From New Economy to War Economy
by Dean Baker
Dollars and Sense magazine, November / December
Now that the "New Economy" appears to have gone
the way of the hula hoop, it looks like the "War Economy"
will be the latest craze.
But before we get carried away with the idea that the September
11 attacks threw us into recession, a bit of a retrospective is
in order. As some of us pointed out years ago, the main feature
of the "New Economy" was a stock bubble of unprecedented
proportions. At its peak in March 2000, the ratio of stock prices
to corporate earnings reached more than twice its historic average.
At the time, the Congressional Budget Office was projecting that
real (adjusted for inflation) profits would barely grow over the
next decade. But simple arithmetic showed that the market had
a bubble on the order of $10 trillion, more than $30,000 for every
person in the country.
This bubble-and its inevitable collapse-have had enormous
consequences. The Federal Reserve Board's research suggests that
the bubble led to an additional $400 billion in annual consumer
spending, as families spent more money based on wealth they accumulated
in the stock market. This additional spending propped up the economy
as the bubble was building. But now that this paper wealth has
evaporated, consumption can be expected to fall
The stock bubble also bolstered the economy by allowing dot.coms
and other high-tech startups to obtain hundreds of billions of
dollars of capital in exchange for now-worthless shares of stock.
Many investors paid ridiculous prices for these shares, and much
of the money funded projects which subsequently proved useless.
The spending did help to support an investment boom. But now that
reality has set in on the stock market, the boom is over, leading
to a gap of close to $100 billion in demand in the economy.
In addition, millions of families bought into the stock market
bubble, encouraged by political leaders and financial advisors
who insisted that their investment was sound. As a result of the
collapse, many people in their late 50s or early 60s are looking
at a far less comfortable retirement than they had anticipated
two or three years ago.
This collapse in consumption and investment demand caused
the recession, which had already set in before September 11. And
it could have been prevented if our political leaders had not
substituted free-market ideology for common sense. It was virtually
impossible to tell a coherent story that made sense of the stock
market bubble. (I asked hundreds of economists to try.) But the
people in a position to warn of the dangers-most notably Federal
Reserve Board Chair Alan Greenspan, President Clinton, and Treasury
Secretaries Robert Rubin and Lawrence Summers- were unwilling
to state the obvious: the market had gone crazy.
Now we're paying a huge price for their colossal mistake.
And the devastation to the airline and tourism industries since
September 11 will only make the situation worse. But now that
the economy needs stimulus, why not insist that government spending
shape economic development in socially beneficial ways?
We need to think more clearly about how to strengthen forms
of transportation other than air travel-especially since the airlines
are getting billions of dollars in bailouts. Trains that reach
speeds in excess of 200 miles per hour have been in service in
Europe and Japan for more than two decades. By comparison, long-distance
trains in the United States often creep along at speeds of less
than 30 miles per hour. Fast trains that go between city centers
can allow for quicker travel than planes on all but the longest
routes, especially if air travel is going to require advance check-in
of two hours or more. (At an average speed of 175 miles per hour,
the trip from New York to Chicago would take four hours.) Trains
also do much less harm to the environment. And since they use
far less fuel per passenger mile than planes, they will also reduce
the nation's dependence on imported oil.
Building a network of fast trains will require a serious commitment
of public money. But of course, the airline industry was not exactly
an outcome of the free market-the public paid to build the airports
and much of modern aerospace technology was a spin-off from military
In addition, as the United States enters a "war on terrorism"
where the size, duration, and battlefield are completely unknown,
we should pay close attention to how our money is being spent.
Of course, the September 11 attacks do not make every military
program the Bush administration has proposed worth funding. As
of this writing, it's not clear what Congress will approve. But
however much is appropriated, the public should be assured that
military contractors won't being making fortunes. During World
War II, some defense contractors voluntarily pledged to be paid
at a rate of "cost plus a dollar"-to show that they
were not profiteering from the war. If today's military contractors
wish to demonstrate their patriotism, making a similar commitment
would be an appropriate gesture.
Finally, if the United States wants to avoid being the target
of future acts of terrorism, it should try doing some good in
the world. More than 35 million people in the developing world
are HIV positive. The United States pledged $200 million- six
hours of the Pentagon's budget-to address the problem. At the
same time, it threatens trade sanctions against countries that
provide low-cost drugs by ignoring the patents of U.S. pharmaceutical
companies. The meager amount of official aid that the United States
does distribute (approximately 0.15 percent of GDP) goes overwhelmingly
to reward political loyalty -Israel and Egypt are the two largest
After World War II, the United States put forward a genuine
development policy, the Marshall Plan, to rebuild a war-devastated
Europe. As a result, the continent prospered, and to this day
millions of Europeans remain grateful to the United States. This
is not a call for defeating the left in other countries, as the
Marshall Plan was designed to do. But in the end, a strategy of
pragmatic humanitarianism will be the most effective way to keep
people in the United States-and in other countries-secure.
The attacks of September 11 show how the obsession with free-market
ideology has harmed the nation. Security at the nation's airports
is provided by private services, often contracted by the airlines.
The workers are generally paid near the minimum wage, with few
if any benefits, and they receive little or no training. Not surprisingly,
turnover is high, with the average airport security worker spending
only six months on the job. This sort of security system may have
saved the airlines money, but it certainly increased the risk
of attacks. Now we have a chance to improve matters. Anyone without
ideological blinders should be able to recognize that airport
security is one area best dealt with by the public sector-where
public safety, not profits, are the main goal.
The attacks have created a new political environment. There
are enormous risks, but also enormous possibilities. The attack
dealt a decisive blow to the market worship that characterized
the New Economy. If progressives aggressively push our agenda-which
is the only way to address the real concerns demonstrated by the
attacks-we may find a nation that is far more receptive than it
has been over the last two decades. ~
Dean Baker is co-director of the Center for Economic and Policy
Research www.cepr.net and the author of The Economic Reporting
Review, which can 6e viewed at www.tompaine.com.