live and work in New York City, and the terrible tragedy on Sept. 11 has had a tremendous impact on the lives of so many people I know. There has been, however, from the very first moment, a remarkable response to the crisis that shows how powerful the American spirit is.

In the days after the attacks, it has also become clear that our economic situation has become more complex. For quite some time now, after eight remarkable years, our economy has been experiencing difficulty. Powerful positives, including a series of Federal Reserve rate cuts and the budget surplus, have been competing with powerful negatives, like excessive corporate and consumer debt, overinvestment in some industries and the troubled economic situation in Europe, Japan and the emerging markets.

Prior to Sept. 11, I felt that the economic situation could well remain troubled for considerably longer than forecasters generally expected. To this complex picture, the attacks added uncertainty and reduced consumer and investor confidence. But the catastrophe will also add stimulus to the economy in the form of substantial new spending by the federal government for security, defense and rebuilding.

The likelihood now that economic difficulty will last for a considerable period is increased, but overreaction is a mistake. It is important to make our economic decisions with an awareness that the great underlying strengths and very favorable long-run prospects of the American economy have not been materially altered by what occurred on Sept. 11, even with the cost of permanent changes in transportation and security.

As to economic policy, we must first make estimates about the increase in spending over the shorter term that will occur because of Sept. 11 ・probably a very large number ・which constitutes fiscal stimulus just as surely as any proactive stimulus program. Many estimate that a total stimulus package should amount to $100 billion to $125 billion. Probably $75 billion will be spent directly as a result of the attacks ・leaving a need for another $25 billion to $50 billion in spending, tax cuts or a combination of the two.

Each measure in a stimulus package must have a substantial effect in the short term, the greatest impact for the money spent and no cost in the later years.

The third criterion is crucial. While our strategy needs to be geared to the changed economic situation at hand, the laws of economics have not changed, and the fiscal discipline that was so enormously important over the last eight years is still extremely important now. Since the short-term fiscal position has changed dramatically, it is all the more important to preserve our already diminished long- term fiscal health. Market interest rates affect business investment and, more important, mortgage rates, which in turn affect housing prices and mortgage refinancing, and hence consumption. And market rates now ・as well as general confidence ・can be significantly influenced by expectations about our longer-term fiscal strength. Despite eight federal rate cuts, longer-term bond market interest rates have come down very little, which many ascribe, in part, to our diminished long-term fiscal condition following the passage of last spring's tax cut.

I believe all these considerations should guide our work going forward on specific stimulus measures. Ever since the softening began, consumption and housing have been the strong point in our economy. Business investment has declined because of great excess production capacity. For most companies, low levels of investment now are not the result of cash positions or financing capacity, but an absence of demand.

To increase demand, the most effective measures would be tax rebates to low- and middle-income working people ・including those who pay Social Security taxes but not income taxes ・who have the highest propensity to spend. The propensity may be even greater in the runup to Christmas. Another option is to extend unemployment insurance payments temporarily. Money put into this program would almost surely be spent immediately. The most effective business components ・though less effective than consumption measures ・would be temporarily allowing purchases of computer hardware and software to be treated as deductible business expenses or allowing some type of accelerated depreciation.

It is also clear what we should not do. A capital gains tax cut, according to a 1998 Congressional Budget Office study, would have nearly zero effect on the economy in the short term. I think the effect could actually be negative in that a capital gains tax cut could induce increased stock sales.

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Another widely discussed measure, a permanent corporate income tax rate cut, would have exceedingly little short-term stimulus benefit relative to the cost. For example, cutting the corporate income tax rate from 35 percent to 25 percent would cost roughly $850 billion, including debt service, over 10 years. But the short-term stimulus from that cut would be a very small fraction of that cost.

The trouble is that a corporate tax cut would not be targeted to encourage new incremental investment. It would apply to profits from investments made in prior years, from new investments that would have occurred anyway and from profits on all other expenditures. A permanent cut would also carry great costs in the later years and thus exacerbate our fiscal problems, with likely adverse impact on current interest rates.

Any positive effect on the stock market from corporate rate cuts would probably be offset, in some measure, by the negative impact on the stock market from increased interest rates. In any event, the increase in consumption from the wealth effect derived from rising stock prices could be far less expensively obtained by other means. A temporary corporate tax rate cut would be even less effective.

Lawmakers and the public are understandably looking for fiscal ways to address the economic difficulties. But looking more broadly, I believe that what happens domestically and internationally in combating terrorism will have a greater impact on our economy than anything we do now in the economic arena. In this regard, the visibility of our leaders in providing sensible and thoughtful discussion of these issues can contribute significantly to building confidence. The long-term strength of our economy gives us the short-term capacity to respond effectively to the events of Sept. 11.