JUNE 10, 2003
MOVEABLE FEAST
By Thane Peterson
The "Enronization" of America | A comparison of U.S. economic and foreign policies with the dirty dealing that brought down the energy giant reveals some troubling symmetries
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Could the U.S. economy go the way of Enron? On the face of it, it's an absurd question. Indeed, with the war in Iraq over, the dollar down, interest rates at historic lows, and business investment showing signs of picking up, many economists believe the U.S. is on the verge of an economic turnaround. Americans might be forgiven if they saunter down the sunny side of the street this summer humming a few bars of that old Bobby McFerrin ditty, Don't Worry, Be Happy.
Bear with me for a minute, however. Even if it's only, say, a 1-in-20 chance that the U.S. could be on the verge of a crisis of confidence worthy of the Enron implosion, the possibility deserves some thought. Let's consider this extreme worst-case scenario if for no other reason than what it says about the country's direction.
Enron's slide began with a seemingly small event -- a writedown in mid-October, 2001, that resulted in a $1.2 billion reduction in its shareholder equity. That, in turn, focused a spotlight on long-standing problems that had previously been ignored. Enron's main weakness: huge, off-balance-sheet borrowing that the energy giant had used to pump up its profits.
CRISIS WATCH. Enron's cocksure top managers were too arrogant to realize the gravity of the predicament they were in until it was far too late. Once investors, regulators, and credit-rating agencies focused on Enron's weaknesses rather than its hype, things quickly spiraled out of control.
What does all this have to do with the U.S.? The war with Iraq may be over, but any number of problems in the news right now could still touch off a crisis. Another terrorist attack or military confrontation in the Middle East or a provocation involving North Korea might do it. Then there's the SARS scare. It seems to be waning, but the disease isn't under control yet.
M. Cary Leahey, a senior economist in Deutsche Bank's New York office, recently published an analysis of the potential economic fallout of a renewed SARS outbreak. His conclusions aren't heartening. Leahey figures that industries accounting for about $1.2 trillion in annual output, or about one-eighth of the U.S. economy, would be "acutely affected," including air and surface transportation, hotels, restaurants, and retailing.
LIVING WITH DISEASE. Over three months, Leahey estimates, an outbreak might result in a 5% reduction in output in those industries, reducing quarterly U.S. GDP by two percentage points on an annualized basis. The good news? He argues that the crisis would probably be short-lived.
"Over time, people would begin to live with the virus, and the impacts on the economy would diminish," he writes. Still, the industries Leahey looks at account for 22.7% of U.S. employment, so there could be significant layoffs if an outbreak lasted very long.
Additional segments of the economy also could be badly pinched. International travel and health services account for a combined 6.7% of gross domestic product. Manufacturing, which accounts for 14.1% of GDP, also might take a major hit from disruptions in the flow of components from overseas and health worries about workers congregating in factories, Leahey estimates.
Even if a renewed outbreak were restricted mainly to Asia, U.S. trade might be severely disrupted in the short term. That's because -- like Enron -- the U.S. has one a lot of outsourcing. Including Japan, Asia now accounts for 28% of U.S. exports and 39% of imports. Last year, China was America's largest trading partner, the report says, accounting for 10.7% of the U.S. total goods imports and 19.2% of consumer-goods imports.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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