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. Last Updated: 07/27/2016

Wartime Boom Not Expected

WASHINGTON -- Given the nature of this new conflict with terrorism, the U.S. economy is not likely to be revived by the developments that fueled previous wartime booms, like surging orders for tanks and airplanes or demand for workers to replace those who go off to fight.

This time, the course of the economy will be determined in large part by the relative power of two broader but opposing forces.

On the negative side is the uncertainty, and in some cases fear, that has gripped businesses, consumers and investors since Sept. 11, further weakening an economy that had been teetering on the brink of recession, if it was not already in one.

On the other side of the equation is government economic policy, which had been performing mild CPR on the decade-long business expansion through much of the year. But now fiscal and monetary stimulus are being engaged full force in an effort to make sure that the downturn after the terrorist attacks is as short as possible.

"The question is whether this situation will push us into recession or pull us out of it," said Martin Baily, who was chairman of the White House's Council of Economic Advisers under U.S. President Bill Clinton.

"The part pushing us into recession is that everyone is more concerned about risk," he said. "The part pulling us out is increasing government spending, cutting taxes, being less concerned about the budget deficit and having the Fed move more aggressively to stimulate the economy than it probably would have without this attack."

The Federal Reserve Board has lately been pulling out all the stops to cut interest rates. Congress and the administration of President George W. Bush have already approved substantial increases in government spending and seem headed toward approval of a second round of tax cuts and additional stimulus measures this year.

By comparison with past efforts, however, the one-two punch of monetary and fiscal policy falls short of the equivalent of the war mobilization of the World War II era, and may not even pump up the economy in the way the Vietnam War did in the 1960s.

"My guess is that this is not going to be all that similar to previous wartime economies," said N. Gregory Mankiw, an economics professor at Harvard University. "Unless the fiscal stimulus ends up being a lot bigger than I expect, the differences will be greater than the similarities to the past."

Instead, the effectiveness of lower interest rates, higher government spending and tax cuts in turning the economy around will depend to some extent on how the battle against terrorism goes, and on whether the United States and its allies suffer retaliatory attacks.

Given that the economy of the United States is far more substantial today than it was in the past, the combination should pack enough of a wallop, economists say, to keep the fallout from the terrorist attacks and the military response from overwhelming the nation's economic strengths. Moreover, once the worst of the war is over, it should set the stage for a healthy recovery, probably sometime next year.

In the past, wars have had varying effects on the economy.

On Dec. 7, 1941, the United States was still struggling to emerge from the Depression. The war effort finished the job, creating what amounted to a full-employment economy.

On Aug. 7, 1964, when Congress passed the Gulf of Tonkin resolution, giving its backing to increased U.S. involvement in Vietnam, the economy had already recovered from a 10-month recession that ended in early 1961. Military spending helped keep the expansion going until 1969, even fueling inflation by overstimulating growth.

On Aug. 2, 1990, when Iraq invaded Kuwait, the economy fell into what proved to be an eight-month recession. A spike in oil prices hurt the economy, and the modest and temporary increase in military spending was not enough to give the economy much of a boost.

On Sept. 11 this year, it was already clear that the United States was enduring a sharp slowdown and that the expansion -- the longest on record -- might already have come to an end.

Despite a series of interest-rate decreases by the Fed and a tax cut signed into law by President Bush, unemployment was creeping up, business investment in new factories and equipment had stalled and consumers were growing increasingly jittery.

If the economy was not in a recession before the attacks on the World Trade Center and the Pentagon, it almost certainly went into one afterward. Big companies have announced about 200,000 layoffs and have put expansion plans on hold. Stock prices and retail sales plunged, though both have recovered somewhat. Consumer confidence remains fragile.