George W. Bush
George W. Bush; drawing by David Levine

There is war in the Middle East. The President of the United States is about to open a new theater of war in Asia. The stock market has collapsed: computer, technology, and conglomerate stocks have been particularly hard hit, declining by an average of 80 percent or more as the Dow Jones went down by 40 percent. A crisis of confidence threatens the survival of the stock exchange and has resulted in the near collapse of several major investment firms and the closing or liquidation of another hundred as a result of phony bookkeeping and capital flight. The city of New York, the financial capital of the world, is edging toward bankruptcy and many Americans have deep doubts about the political and economic system.

That is what happened in the early 1970s. The Arab–Israeli wars had set off an oil embargo and caused a recession. President Nixon sent American troops on an “incursion” into Cambodia; the country’s economy was crippled by Johnson’s and Nixon’s refusal to pay for the costs of the war and American society was torn by protests. These crises were resolved by initiatives for peace abroad, and by bipartisan cooperation at home.

After 55,000 Americans had died, Nixon negotiated a cease-fire in Vietnam. Jimmy Carter, with Menachem Begin and Anwar Sadat, negotiated the Camp David Agreements, one of the reasons that Carter was awarded the Nobel Peace Prize this year. The New York Stock Exchange crisis ended with legislation protecting the assets of securities holders. The New York City crisis was resolved thanks to the leadership of Governor Hugh Carey and Mayor Ed Koch, the bipartisan support of legislative leaders in Albany, and the cooperation of labor and business on a series of painful measures to cut back expenditures. President Ford grudgingly provided modest federal assistance. It is worth looking at what is happening now in the light of what happened then, both to apply some of its lessons and to avoid some of its pitfalls.

New York City’s looming crisis is, once more, caused by New York’s vulnerability to the condition of the national economy, and particularly of its financial industry, as well as to the international situation. The recession of the 1970s and the collapse of the stock market were caused by war in the Middle East, higher oil prices, and the US invasion of Cambodia, all coming on top of the speculative bubble of the late 1960s. I would argue that similar factors are at work today. We are absorbing the collapse of the stock market bubble of the late 1990s and its related financial scandals. But New York, its economy, and its psyche are still feeling the wounds of September 11, and, as a result, the city’s economy and many companies located in New York are more sensitive to the possibility of war in Iraq and its likely aftermath.

The principles that saved the city twenty-five years ago are still applicable today, but they will be harder to apply successfully. Mayor Bloomberg faces a gap in the budget of about $5 billion to $6 billion, roughly similar in proportion to what the city faced in 1975; but the rescue plan that my colleagues and I then worked out provided a four-year period to arrive at a balanced budget, whereas both current law and the need to maintain credit ratings require that the city’s budget be in balance in one year. In 1975 the state was able to provide significant assistance to the city; today the state may actually be in worse shape than the city, but Governor Pataki can, and must, support the reinstatement of the commuter tax, which provides $500 million annually to the city.

In 1975, eleven clearinghouse banks, led by Citibank, Chase, and Morgan, had an important and direct investment in the city and the state; today these have been merged into two giant global banks, JPMorgan Chase and Citicorp, whose main financial interests and commitments are more likely to be in Argentina and Brazil than in New York City and New York State. The New York unions in the Seventies, led by Victor Gotbaum and his colleagues, agreed to major concessions on their contract demands and to make investments in city bonds from their pension funds; both of these decisions will be difficult to duplicate. Finally, in the late 1970s the national economy and the markets were recovering. They show no solid sign of doing this yet; a few days of strong markets do not make a recovery.

The mayor and the governor are therefore going to look at the same set of painful choices as we did in 1975 but in a more difficult climate. Increased taxes and cutbacks in services and jobs are inevitable and the question, as always, will be which combination of both measures will be least damaging to the city’s economy and social fabric. I believe the most important lesson I learned from the city crisis of the 1970s was the need for fairness in the allocation of painful costs. It is an unfortunate reality that those least able to afford it always suffer the most; but it is up to the political leadership to make every effort to allocate sacrifice as fairly as possible and to make it a clear objective of any plan to deal with the city’s problems. Mayor Bloomberg should be extremely sensitive to this issue.


The city’s debt, even though very heavy, has been sufficiently restructured so that the risk of bankruptcy we faced in 1975 is no longer present. However, the attempt to deal with a serious budget crisis, which might last two or more years, could still cause unacceptable economic and social damage. The city should therefore seek federal support. With forty-six out of fifty states, together with their cities, facing budget deficits between $75 billion and $100 billion in the coming fiscal years, a special federal assistance program for states and cities is badly needed. Between 1972 and 1975 President Nixon set up such a program, calling it “revenue sharing,” and it was largely successful. Governor Pataki and Mayor Bloomberg should organize a national alliance of governors and mayors to lobby the administration and Congress to set up such a program now. The temporary increase in the federal deficit to finance such a program will be entirely justified by its economic and social benefits; it would provide direct stimulus to a weak economy.

As we face these issues, the shadow of Iraq and terrorism hangs over the city as well as over the country. A few weeks ago I attended a symposium in New York in which Czech President Václav Havel, President Bill Clinton, and Elie Wiesel took part in a general discussion about power, freedom, and human rights. What struck me most was Havel’s speech, in which he described, at the end of his term in office, his self-doubt, his feelings of inadequacy, his concerns about his ability to influence events.* The text of his speech is published in The New York Review, October 24, 2002. At the same time, he was firm in his support for American intervention in Iraq if it were part of an international coalition that would be approved by the UN and NATO. “You cannot negotiate with tyrants,” he said.

However, Havel was very fearful of the consequences of a unilateral American action. For his protests against the Communist regime, Havel spent years in prison. His moral strength was a major cause of the collapse of a totalitarian regime; his humility was an inspiration in the light of his remarkable achievements. I can only wish that, as we trumpet a new doctrine of global superiority and the right of preemptive self-defense, we would exhibit even a fraction of the humility and the intellectual open-mindedness of Havel. It would be reassuring to a world suddenly faced with overbearing assertions of American global power, a political strategy far removed from the collective and multilateral security arrangements advanced by Presidents Roosevelt, Truman, Eisenhower, and Nixon.

America now faces two major challenges simultaneously. The first involves our approach to international and national security in dealing with Iraq and the war on terrorism. The second involves our domestic economic and political policies as we face a possible war and a weak economy simultaneously. These two challenges are closely related, although the present public debate does not explicitly link the two. And unfortunately we cannot expect a full debate on these questions, since a congressional majority has concluded that it is more desirable to quickly approve the administration’s request for war powers than to explore in depth the risks and consequences of making war. Who will now ask the questions that remain unanswered, not only about Iraq but also about its aftermath, and about America’s global power and the new doctrine of preemptive attack? The absence of such questioning is now all the more regrettable since the administration’s withholding of information about North Korea’s concealed nuclear weapons program has prevented coherent, informed discussion of America’s security in Congress and in public debate.

This time there will be no negotiations at Camp David. Saddam is not Sadat, and it seems doubtful that he will give up willingly whatever weapons of mass destruction he has. If he cannot be persuaded, or pressured, to do so, we face the prospect of war. But what kind of war?

The administration so far has failed to distinguish between the profoundly different economic and political impact of the two possible approaches to military action in Iraq—on the one hand, within the Atlantic Alliance and the UN and, on the other, unilateral attack. Important Republican senators such as Richard Lugar and Chuck Hagel, as well as Democrats such as Ted Kennedy and Carl Levin, have tried to point to the critical importance of this distinction. Their arguments have been ignored.


That is wrong; how we go about dealing with Iraq will have deep repercussions on our international position as well as on the strength of the Atlantic Alliance; and it will have significant effects on our domestic economy and on the cohesion of American society.

It is clear today that uncertainty over Iraq has become an important factor in weakening an already weak economy. This is caused by uncertainty about the war, its cost, and, more important, the cost of its aftermath. We are uncertain about the future supply of oil as well as future oil prices; about the cost of continuing to wage war in Afghanistan and reconstructing its economy; about how the US plans to deal with Iran and North Korea, Pakistan and Indonesia, and other dangerous regions of the globe; and about the likelihood of further terrorist acts in America. How we deal with Iraq will have a dramatic impact on our domestic situation. The two issues must be linked.

“Going it alone” in Iraq will mean causing permanent damage to the effectiveness of the UN, as well as of NATO and the Atlantic Alliance. These institutions have been the pillars on which global security has been based for the last fifty years; if they are excluded from US policy in Iraq, and from their historical role in deterring or actively opposing a threat to peace, the effects could be deeply destabilizing for years to come. Countries with long records of collaboration with the US could be more estranged from it than at any other time since World War II.

The support of our major allies as well as of the UN Security Council would make a crucial difference in any policy the US may choose to follow. If a broad coalition backed up a policy of calling for stringent inspection with the possibility of using force, Iraq might be disarmed. At the very least such a policy should be tried. In any case the support of allies combined with UN authorization would confer critical advantages on any policy involving military action. It would maintain greater stability in the Muslim world; it would provide for our sharing burdens in any reconstruction effort; it would maintain the cohesion of NATO as a platform for the alliance; and it would provide greater social cohesion both in the US and in Europe if a war, as may well be the case, turns out to be longer and costlier in lives and in resources than expected.

President Bush has stated that war is his last option. But if he intends to exercise this option unilaterally, the administration and Congress owe the public and the world a clearer explanation of the risks and the costs involved than anything we have heard so far; both the risks and the costs will undoubtedly be greater than those that have already been discussed. A war could be longer and more damaging to all sides than the administration has acknowledged. The possibility that Saddam Hussein would use biological or chemical weapons against attacking forces has been raised by military experts and can’t be dismissed.

If a war breaks out, we will, in any case, have to consider stronger measures of domestic security, as well as of economic readiness, such as sharply reducing our civilian energy consumption. We would have to amend the existing tax cuts to pay for stronger defense, and give special budgetary assistance to state and local governments for investment in protection of citizens. We may also have to provide greater resources to the IMF and the World Bank to meet financial crises in countries like Turkey or Brazil. We should try to accelerate our ability to vaccinate all Americans against smallpox. It is also worth noting that our new doctrine of total global military superiority implies open-ended increases, far into the future, in the size of the “military-industrial complex” that President Eisenhower warned against more than forty years ago. We should be told its real costs before the administration plunges ahead with its plans. Whatever the costs of all these measures, they should be apportioned fairly.

None of these eventualities is getting anything like adequate discussion today, and yet wars have a way of getting out of hand. Iraq is certainly weaker than it was during the Gulf War and the US would sooner or later win any war in which it was involved. But the region is less stable and the world is less stable than it was in 1991, and the consequences of a war, particularly if the US is fighting largely without allies, are unpredictable.

We must also examine whether we have the necessary resources and stable domestic situation, both political and economic, required for such an effort. The lesson I learned from the New York City fiscal crisis was that a political leader can ask for considerable sacrifice from the American public if the sacrifice is seen as justified and is distributed reasonably fairly. I doubt that the public feels such fairness exists today in view of tax cuts heavily weighted in favor of upper-income Americans, as well as the disclosures of corporate scandals in which senior executives walked away with hundreds of millions of dollars while employees lost their jobs and their savings. Some of the same corporate executives, moreover, were given preferential access to the lucrative initial public offerings of “hot stocks.”

I do not recall a period of greater gloom in the financial community; the crisis of the New York Stock Exchange in the 1970s comes closest. The lack of confidence then centered on three factors: shaky capital structures of the brokerage houses (disguised by faulty accounting and incompetent management); the Israeli– Arab wars, which resulted in the oil embargo; and the long bear market that went with the high costs of energy. Today, most of these elements are present but it is also the financial integrity of the entire American business community that is under suspicion. Credit comes from the Latin credere, “to believe.” The system is in jeopardy when the public no longer has confidence in major corporations and institutions. That is the case today.

Our national economy is fundamentally on the wrong track. The federal budget, which had a steadily increasing surplus at the end of the 1990s, now has growing deficits. From being a country with a budget in surplus, a strong currency, and a decreasing national debt, the United States has become a country with a long-term budget deficit, a weakening currency, and an increasingly large national debt. America’s huge foreign deficit requires capital inflows of over $1 billion per day. It had been provided largely by foreigners who invest their money here, attracted by the strength of our economy and our currency as well as by the integrity of our markets. This inflow is now sharply reduced, depressing the dollar and increasing the risk to the US economy.

America’s dependence on foreign oil, and the fact that its sources are not reliable, worsens our foreign trade deficit. Conservation is necessary for national security but no administration, Democratic or Republican, has been willing to present the country with realistic policies to cut down consumption. These should include an oil import fee and more stringent mileage standards for cars and SUVs, as well as development of alternative sources of energy. Many Americans seem willing to fight a preemptive war to protect the country from Iraq; but they are not willing to take simple actions to preempt an almost certain energy crisis.

The most important economic issue facing the US today is the issue of fairness. The stock market boom and its inevitable bust have created ever-wider gaps between the very wealthy and the rest of Americans. The outrageous compensation packages of many corporate managers and the abuses that have been exposed throughout our financial institutions have shaken the public’s faith in the fairness of the American system. It has convinced overseas critics that American-style capitalism and globalization exploit the less fortunate. It may convince many Americans of the same thing.

Nearly a century ago, Theodore Roosevelt railed against the “malefactors of great wealth,” referring to the Morgans and the Rockefellers, the Carnegies and the Vanderbilts. In the early 1900s, Roosevelt’s antitrust laws and Federal Reserve System were the beginnings of a regulatory answer meant to control the excesses of these and other “robber barons.” In retrospect we can see that they built up much of this country’s industrial and financial infrastructure as well as many of its cultural and educational institutions. They were followed, however, by the financial speculators of the 1920s who brought about the crash of 1929 and the Great Depression. Finance capitalism almost ruined the US then, and Franklin Roosevelt, with his New Deal legislation to regulate the securities and banking industries, saved American society and capitalism with it. What we are seeing today bears more resemblance to 1929 than to 1905 and to the paper empires that collapsed in the crash. I believe that market capitalism is the best economic system ever invented for the creation of wealth; but it must be fair, it must be regulated, and it must be ethical. The excesses of the last few years show how the system has failed in all three respects.

Only capitalists can kill capitalism, but the system cannot stand much more abuse of the type we have witnessed recently. Such companies as Enron, WorldCom, Global Crossing, and Tyco, and their CEOs, cannot be allowed to be representative of American business. These corporate leaders were high-level thieves who stole from their shareholders and employees to enrich themselves. It will take a while to absorb just how brazenly they violated the law and betrayed their responsibilities. Unless corporate leaders can demonstrate their commitment to fairness and respect for law, the future of American capitalism will be in jeopardy.

As the finance capital of the world, New York has an enormous stake in the restoration of confidence in our financial system. The process of reform has begun with the Sarbanes-Oxley law, which, among other things, provides for a system of federal oversight of public auditors through a Public Company Accounting Oversight Board, as well as new disclosure requirements applicable to publicly traded companies and insider trading, and civil and criminal penalties for persons who are responsible for false accounting and false financial reports. But the act’s scope may not be as wide, and its provisions for enforcement may not be as effective, as full-scale reform would require.

We have a long way to go before both regulation and corporate ethics are sufficiently strengthened. Clearly the efforts of New York State Attorney General Eliot Spitzer to prosecute corporate corruption and deception should be encouraged, along with his collaboration with the SEC chairman, Harvey Pitt. But the administration’s recent refusal to provide the SEC with the budget called for by the legislation it supported contradicts its rhetoric about stopping abuses. Only thoroughgoing reform can achieve fairness; and the need for fairness goes beyond the consequences for the salaries and savings of private citizens. National security in a depressed economy is our most important issue today. To deal with it will require real sacrifice on the part of all Americans; and if sacrifices are to be justified, they must be seen to be fair.

—October 24, 2002

This Issue

November 21, 2002