Wartime Recession?

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It's no wonder, then, that the National Retail Federation predicted a decidedly uncheery holiday shopping season, cutting its sales growth outlook for the fourth quarter from 4% to 2.2%--a forecast that may still be overly optimistic. Or that luxury department store Bergdorf Goodman has canceled the remainder of its fall orders.

That sort of thrift would have been applauded during World War II, when the Federal Government imposed rationing of food, gasoline and tires. But now Washington is doing all it can to get consumers to open their wallets. The Federal Reserve Board slashed short-term interest rates half a point, its eighth cut this year, and the Bush Administration signed a $40 billion stimulus package to help with the recovery effort and the fight against terrorism.

That appropriation may be just the beginning. There is talk in Congress of an unprecedented bailout of the tourism industry, though that could turn into the biggest pork barrel project ever. President Bush is pushing for an increase in charitable deductions, while Citigroup executive committee chairman and former Treasury Secretary Robert Rubin, who joined Federal Reserve Board Chairman Alan Greenspan in a private meeting with congressional leaders last week, is recommending moves to stimulate consumer spending.

Many rank-and-file Republicans have seized on the tragedy to renew their push for cuts in corporate taxes, an idea that threatens to unravel Congress's newfound bipartisanship. "Before we can even bury our dead, they're asking for tax breaks," grumbles Charles Rangel of New York, the ranking Democrat on the tax-writing Ways and Means Committee.

Any such stimulus would probably cost $80 billion over two years. Greenspan, who also testified before a Senate hearing, cautioned that Washington shouldn't move too quickly with a massive, budget-busting relief package until the full extent of the fallout is known. Treasury Secretary Paul O'Neill, who has had disagreements with the Bush Administration's tax policy and was curiously absent from the closed-door session with Greenspan and White House chief economic adviser Larry Lindsey earlier in the week, told the committee that the government shouldn't resort to "off-the-shelf political things that have been paraded around." As both Greenspan and O'Neill pointed out--to the discomfort of many in the White House--permanent new tax cuts or spending programs can hurt the economy more than they help by pushing up long-term interest rates and making business loans and mortgages more expensive.

None of those concerns, however, will keep Congress from rescuing the airlines. Every airline job, the industry says, helps create another six, from travel agents to food-service and assembly-line workers. Thanks to high labor costs and a reduction in business travel, though, the major carriers were already facing their worst year in a decade before Sept. 11, with $2.5 billion in potential losses.

That seems like chump change now. After a two-day complete shutdown of U.S. air space, bookings are off more than 40%, and the carriers could easily lose $25 billion by mid-2002. "This is a catastrophe for an industry that struggles even in normal times," says Richard Clarke, director of travel and transportation at Giga Information Group.

By Friday, airline executives had managed to wrestle a $15 billion package from a somewhat skeptical Congress--including $5 billion in immediate aid, an additional $10 billion in loan guarantees and some liability protection for United and American in connection with the terrorist attacks. Some observers think even that level of assistance won't avert trouble--and that the only solution is for the airlines to get together, much like the bankrupt railroads in the '70s, to carve up territories and raise ticket prices.

Insurers, which are probably facing a bill of more than $30 billion for the costliest disaster ever, won't need such drastic measures to survive. That doesn't mean, though, that they are not hurting. Warren Buffett's General Re reinsurance outfit stands to lose about $2 billion, and European giants Munich Re, Swiss Re and AXA aren't far behind. Direct underwriters such as AIG, Chubb, Travelers and Hartford could lose hundreds of millions of dollars each. Many underwriters have jacked up the premiums for airlines and are sure to slash the level of coverage available for damage on the ground. In the future, companies will probably have to pay extra to be covered for an act of terrorism. It hasn't all been bad for the industry, however. With millions of individuals and businesses now worried about new risks, sales of life and business-interruption insurance are expected to soar.