THE U.S. ECONOMY contains powerful forces that promote growth and full employment. Our culture and institutions reward entrepreneurial activity. They are intact, completely undiminished by the events of September, as well as the anthrax scare that followed in October. People are motivated by the intellectual and financial rewards of building companies, developing new products and services, and serving markets. They continually look for opportunities to move the U.S. economy forward. With high rewards for entrepreneurs, the competitive market system is the engine of long-run growth and the mechanism by which the economy absorbs short-run economic shocks.

The role of competitive forces was apparent soon after September 11, as markets responded to changed demands and firms began searching for technical innovations to address the new security environment. The travel industry is the most obvious example: Airlines quickly cut flights and introduced promotional fares, while hotels and resorts offered discount rates. Other industries followed suit. By late September, the auto industry was advertising significant savings to consumers in the form of zero-interest financing. Meanwhile, property insurance companies increased their premiums on commercial policies substantially, expanded deductibles for such coverage and, in some cases, added clauses to exclude losses resulting from acts of terror.

The United States is known around the world for its technology. In this time of stress, consider a few examples of how firms are bringing technology to bear on the problems we face: Manufacturers of equipment generally used to prevent bacterial contamination of food applied electron-beam technology to decontaminate mail sent through various Washington, D.C., postal facilities. Researchers at the Mayo Clinic announced the development of an apparently reliable one-day test for anthrax exposure. And at Saint Louis University, researchers are capable of adapting their studies of the dispersion patterns of dust and cat allergens to help determine how biological agents such as anthrax spores are dispersed. (See sidebar.)

Other opportunities abound for new approaches to help solve old problems or to define solutions for emerging problems. Providing security for our transportation systems, our food chain, our energy generation systems and our borders is an area ripe for innovation. For example, in the immediate aftermath of September 11, severe bottlenecks developed at the Canadian and Mexican border crossings as detailed inspections of thousands of trucks were implemented. Since the passage of NAFTA, some industries--one being, automobile production--have become highly integrated across the three North American economies. The traffic jams that emerged forced the temporary closure of a number of production facilities because parts could not be delivered "just-in-time." Experts have concluded that thorough security inspections cannot be completed efficiently at centralized border crossings. If true, then without substantial innovation, some of the cost savings that we have realized in recent years through reduced inventories will be lost.

What to do? One possible solution is to adapt satellite tracking technology, now in common use by trucking companies, to reduce such production disruptions. Conceivably, entrepreneurs could extend this technology to monitor vehicles that have been inspected and sealed at dispersed points-of-origin so that full truckloads can be cleared through border crossings electronically.

Passenger and baggage screening at major airports is another area with considerable potential for profitable innovation. Airlines now recommend that passengers arrive at major airports two hours in advance of their departure time to allow for check-in and security clearance, an increase of more than one hour from the recommended lead-time prior to September 11. This additional time substantially increases the cost of airline travel to consumers, above and beyond any higher ticket prices or user taxes needed to pay for more intensive security screening.

Over the long run, such cost increases, if sustained, can be expected to provoke significant substitution of other modes of travel, particularly for short- and intermediate-distance trips. Nevertheless, even after such substitution, the total costs of travel will be increased. And, to the extent that new security procedures permanently increase travel time and expense, we can expect to see people use other technologies, such as video conferencing, more frequently for conducting business.

Businesses and entrepreneurs working to develop new technologies in this environment can be successful because of government policies and the structure of our labor and capital markets. Firms and jobs are created and destroyed continually in our economy so that ultimately our resources are directed toward the most productive activities. Experts have noted this characteristic frequently in explaining why "high-tech" has penetrated production processes here more quickly and more intensively than in other countries. In such an environment, the transition to an economy that requires a higher level of security can be accomplished with little, if any, disruption of the long-term productivity trends that are the source of our increasing standard of living.

Compared with other industrialized economies, job entitlements in the United States are relatively low. Seniority practices, job security provisions of negotiated labor contracts, plant closure notification laws and the like provide some short-term job security to workers. However, in the face of a major shock that significantly shifts demand permanently away from the output of one industry toward another, these provisions affect only the transition from an old environment to a new one. For example, in the aftermath of September 11, lighter passenger loads caused airlines to employ smaller planes more frequently, meaning senior pilots needed to be re-certified to fly those planes. Once the retraining has been accomplished, these firms will be able to operate efficiently at the lower level of demand.

Finally, regulatory conditions also help smooth the economy's adjustment to the new threat of terrorism. A market system works most effectively when prices signal where resources should be used. In our current situation, we are much better positioned than we were in some significant historical situations. (See sidebar.) With the outbreak of the Korean War, the federal government instituted price controls and rationed critical materials. One effect of those policies was that investment in large structures and the production of automobiles were disrupted by steel rationing. The government also imposed credit controls on mortgage and consumer credit. All of these regulations interfered with the market system's ability to direct resources to their most productive uses.

Back to the top | Next >