Cost of fear is taxing to economy

www.boston.com By Charles Stein, Globe Columnist, 2/23/2003

When I think of the cost that fear has imposed, I'm reminded of those clever television commercials for MasterCard: duct tape: $7.50, plastic sheeting: $17.95, damage to the American economy: incalculable. It is hard to put a price tag on the assorted fears that we are coping with today: fear of war with Iraq, fear of war with North Korea, fear of terrorism. But make no mistake about it. The costs are real. A fear tax has been levied on the economy and we are paying it, just as surely as we pay taxes on income and sales.

The fear tax shows up in the price of oil, consumer spending, business investment, and stock prices. Add them all up and in the opinion of some economists, the total is significant. ''This is a big deal,'' said Allen Sinai, chief economist for Decision Economics in New York. Sinai estimates that anxiety about the future is reducing annual growth by one percentage point. When you consider that the US economy is expected to grow at only a 3 percent clip this year, one percentage point makes a big difference.

On the business side, fear has led to paralysis. For companies already dealing with weak profits and too much capacity, nervousness is one more reason to hunker down and spend as little as possible. Walt Disney Co. last week blamed war fears for a decision to freeze hiring at its Florida theme park. ''Recent events, specifically uncertainty about war, make it difficult to assess the future impact on our business,'' a Disney spokesman said.

For consumers the picture is more complicated. Consumer spending has held up surprisingly well, given all the troubles in the world and the weakness in the economy. Spending on housing and cars has been particularly strong. But when pollsters question people in routine consumer confidence surveys, they come across something puzzling. Asked about current conditions, consumers say things are not too bad. But when asked about the future, consumers express much more pessimism. Pollsters can't prove it, but they think that gap is mostly about fear, which is lurking not far below the surface. John Gorman, president of Opinion Dynamics, a local market research firm, recently held a focus group on the issue of prescription drug coverage. Out of the blue, one of the participants wondered out loud whether her health insurance policy would cover ailments caused by poison gas.

In the energy world, separating out the impact of war fears from other problems is not easy. Oil prices have been pushed higher by both a strike in Venezuela and cold winter weather. Still, the war premium is real. Joseph Stanislaw, president of Cambridge Energy Research Associates, a consulting firm, thinks fear of war has boosted oil prices by $3 to $4 per barrel. Oil currently sells for about $37 a barrel.

Allen Sinai guesses that anxiety has shaved at least 10 percent off stock prices. Again, you can't prove it, but the conclusion is a logical one. Stocks sell at a multiple of their current earnings. The more optimistic the view of the future, the higher the multiple. With all the clouds hanging over the economy, Wall Street has found it difficult to be optimistic about the prospect for future earnings. Risk taking, another element essential for a healthy stock market, has also been a casualty of war fears.

The next question is obvious: If there is a war with Iraq and it goes reasonably well, will the economy and the market do better? Alan Greenspan thinks so. In his recent testimony before Congress, the Federal Reserve chairman said if the uncertainty surrounding Iraq diminishes, the economy ''was poised to grow more rapidly.'' He didn't say how much more rapidly and he conceded that the economy was wrestling with other ''strains and imbalances'' that could continue to constrain growth.

So the right answer is: We can't be certain what will happen if our fears recede. Still it would be nice to find out. We all pay enough taxes now. The fear tax is one we could do without.

Charles Stein is a Globe columnist. He can be reached at stein@globe.com.

This story ran on page F1 of the Boston Globe on 2/23/2003.