Comments: Terror attacks won't tip the economy over the edge

I'm not sure I agree with the general tone of your comments. I think circumstances alter cases. We are effectively dealing with 'stylised facts' based on a class with two members (New York, Madrid). I think this makes it risky to generalise. It is important to distinuish between the financial markets and the real economy. The point about business cycles and shocks is not necessarily the size of the shock, but where it comes in the cycle. In the 09/11 case the US was already bottoming out of a recssion probably induced by a Nasdaq crash which was some 18 months previous. Also China was just coming onstream. Madrid already had sizeable negative interest rates, and radiant consumer confidence, which was re-inforced by a rapid detection, and a swift and popular change of government. In the UK none of these apply. The UK was in all probability entering recession. The government is popular, but the fact that they weren't suicides, and that the 'ring' hasn't been penetrated, means that detection may need time, and that there may be more attacks. Consumer confidence is the critical thing. The debate was already open about whether the UK would have a soft or hard housing landing. This development only adds more intensity to that debate. Of course part of the problem is that we economists have in some ways painted ourselves into the picture, the thing has in some meaningful sense become self referential, so we have to watch what we say, and keep a brave face. We should not, however, surrender our critical faculties.

Posted by Edward Hugh at July 11, 2005 09:36 AM
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