No one sure what war will do to the economy

By Paul Clark
POSTED: 2001-10-07 13:49:55 

ASHEVILLE - War traditionally means good things for the economy, but this kind of war and this kind of economy have even the experts guessing. 

World War II lifted the United States out of the Great Depression, as companies pumped up production to meet the nation's need for guns, boots and fighter planes. Defense contractors needed parts and people, so the benefits rippled throughout the national's supply chain, sending dollars deep into America. 

This war, however, won't need as many raw materials, many experts believe, so its impact on Americans will be harder to gauge. The Citizen-Times interviewed several economists recently to ask them what a war's effect would have on the economy. 

IMMEDIATE EFFECTS 

The price of gas may go up, because a lot of it comes from the Middle East, where much of the fighting may be, said Ron Shiffler, dean of Western Carolina University's college of business. But the United States gets enough petroleum from Venezuela, Mexico, Alaska, Kuwait and Saudi Arabia to supply the nation, even if terrorism-supporting Iraq turns off its taps. 

Some of the effects have already been felt by area businesses. 

"Luxury items are the first thing to go," said Susan Slater, vice president of Gulfstream Marine Sailboats in Asheville. Boat sales traditionally go down when the economy dives, and now that the fighting has begun and money concerns abound, "people will be even more cautious," she said. 

Business each year for the last several had been better than the last. Now, Slater is thinking about all the small boat dealers who have closed their doors during the 2-year- old economic slowdown. She's wondering how she'll fare. 

UP OR DOWN? 

Experts are divided on whether war means war on the economy or not. Floyd Duncan, an economic and business professor at Virginia Military Institute in Lexington, Va., believes America will feel the pinch of this war for a while. 

"There's a finite amount of resources in any society," Duncan said. "The problem with going to war is that resources that were used for consumers and governments for highways and schools and Medicare and Medicaid now have to be diverted into Defense Department spending." 

The economic implications nationwide won't be as profound as some people think, Earl Walker, dean of business administration at The Citadel in Charleston, S.C., said. 

"Although much of the military equipment is aging, it is still quite viable and much more sophisticated than anyone else's in the world," Walker said, "so I don't expect to see us pouring millions of dollars into the armaments industry like we did in World War II." 

Shiffler doesn't expect the stock market to go much lower than it did in the days following the Sept. 11 attack. 

"Consumer spending will be a key," he said. "I think consumers have shown over the past six months they're willing to spend money. I don't think they're going to zip up their wallets." 

PERSONNEL DRAIN 

The biggest impact on Western North Carolina probably will be the hundreds of residents in the armed forces, military reserves and National Guard sent off to fight, support and defend, according to Robert Mulligan, assistant professor of economics at Western Carolina University. 

Their loss will have a huge impact on their employers in the area because they are typically more professionally proficient than those available to replace them, Mulligan said. 

"Your firm's revenue will go down because you don't have the same productivity," he said. "They're not producing something of the same value." 

Americans will likely have to live more humbly than in the past, Duncan said. 

Much of the petroleum that was refined for automobiles may be diverted into the tanks of fighter jets, he said. Metals formerly used for white goods such as ovens and washing machines may go into ammunition instead. 

WHO BENEFITS? 

That the defense industry will benefit goes without saying. But turning American into a more secure nation will help the security and technology industries, who will be hired to help businesses and governments gain more control over who has access to public buildings and information, Walker said. Companies that make retinal scanners and other identification devices will likely see a surge in business, Shiffler said. 

The construction industry will likely get a boost from people who need to make their plants, buildings and grounds harder to enter, he said. 

With Americans still skittish about flying, businesses that cater to the motoring public will likely do better, Walker said. 

MONEY FLOW 

During the Vietnam War, President Johnson said Americans could have both guns and butter - that they could both finance the war and support social programs such as equal rights. 

"But we didn't take particularly good care of the economy, and we ended up with inflation that took a number of years to get rid of," Duncan said. 

The Federal Reserve has shown by its willingness to lower interest rates that it won't let the country slip into the recession some people say it's heading for, Walker said. 

The terrorism of Sept. 11 "is a temporary shot for our economy, but our policymakers have a good handle on how to handle this shock," Duncan said. "(Federal Reserve chairman) Alan Greenspan will do what he has to to keep the economy going." 

INVESTMENTS, DEBT 

On the personal-investment front, war might be good for most people's stock portfolios, Walker said. 

"One of our alumni said he really likes Philip Morris right now," Shiffler said, only somewhat facetiously. "He said in times of crisis people are going to buy Miller Beer and they're still going to buy cigarettes." 

This is a good time to reduce debt, Mulligan said. It's not a time to be living beyond your means. Using your money to pay off student loans at 11 percent is a guaranteed 11 percent return; using it to invest in the stock market might pay better or it might not, Mulligan said. During times like this, it's better to go for the sure thing. 

Shiffler said he was reading in The Wall Street Journal that Wal-Mart reported that people during the crisis bought TVs, food, guns. 

"It had some real strong sales during this entire crisis," Shiffler said. "We may not buy as many refrigerators, but we'll still be buying." 

RECESSION? 

If the Federal Reserve continues its same policies toward the economy, the United States should be all right, Duncan said. The stock market crash of 1987 was far greater in magnitude than the 1929 crash that led to the Great Depression. But lessons learned from the Depression helped the Federal Reserve manage the '87 crash better, he said. 

"All of this can go forward without inflation, without a recession," Duncan said. "Many of the (inflation and recession) problems in the '60s and '70s were the result of government policymakers not knowing what they were doing. They said the economy is going too fast and they slammed on the brakes, or they said it was going too slow, so they stepped on the accelerator. 

"The economy can't take those kinds of shocks. Once we stopped doing those things, the economy started stabilizing. 

"The shock of Sept. 11 was a big shock to the economy. But once those problems - the airlines losing passengers, business travel and the travel industry hurting - work themselves, out, they will disappear." 

PUBLIC SUPPORT - THE KEY 

Duncan hears America saying it will make sacrifices necessary to fight a protracted war. 

"People are saying that they're willing to live with longer lines at the airport to be more secure in the air," he said, even if it means paying more in taxes or receiving less in the way of federal services. 

"If the nation is committed to this long-term effort to rid the world of terrorism, then we are voluntarily saying we're willing to (give up) some of our resources," Duncan said. "Ultimately it means a lower standard of living. But if we all make that choice, I don't see any adverse effects that we'll have to live with. 

"How long they're willing to (sacrifice) I don't know. I wonder if they will be willing to do that when we start seeing young men brought home in body bags," Duncan said. 

"The hardest thing," Shiffler said, "is going to be to sustain this patriotic feeling that's going across this country right now. The longer Vietnam went on, the more unpopular it was at home in America." 

Contact Clark at 232-5854 or PClark@CITIZEN-TIMES.com