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America Recovers: What Effect is America's New War and Fear of Terrorism Having on Economy and Business?

Aired October 24, 2001 - 06:41   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DARYN KAGAN, CNN ANCHOR: What effect is America's new war and the newfound fear of terrorism having on the economy and business?

Richard Berner is chief U.S. economist for Morgan Stanley. He sees both the dark clouds, also a silver lining.

We're going to look at a little bit of a piece he wrote for the "The New York Times" yesterday, where he says: "Reclaiming our safety and security is our first priority, regardless of cost. But we must also recognize that this shifting economic mix has implications that go well beyond the question of cyclical recovery from recession; it will reshape the economy for years to come."

And Richard Berner is our guest from the New York bureau this morning -- good morning -- thanks for joining us.

RICHARD BERNER, MORGAN STANLEY: Good morning.

KAGAN: If we could start on a personal note first. I see Morgan Stanley, and I know that there were large offices of your company at the World Trade Center. I'm wondering, is that where your office was? And were you there on September 11?

BERNER: I was not there. I was in the Marriott World Trade Center Hotel at the time. At the time, I was president of the National Association for Business Economics, and we were holding our annual meeting in the hotel. And fortunately, all of us escaped.

KAGAN: Just a little technical -- there you go. They were telling you the wrong camera to look at -- straight ahead -- there you go.

That is good news that you escaped, but I imagine that you did know a number of people, who lost their lives on that day.

BERNER: Right.

KAGAN: And our condolences in that thought.

Let's go ahead and look at this piece that you did write for "The New York Times." First of all, looking at terrorism and how it's changing business. Let's look at some of the costs that you point out that American business will have to start paying. One: higher insurance and security costs.

BERNER: That's right, Daryn. I think that American businesses are going to pay higher insurance premiums. They'll have to pay higher security costs. Some will want to hold more inventories to make sure that their customers get the products and services that they want, and they have assurance of supply.

So the just-in-time inventory management techniques of the past may have to give way to a different set of techniques in the future.

KAGAN: One of the differences that government will be doing: building up the defense, not pumping as much money into building up the economy. Long term, that does hurt businesses.

BERNER: Well, the basic problem is, as I noted, that is obviously key to reclaiming our safety and security. We must incur these costs.

KAGAN: But explain to us why that's not also a good economic benefit. I'm thinking back to World War II, and that helped the U.S. come out of the Depression with the increased defense spending and gearing up for war.

Why isn't it true this time around?

BERNER: It did. Let me point out, however, that over the past 15 years, we benefited from what I call, and many call, the peace dividend, after the Berlin wall came down and the Cold War ended. That freed up a lot of resources for private investment as defense spending fell from more than 7 percent of economic activity to less than 4 percent, and those private recourses went into private investment.

As a consequence, our economy was strong and productivity increased, increasing the prospects for long-term growth. This time, if we reverse that trend, we'll have fewer resources available for private investment.

KAGAN: Let's help some Americans look ahead and make some plans here. How long do you think a recession would last?

BERNER: Well, it's difficult to say. Obviously, if there are no further terrorist attacks, we've got a couple of opposing forces in play. The forces that are depressing the economy, but massive fiscal and monetary stimulus unprecedented really in a post-war period that should help lift the economy out of recession probably decisively by the second half of next year.

KAGAN: Also, Americans wondering what they can do on an individual basis. Could something as basic as buying American really help the U.S. economy?

BERNER: Sure. But obviously, Americans are going to do what motivates their own...

KAGAN: Pocketbook.

BERNER: ... their own personal well being.

KAGAN: Sure.

BERNER: And it seems to me that patriotism can only go so far. People are going to be limited by their incomes. If in the short term, they are limited by the loss of a job, then clearly that's going to have an impact on spending.

KAGAN: So are you saying that this is a problem that the U.S. government has to solve?

BERNER: Well -- excuse me -- as always is the case, I think it will be a problem if the government solves it. As I mentioned, we've already gotten substantial easing in monetary policy. We've gotten tax cuts already...

KAGAN: Do we need more?

BERNER: ... already put in place. I think we will get some more tax cuts, and those will all ease the pain of recession.

KAGAN: But has enough been done? Are we just trying to wait for this to play out?

BERNER: I think enough has been done, and what we anticipate together those forces will lift the economy into recovery by the second half of next year. We do have to wait for some for the recessionary forces to play themselves out.

KAGAN: And just to bring it around full circle to give us a personal snapshot, give us a look inside of Morgan Stanley and how the company is regrouping. Where are you conducting your business? Where are your offices, and how are people doing personally?

BERNER: Well, first of all, let me say that we're very happy that most of our people escaped from the World Trade Center disaster. Obviously, the disaster was very traumatic for us and for many of our colleagues in other firms. And we are still regrouping. As for plans for the future, I'll leave that up to other people to explain that in the future.

KAGAN: I got it. You're handling the economic forecasting part if it (ph). Plenty on your plate, I would imagine, just alone with that.

Richard Berner with Morgan Stanley -- thanks for stopping by and joining us today.

BERNER: Thank you.

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