Q&A: The attack's economic impact

Over the much longer term, Internet and technology-related stocks will also benefit as we move to a more decentralized, electronic financial market.

(I have posted Chapter 19 of my book "If It's Raining Brazil, Buy Starbucks on my web site at www.peternavarro.com This chapter illustrates how to think about how catastrophes like war and drought move the markets.)

csmonitor.com There are already reports of rising gasoline prices. If military actions are taken in the Middle East, can we expect these price hikes to continue? Is this the single biggest economic threat during this fallout period?

Navarro: Rising oil prices reflect expectations of a possible supply disruption in the Middle East. Such a disruption could come about because of war.

Alternatively, it could be a political event such as an oil embargo. It is the president's job to respond to this attack militarily but to do so in a way that doesn't disrupt the oil markets.

Note that NOTHING has changed regarding either the supply or demand of oil as a result of the attack. The only thing that has changed is expectations about the future. Here, again, prudent government action can stabalize the oil markets.

As for rising gasoline prices, both Congress and state legislatures should monitor the situation carefully for price gouging and profiteering.

csmonitor.com Is there a big difference between consumer confidence and investor confidence these days? Do you expect either or both to drop significantly both here and abroad?

Navarro: As I stated in my response to the first question, one of the biggest dangers of this crisis is a blow to consumer confidence and business investment. Prior to the attack, consumer confidence had been the bulwark of our economy - but had fallen in the weeks just prior to the attack.

As for business investment, it seemed poised for a recovery as at least some executives believed a bottom had been reached in the business cycle.

If the President and Federal Reserve mishandle the crisis, the bottom will drop out of both consumption and investment. It is all in the policy makers hands now as to what happens but actions must be swift.

csmonitor.com To what extent is the damage in New York City damage to the "linchpin" of global trade? Will the crippling of businesses in the World Trade Center and the downtown cleanup period hamper the flow of trade enough to damage world markets?

Navarro: The disruption will be significant but surmountable. Trade should resume relatively swiftly. The broader lesson here perhaps is that it is imprudent to rely on a centralized model of financial trade. Look, then, for a rapid movement to a world of electronic and decentralized financial markets immune to physical (but not technological) attack.

csmonitor.com Any chance that rebuilding efforts and military spending could offset some of the negative impacts on the economy?

Navarro: As I discussed in the first question, there will be both a short- and long-run fiscal stimulus from increased defense expenditures. The short-run stimulus will occur as we expend missiles and other materiel during any retaliatory efforts. The longer run stimulus will likely be the result of new anti-terrorist and perhaps missile defense legislation that will dramatically increase defense expenditures.

My cautionary note here: Expansionary fiscal policy during the 1960s in the form first of the 1962 Kennedy Tax Cut and later by the Vietnam War set the stage for the rapid inflation and recession in the 1970s. We must be very careful here to coordinate both fiscal and monetary policy and not overreact.

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