[A-List] US economic malaise

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Corporate scandals will cost US $35bn
By Alan Beattie in Washington
Financial Times; Sep 05, 2002

The wave of corporate governance scandals will cost the US economy $35bn
- as much as a$10-a-barrel rise in the price of oil, according to
research released yesterday.

Economists at Brookings Institution, the Washington think-tank, said
their conservative estimate was that the scandals would take 0.34 per
cent off gross domestic product in a year. That would equal the annual
cost of government spending on homeland security or a $10-a-barrel oil
price rise, they said.

Carol Graham, director of governance studies at the institution, said
the depressing effect on share prices and hence consumption was the main
route through which the scandals would affect the economy. "Part of the
problem stems from the public perception that the scandal is situated at
the centre rather than the periphery of the system," she said.

If the falls in stock prices this year were not reversed, the scandals
could take 1 to 2.5 per cent off the economy over the next 10 years, the
report said. Lower stock prices would also reduce investment through
increasing the cost of capital, the report said.

The estimates are among the first independent assessments of how much
the string of revelations about malfeasance, which started early in the
year with Enron and spread across corporate America, have cost the
economy. Official data showing the economy slowing more than expected,
to a below-trend 1.1 per cent in the second quarter, suggested that
these estimates could be on the low side.

The wave of corporate scandals has receded from view recently as stock
prices stabilised and then rose during August. The passage of the
Sarbanes-Oxley accounting reform bill before the summer congressional
recess also helped to put the issue on the back burner.

But Brookings Institute analysts said the scandals - and the
administration's reactions to them - could re-emerge as a key
battleground in the forthcoming mid-term elections.

The Bush administration has floated various ideas for combating the
effects of the falls in stock prices and the increased uncertainty which
appears to be holding back business investment, including cutting taxes
on dividend payments and allowing investors to write off stock price
falls against tax. But it has stressed that these ideas are at a
formative stage, and economists say that recent estimates from the
non-partisan Congressional Budget Office showing a large drop-off in tax
revenue may have increased the risks to proposing new tax cuts.

The falls in share prices this week, if they spark a renewed sell-off in
asset markets, could also serve to refocus attention on the economy.