War on terror takes toll on U.S. economy

WASHINGTON -- Two years into the war on terrorism, hopes that the struggle would be only a brief drag on the economy are fading. Businesses and consumers are facing a growing list of security-related burdens, the federal deficit is ballooning from increased military spending and Americans are jittery about the future.

Many analysts believe that the first decade of the 21st century could well be a mirror-opposite of the 1990s. Back then, the country reaped a huge "peace dividend" as gushers of money freed after America won the Cold War were diverted from the military to private enterprise.

Those business investments helped spur a record-long 10 years of economic expansion and a surge in productivity to levels not seen in decades.

But now, Congress is debating President Bush's request for an additional $87 billion for the Iraq occupation, and soaring spending on defense and homeland security has brought back the era of massive budget deficits.

"If you add everything up, a significant weight has been placed on the economy," said Mark Zandi, chief economist at Economy.com. "Going forward, we are just not going to see the kind of investment and productivity growth we would have had because we are devoting so much more to defense and homeland security."

The increased government borrowing -- estimated to total $1.39 trillion over the next decade -- will drive up interest rates not only for consumers trying to buy new homes and cars but also for businesses. That will make it more expensive for companies to get the money they need to expand and modernize, the kind of investment that boosts productivity.

All the government spending does have benefits, especially in the current period when the lingering effects of the past recession mean there is plenty of slack in labor markets and production.

Zandi estimates that economic growth will be nearly 0.7 percentage point higher this year because of spending on defense and homeland security, outlays that have jumped by 36 percent since 2000 and will total an estimated $627 billion this year after adjusting for inflation.

But the increased emphasis on security has also created new problems for businesses.

At a time when U.S. manufacturing is already in a deep slump with 2.7 million job lost over the last three years, American companies are having trouble obtaining visas to get customers into the country to inspect everything from jet airliners to machine tools.

Chip Storie, a vice president at Cincinnati Machine, said one of the company's top Chinese customers is now considering switching to a Japanese or European competitor because it took six months to get the visas needed to travel to Cincinnati to inspect a $5 million machine tool purchase.

"We are finding that visa applications which were taking a matter of days to process prior to 9-11 are now taking six months or longer," Storie told a congressional committee.

And it is not just machine tools. Tourism, already hard hit since the terrorist attacks, is losing business to other countries because foreigners must wait so long to obtain travel visas.

While State Department officials have pledged to devote more resources to reducing the visa review backlogs, businesses say they have yet to see signs of improvement.

"This is a huge problem and it is getting worse," said William Reinsch, president of the National Foreign Trade Council, a Washington lobbying group. "In a down economy, losing a sale because you can't get a customer into the country for three months is a real problem."

Companies are also concerned about proposed regulations from the Bureau of Customs and Border Protection designed to improve scrutiny of cargo shipments arriving by boat, plane and truck. U.S. companies fear that the rules will slow shipments and disrupt their just-in-time delivery procedures, forcing them to keep bigger inventories on hand at more expense.

In addition to costs that can be measured, terrorism has added harder-to-calculate burdens on the economy in the form of depressed consumer and business confidence.

"We certainly feel a lot worse and a lot more vulnerable," said David Wyss, chief economist at Standard & Poor's in New York. "If people get scared and decide to spend a little less and save a little more, that could hurt economic growth."

Worries have increased in recent months with more terrorist attacks in Iraq and Israel and the massive U.S. power blackout, which, while not terrorist related, emphasized how vulnerable the country's infrastructure remains.

The incidents come on top of three years of shocks from the bursting of the stock market bubble to a recession, Sept. 11 and a wave of corporate accounting scandals.

"When you combine all of these things, it represents a tremendous burden on the economy," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "History shows that once confidence is depressed, it takes a while to rebound."