Q&A: The attack's economic impact

Peter Navarro teaches MBA students about the effects of macroeconomic shocks on the economy at the Graduate School of Management, University of California-Irvine. He is the author of "If It's Raining in Brazil, Buy Starbucks: The Investor's Guide to News and Other Market-moving events."

Professor Navarro was interviewed by The Christian Science Monitor's online producer, Ben Arnoldy.

csmonitor.com Care to give a ballpark estimate of what the total cost of damage will be in this attack? Is it comparable economically to events such as Pearl Harbor, the OPEC crisis, major hurricanes, etc.?

Peter Navarro: America has lost two large buildings, several smaller buildings, four large aircraft, and thousands of souls. Of these losses, no price is high enough to set for the lives lost. As for the property, while not inconsequential, it is likely to be of a much lesser value than the property damaged by Hurricane Andrew or the Watts riots.

The larger price tag for this event will come, however, if the attack triggers a deeper national and perhaps global recession. And perhaps the largest costs will come from the increase in military expenditures and national security measures that will be taken in the wake of the attack.

As for the Pearl Harbor analogy, the loss was far greater in that instance because what was lost was a significant portion of the naval fleet that was essential to defending the nation. While the Pentagon sustained very serious damage in this attack, it is unlikely that the damage will materially affect national security.

csmonitor.com Before this attack, the US was teetering on the edge of a recession. Is recession much more likely, even a virtual certainty now? Why or why not?

Navarro: Whether this terrorist attack plunges the economy deeper into a recession or, perhaps ironically, becomes the catalyst for a renewed expansion will be determined by how the President and Federal Reserve Chairman Alan Greenspan.

The most pressing problem facing us now is the possibility that the attack will further weaken consumer confidence even as it dampens the enthusiasm of corporate executives for new investment. A reduction in both consumption and investment would be a severe macroeconomic blow that would likely deepen and extend our recession.

To avert this economic disaster, the Federal Reserve must move swiftly to further lower interest rates and expand liquidity in the markets. If this wielding of expansionary policy is done with conviction, it will set the stage for a swifter economic recovery. Such a recovery will be aided by expansionary fiscal policy which is likely to come in the form of a dramatic increase in defense expenditures both in the short run and over the longer term.

A key point: The attack did NOTHING to harm our productive capacity as a nation. As it was in the 1930s and in FDR's words, "we have nothing to fear but fear itself." There is a way out - but the path is fraught with peril.

csmonitor.com What industries will be most effected by the attack and its aftermath?

Navarro: Two sectors - the airlines and insurance - will bear the major brunt of the attack. The airlines will be hurt by reduced travel as well as perhaps higher fuel costs. (Higher fuel costs will also hit energy intensive sectors like chemicals and plastics hard.)

Selective insurance companies will be hit hard by claims in much the same way that Hurricane Andrew did while brokerage firms are likely to see further declines due to reduced stock market activity.

Finally, if consumer confidence plunges, the retail sector will be hit. On the up side, the military and defense companies will see their stock prices rise as will oil and gas exploration companies. "Defensive stocks" like those of food, tobacco, and pharmaceutical will perform better relative to the market as investors see them as safe havens.

Page: 1 | 2