The day-to-day developments of the war in Afghanistan and the preoccupation with whether the markets know something we don't know (recovery ahead) have deflected attention from the big macroeconomic question of the day.
To what extent will the changed landscape, post-Sept. 11, affect the US economy's rate of growth? Potential growth is circumscribed by the growth rates of productivity and the labor force. The labor force grows on average 1 percent a year. And productivity growth -- well, that's the big question mark for the US economy going forward.
To the extent that the 1990s benefited from the end of the cold war, globalization, deregulation and restructuring, the next decade may see a reversal of those trends, according to Neal Soss, chief economist at Credit Suisse First Boston.
"Globalization was about taking politics out of international commerce, and deregulation was about taking politics out of domestic commerce," Soss says. "These forces will be blunted, if not reversed, to deal with the collective enterprise called war."
In a recent report, Soss discusses four key forces "that helped suppress business cycles in the last two decades," which saw a nine-month mild recession of 1990-1991: globalization, deregulation, just-in-time inventory management and geography agglomeration.
The benefits of globalization are obvious, except to those who trashed storefronts at the World Trade Organization meeting in Seattle two years ago. Global competition and the proliferation of free-trade zones restrained inflation and boosted productivity, providing consumers a wide array of quality goods at the lowest possible price. The events of Sept. 11 reversed the trend in open-door policies.
"Immigration policy is already under review, and flows of merchandise across our borders will, at the very least, be subject to great scrutiny and episodic delays," Soss says.
That has implications for inventories. If just-in-time inventory management allowed companies to hold smaller stocks of raw, processed and finished materials, just-in-case means more bloated inventories and higher costs for corporations. For the same output, businesses will now need to hold higher stocks than they did before to ensure smooth business operations, now that border delays and time-consuming, stepped-up screening procedures are part of everyday life.
Working capital tied up in inventories is unavailable for more productive uses. And while the added cost of doing business is currently coming at the expense of profits, not inflation, that's not likely to be the case when the pace of economic activity improves.
The terrorist attacks have sent the process of deregulation into reverse. The federal government is now intervening in the airline, insurance and banking industries, Soss says. "The new Office of Homeland Security is as likely to have at least as profound an effect on the structure of our society in the decade ahead as the Environmental Protection Agency did a few decades back."
Security versus freedom: the eternal trade-off. War tips the balance in favor of security, which may be good for our personal well-being (fewer of us will die), but not our economic well-being (the US will be poorer as a nation).
Before Sept. 11, homeland security was free. Now it costs money. That's the antithesis of productivity, which is getting more for less (or something for nothing).
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