Speaking at a forum yesterday on the economic aftermath of the Sept. 11 terrorist attacks, professors from both Tufts and the Fletcher school predicted that the US would enter a recession within the next year.
"We are technically not in a recession yet, in the United States," said Lisa Lynch, a professor of international economic affairs at Fletcher. "There's a quick and dirty rule of thumb to tell when a country is in recession - the economy has to be contracted for more than six months."
According to Fletcher Dean Stephen Bosworth, the US economy was shrinking before the attacks, and Lynch said that all economists are predicting a small decline in the third quarter of this year. Financial markets in New York closed for several days following the collapse of the World Trade Center on Sept. 11, and their counterparts around the world fared poorly in the days after the attack.
The attacks on Sept. 11 took immediate tolls on the entire US economy. At the moment, economic uncertainty exists, which Fletcher professor Michael Klein said typically accompanies political uncertainty. He said that people need to take a "wait and see attitude" and that raising oil prices could sound the first warning of recession.
So could unemployment figures, and according to Lynch, unemployment had increased noticeably before Sept. 11, from 4.5 percent to 4.9 percent. Economists predict that the unemployment rate could increase to six percent by the end of this year.
High unemployment knocks consumer confidence, which would drive the economic downturn.
"If consumers follow what we call precautionary savings for a prolonged period of time," Lynch said, "this could have an effect in making the predictions for a recession be true."
According to Klein, consumer confidence in September was at its lowest point since November 1993. Klein said the economy is experiencing a widespread and synchronous weakness.
But economists still do not know how people will react to the attacks during the following months. "A blow to confidence in this time in particular could be devastating," Klein said.
Lagging spending will also affect the federal government. According to economics professor Gilbert Metcalf, non-defense discretionary spending will be cut by ten percent to finance the government's counter-terrorism efforts. He added that the initiative for partial-privatization of Social Security has died because of the stock market's sharp decline.
Metcalf proposed that the US consider temporary rather than permanent tax cuts, saying that it could offset tax cuts now with fewer and smaller tax cuts later.
The government has already tried to prevent recession with monetary policy. As Lynch explained, the Federal Reserve cut the prime interest rate from 3.5 percent to three percent a week after the terrorist strikes. Klein noted that the European Central Bank lowered its interest rate less than a week after the attack.
Most investors expect the Fed to cut rates another half percentage point today.
Fletcher Professor of International Diplomacy Karen Jacobsen addressed the effect of Afghani refugees on the economy. Since Sept. 11, several Afghanis have fled the country for neighboring Pakistan.
Jacobsen stressed how immigration into the US and other countries, by growing and diversifying the population, can increase economic output. But she added that migration causes social concerns and can also introduce security threats into the US.
Audience members said that they left the panel better informed about the state of the economy.
"They did a good job of relating events to the global effect as a whole," sophomore Mirette Kouchouk said. "I'm not sure what to expect, I think we're all preparing for the worst. I'm still waiting to see how the rest of the world is doing before changing my personal habits."
