Consumer confidence is key to flagging economy

Ask not what the economy can do for you, but what you can do for the economy.

That seems to be the consensus among those who follow the fluctuations of American economics.

The effects Sept. 11 will have on the long-term economy are hard to predict.

“The reality is right now people don't know what the impact is going to be,” Alex Slivka, director of domestic equities at McKinley Capital Management Inc. said. “In the short-term fear and greed drive the marketplace.”

President Bush says Sept. 11 has stunned the economy and the costs, as much as $300 billion that has been predicted, could slow the economy for years.

The economy, though weak, was faring well prior to the September events but now seems headed for a recession.

“The government is anticipating recession and responding in advance, which is unusual,” Dr. Matthew Berman, a professor at the University of Alaska Anchorage's Institute of Social and Economic Research said.

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Increased spending on security, airline bailouts and higher insurance costs may hinder post-recession recovery but economists are reiterating that these costs won't ruin America's $10 trillion economy.

The common theme is consumer confidence. When people don't spend, whether out of fear or anxiety of job security, the economy suffers.

“One of the great lessons of macro-economics is that our economy is based on faith,” UAA economics professor Larry Ross said. “It's based on the confidence citizens have in our system.”

In times of crisis consumers tend to lose confidence and spend less.

“People are not going to stop buying food and clothing, but they will stop spending on travel and luxury,” Berman said. “The primary effect has been to scare consumers out of doing some of the things they used to do.”

Increased government spending can lead to inflation, but few are predicting the high inflation levels America endured in the early 1970s while the war in Vietnam was winding down.

“During Vietnam, [President Lyndon] Johnson tried to have both guns and butter,” Dan Hayes, co-founder of Saybrook Community Capital in Los Angeles said. “Finance a war halfway across the world, fight a war on poverty through deficit spending and not cut back on consumer goods. The result was the persistent inflation we say developed in the early 1970s.”

While it's impossible to predict the intensity or duration of the current war on terrorism, many Americans remember war as an economic savior. World War II pulled the nation out of the depths of the Great Depression.

“Traditionally America's involvement in wars have stimulated the economy,” Ross said.

Hayes says inflation was not an issue during the Korean Conflict due to overcapacity from World War II and the Persian Gulf War was too small to have much of an impact except its negative effect on consumer confidence.

But Hayes says that while the government has taken steps to avoid financial panic, there is still concern over increased federal spending.

“The Treasury and the Federal Reserve have worked to make sure there is sufficient liquidity in the markets,” Hayes said. “But I'm very concerned that the spending and accompanying pork barrel waste planned to secure the nation's dams, electricity grid, oil pipelines, drinking water systems and sewage treatment plants, combined with the `bailout' of the insurance and airline industries is going to create an inflationary environment sooner than anyone envisions.”

Hayes says that areas dependent on air travel and tourism such as Southern Calif., Hawaii and Alaska will feel the largest impact. Berman agrees.

“Alaska industry's outlook is not good,” Berman said. “Tourism will lower expectations for next year and the oil industry is down.”

Alaska also relies heavily on the airline and air cargo industries. Any disruption in either industry will effect Alaska.

“The impact on Alaska could be more severe than on the nation as a whole,” Berman said.

The bottom line for Alaska and the nation is consumer confidence.

“If we all believe we will have prosperity, they will behave in a way that will create prosperity,” Ross said. “If we all believe there will be a recession—we will have it.”

The American economy is driven by the population, not analysts. It has suffered setbacks but has proven dependable.

“Our resilient economy is a direct result of the openess and change embodied in our democratic system,” Hayes said. “Change creates opportunity and opportunity strengthens the economy.”