From Many Voices, One Battle Strategy

Bush Tries to Steady Economy Jolted by Attack

The New York Times - Cover, 9/24/01
By RICHARD W. STEVENSON and JOSEPH KAHN

WASHINGTON, Sept. 22 — President Bush predicted today that the economy would rebound "in America in the years ahead," but he faces a Congress and Federal Reserve already divided on policy and partisan lines over how to achieve that goal.

As evidence mounts that the terrorist attacks in New York and Washington have deeply wounded an already weakened economy, Mr. Bush sought to reassure the country without committing himself to specific actions beyond bailing out the airline industry.

His vagueness about how or even whether he would seek to re-energize the faltering economy reflected debates in the White House, Congress and the Federal Reserve about acting quickly or waiting for a clearer picture to emerge from the post- attack chaos.

Mr. Bush made his remarks in his weekly radio address as he spent the weekend at Camp David, consulting with his national security team and conferring by telephone with President Vladimir V. Putin of Russia. Meanwhile, the military mobilization continued apace as B-52 bombers departed their base in the United States and aircraft carrier battle groups shifted positions.

The economic challenge became intense in recent days as airlines and other companies announced tens of thousands of layoffs, the stock market swooned, consumers grew jittery and the international outlook worsened. Though it will probably be months before it is made official, the economy may well have entered a recession this month, economists said. That would mean an end, after 10 and a half years, to the longest business expansion on record.

A survey of 44 economists this week by Blue Chip Economic Indicators, a research firm, concluded that the economy would contract at an annual rate of 0.5 percent in the third quarter, which ends Sept. 30, and then shrink at a 0.7 percent pace in the final three months of the year. The most broadly used definition of a recession is two consecutive quarters in which economic output falls.

On Friday, Northwest Airlines said it would lay off 10,000 workers, bringing to more than 100,000 the job losses in the last week just in the airline and aviation industries. And by the time trading ended on Wall Street, the Dow Jones industrial average had lost 14.3 percent for the week, its worst weekly performance since early in the Depression.

In his weekly radio address to the nation today, Mr. Bush sought to assure Americans that the economy remains fundamentally strong and that its entrepreneurial spirit remains undimmed.

"The terrorists who attacked the United States on Sept. 11 targeted our economy as well as our people," Mr. Bush said. "They brought down a symbol of American prosperity, but they could not touch its source."

But if the rough patch the economy is sure to encounter in coming weeks and months should become something worse or go on for a long time, it could diminish the public's enthusiasm for the campaign against terrorism, undermine Mr. Bush politically and further reshape the nation's domestic agenda.

The administration and both parties in Congress are weighing a broad range of responses, including tax cuts for individuals and businesses and new spending programs. But the White House and Democrats on Capitol Hill are already beginning to stake out differing positions, suggesting that longstanding ideological clashes will complicate efforts to reach a bipartisan agreement.

The debate has been shaped in the last week by Alan Greenspan, the Federal Reserve chairman, who counseled patience and warned that a hasty move to stimulate the economy through further tax cuts and government spending could backfire. But Mr. Greenspan does not have to run for re-election or maintain political support in the way that Mr. Bush and Congress do as they lead the nation into an open-ended conflict.

On Friday, two influential business groups advised the White House to move quickly to push a stimulus package through Congress, suggesting that the economy might be deteriorating faster than the administration recognized. But administration officials said they remained as concerned about doing too much for the economy as they were about not doing enough.

"We don't want to overstimulate and just have an inflation problem long term," said Kenneth W. Dam, the deputy treasury secretary, referring to the possibility that an overheated economy could set off a surge in prices.

But with inflation a distant threat and layoffs, lost profits and tumbling stock prices defining the economic landscape in the here and now, political pressure is building to take action. Treasury Secretary Paul H. O'Neill told Congress on Thursday that the administration is "looking at every instrument that's ever been used before, and some that haven't" to give the economy a boost if necessary.

Mr. O'Neill and Mr. Dam have both hinted in the last few days that the administration's preference, should it go ahead with a package, is to focus on permanent tax cuts for business, perhaps a reduction in corporate income taxes.

On Capitol Hill, many Republicans are pressing for a reduction in capital gains taxes, a step they say would help the stock market and provide capital to businesses by making investing more attractive.

Most Democrats, by contrast, are seeking temporary tax cuts for all workers, saying that the best tonic for the economy would be to put cash into the hands of people who would go out and spend it.

Should they decide to go ahead with a permanent package of tax cuts, administration officials said, they believe there is plenty of money available from projected surpluses.

Democrats, on the other hand, not only want to make any stimulative tax cut temporary, they would also like to roll back parts of the tax bill Mr. Bush signed into law this year. The Democrats especially want to reverse those, like the repeal of the federal estate tax, that do not take effect until the end of the decade.

The case for a permanent reduction in corporate taxes, Mr. Dam said, is that it would "change corporate investment decisions overnight" by freeing up more cash and promising a higher rate of return on new plants and equipment.

The case against it, he said, is "fundamentally political" because it would be portrayed as a break for powerful special interests, a characterization that he said was unfair.

But some economists say that companies are suffering from excess production capacity, not from a lack of investment capital, and are not going to expand their operations until demand from consumers increases.

"Any stimulus ought to put money in people's pockets to give a lift to the economy now," said Senator Kent Conrad, Democrat of North Dakota, chairman of the Senate Budget Committee. "It has to be coupled with long-term fiscal discipline to take the pressure off long-term rates."