growth. Going through airports takes longer if the searches have to be more rigorous. Sending goods around the country will take longer, as air freight slows. Getting in and out of offices and factories takes longer if people are to be searched. Stocks have to rise relative to output as the just-in-time economy becomes a just-in-case one. Critical computer systems will have to be triplicated, not just duplicated, and physically separate. Both of Bank of New York's clearing systems were located in the Wall Street area and both were destroyed by the blast. The bank is by far the largest clearer of funds in New York and its limited third back-up in New Jersey could not cope. This caused huge trouble for the whole banking system and the New York Fed had to pump in enormous amounts of money to keep the banks going.
The need for back-up applies not just to systems but to people. Most large companies are now asking themselves whether it is wise to have their top teams located all in the same place. Many companies have rules about senior executives travelling in the same plane but now they have to ask whether it is wise to have them in the same head office.
The people problem is bigger than the systems problem. Computers are becoming ever cheaper. People are becoming ever more expensive. No firm could possibly plan for a catastrophe such as occurred on 11 September, but companies are being forced to make sure they have enough staff to handle predictable emergencies. The obvious effect of this is that when companies cut their payrolls they need to be very careful that they leave themselves with the people needed to get the job done. In many ways this is a good thing. Companies run with a bit of slack that can cope with the unexpected are likely to create a sounder economy than one where firms are so lean that they are always on the edge. But it does mean slower growth. And there is the rub. We will have lower living standards as a result of terrorism.
This applies universally, not just in the US. Some resources will to have to come out of consumption to pay for higher insurance rates, higher transport costs, the people who handle security at airports and on planes, and eventually, higher taxation too. The figures may well tell us that we are getting richer, for GDP will rise.
But we won't feel richer because the money will be going into necessary but unproductive functions. One of the ironies of the destruction in New York is that all the work of reconstruction adds to GDP, whereas the destruction does not subtract from it. Wars are said to be good for economic growth, and in a narrow sense they are, for they show as growth in the figures. But in terms of consumption their effect is the reverse. Shifting resources into civil defence has to happen, for we have to protect ourselves. But there is a cost to everything, and combating this terrible threat puts a burden on us all.