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It would be invigorating for our spirit and patriotism if the American economy responded to last week's terrorism by a defiant show of strength. The symbolism would (as others have said) send a message that we cannot be cowed. Secure jobs and rising incomes would also help sustain national unity and political good will.

Perhaps this will happen. But the odds are against it, less because the terrorism did so much economic damage -- either psychological or physical -- than because the economy was already weakening. The late lamented boom left a legacy of business over-investment and debt-financed over-consumption that is now depressing new spending, which after all is the propellant of production, jobs and incomes. Last week's attacks compound these pressures by damaging some industries (airlines, tourism), creating new uncertainties and jeopardizing confidence. When the Federal Reserve cut interest rates Monday, from 3.5 to 3 percent, it pointedly warned that "last week's events have the potential to damp spending further."

In August, industrial production had declined for the 11th consecutive month and was almost 5 percent below its level a year earlier. Likewise, the unemployment rate rose from 4.5 to 4.9 percent. Although low by historical standards, this was a full percentage point increase from the 3.9 percent reached late last year. Since World War II, any rise in joblessness greater than 0.4 percentage points has signaled a recession.

Although expected, Monday's stock market decline could -- considering the circumstances -- have been much worse. The larger danger is that it has simply accelerated a persistent downward drift, reflecting an erosion of profits and a suspicion that the market was still overvalued. The history of many previous crises (the launching of Sputnik, the Cuban missile crisis) is that, after initial declines, the market more than recovers its losses within six months. Unfortunately, the market may have been set to decline anyway, because the economy was declining.

Look at housing as a point of vulnerability. Until now, it has been an enclave of strength. Since 1998, housing construction has exceeded 1.6 million units annually. Meanwhile, prices of existing homes have been on a quiet rampage, rising 6 to 9 percent between June 2000 and June 2001.

Housing's good fortune stemmed mostly from a strong economy, low unemployment, widespread optimism and low mortgage rates. But housing's strength also involved a loosening of credit standards and a speculative spiral: People rushing to buy before prices rose; or existing homeowners selling at hefty profits that were used to bid up prices of larger and more lavish homes. The result is that, even before last week, housing showed signs of weakening.

Rising unemployment implied more loans would go into default and fewer people would qualify for new loans. Slowing personal income would drain cash from the resale market and dampen or reverse price increases.

Consumer spending would also weaken. For the past decade, rising home prices and low mortgage rates have driven waves of mortgage refinancings. Many homeowners have increased their loans against higher home values -- and then spent some of the extra cash. Subsiding home prices would undermine this debt-financed spending.

We have heard invocations that people should buy and spend, because it's patriotic and socially beneficial. Although there may be some of this, most people will react to their own circumstances and mood, which are worsening. Will people now be more likely to buy a home than last week? Doubtful.

Over the past decade, Americans' optimism has rested on a tripod of strong markets for jobs, stocks and homes. All are now wobbling, and if consumers lose faith, business investment won't recover.

What this suggests is that the White House and Congress cannot simply watch the economy and wait. There may be policies -- accelerating the tax cuts, sensible increases in military spending or school construction -- that could improve people's income and job prospects, while meeting genuine national needs.

This is a time to be prudent without being dogmatic. Democrats need to consider more military spending, Republicans more social spending. Americans find their economic as well as their physical security under assault. Our leaders need to attend to both, because an economic crisis would surely give the terrorists an undeserved measure of credibility and satisfaction.

Washington Post Writers Group

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