Review of Impact and Response

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3.The Economic Impacts of 9/11

The attacks of 9/11 had an immediate and dramatic impact on the U.S. economy, particularly on the financial, airline and insurance industries. The New York Stock exchange was closed, share prices and stock indexes declined in value, and the New York Mercantile Exchange was closed, along with banks and brokerages on Wall Street. Several major securities dealers in the critical U.S. government securities market had offices in the World Trade Center, particularly Cantor Fitzgerald, which lost nearly 700 employees.29 Banking and financial markets play a role in the broader economy analogous to the role of the circulatory system in the human body.30 Because of the concentration of so much financial activity in and near the World Trade Center in New York City, one would expect that banking and financial markets would be hit especially hard by the 9/11 attacks. Indeed, according to one study, an estimated 40% of the individuals who perished in the World Trade Center were employed within the financial services sector.31 Consequently, one would expect that the strains produced in these markets immediately after the attacks would present a serious risk to the overall U.S. economy.32

Airlines throughout the country were grounded for several days; some eventually went bankrupt, while government subsidies helped others maintain some level of service while restructuring their debts. Airline travel in October 2001 was 20% lower than in previous years, and the resulting drop in passenger flights led to more than 100,000 employees losing their jobs, while airline orders for new aircraft plummeted.33 Other industries were also badly affected, such as hotels, tourism, automobile rentals, travel agents, and civilian aircraft manufactures. For example, hotels reported higher vacancy rates and employment in the sector as a whole fell by 58,000 (about 3%) in October and November, 2001.34

Nearly 18,000 businesses were dislocated, disrupted or destroyed by the attacks.35 In Virginia more than 5,000 amusement and recreation jobs were cut from September to October, a 12.6% reduction in that industry’s work force, while the state’s hotel industry shed 1,300 jobs during the same period, a 2.6% drop.36 The closing of Reagan National Airport to protect federal facilities in the Metro Washington area represented a significant economic blow to the region.37 And nationwide, many industries leaned heavily on their insurance providers for help in surviving the crisis. For example, the World Trade Center and the adjacent buildings were insured for $4 billion, the damage to the Pentagon cost another billion to repair, and the four airplanes used by the hijackers were worth between $50 million and $100 million each.38 Overall, the loss of life and property gave rise to the largest property/casualty claim in history, estimated at $40 billion.39 However, generally speaking, stores remained open, people still shopped, ate at restaurants, finalized real estate deals, sold cars, planned weddings, etc. The economy did not grind to a standstill, despite the intentions of Osama bin Laden and his colleagues.

In truth, the U.S. economy in 2001 was already experiencing a reduction in growth. Key economic indicators reflected this, as reported by a 2002 Congressional Research Service report: industrial production reached a peak in June 2000 and slowly began to decline, the two consumer confidence indexes peaked in May 2000 and the unemployment rate began to rise, reaching 4.9% in August 2001 (from a low of 3.9% late in 2000). Nationwide, in all sectors of the economy from mid-September through the end of 2001, new filings for unemployment insurance increased from just over 300,000 per week to nearly 650,000 per week. Data revealed that GDP began contracting in the 1st quarter of 2001, a contraction that continued through the 3rd quarter. This period of contraction would, of course, explain the rise in the unemployment rate. In other words, the economy was softening and the possibility of a recession loomed.

The loss of the World Trade Center—a primary hub of the nation’s financial sector as well as a major employer and tax revenue provider for New York City—resulted in losses that have been estimated in the tens of billions. Globally, the damage to the U.S. economy had a ripple effect, particularly on our closest trading partners like Canada and Mexico. However, on the national level, positive GDP growth began again in the 4th quarter (at an annual rate of 2.7%, rising to an annual rate of 5% in 2002) despite the attacks of 9/11, and growth has remained fairly consistent every year since 2001.40 In one indicator of renewed consumer confidence in the economy, special financing incentives offered by the automobile companies in October 2001 led to record motor vehicle sales for that month and another near record month in November.41 By comparison, consumer confidence did not fall after 9/11 by nearly as much as it did in the 1990-91 recession.

One reason that the damage to the U.S. economy was considerably less than some had anticipated is that the U.S. economy is so large, so dynamic, and so agile that it was able to absorb the 9/11 attacks with only limited longer-term consequences for either financial markets or the general economy.42 Also, under the leadership of Alan Greenspan, the Federal Reserve cut interest rates aggressively, sending fixed mortgage rates plummeting to 30-year lows and causing a boom in housing sales, refinancing, and new home construction.43 Another reason for the relatively low impact on the economy is that our nation’s financial sector is designed to be resilient. In fact, terrorism scholar Erica Chenoweth recently observed that this particular sector may be more resilient than others in recovering from a terrorist attack, for several reasons.44 First, a significant amount of important work is done by computer, and standard policies exist requiring employees to back up transactions, save information on a regular, networked basis, and store backup materials at offsite locations. Such policies did not arise out of a perceived terrorist threat exclusively, but also out of modern security needs regarding hackers, network blackouts, electricity blockages, fraud, and natural disasters. The nature of modern monetary transactions is such that communications and information acquisition is much more timely and accurate, making markets more efficient and flexible.45 Second, enormous amounts of this industry’s resources have been directed at securing insurance policies. Therefore, when property or data is lost or irretrievable, firms are guaranteed compensation for losses, damages, and liabilities. Finally, the financial service firms on Wall Street and throughout Manhattan have often resided within rented space. Indeed, property lost through disasters is minimal, since these companies have not owned the buildings in which they operate. Therefore, those suffering the greatest losses are the property owners, not the businesses occupying these premises.

Immediately after 9/11 there was considerable concern about the potential for investor panic, which could result from nearly any kind of event indicating market weakness. However, as Chenoweth observes in her recent analysis, this concern was allayed by several important events following the attacks.46 First, the securities market was only closed for four days, opening again after the telecommunications network in lower Manhattan became operational. Although the stock market re-opened on September 17th, it took 19 trading days for the S&P 500 index to bounce back to its pre-September 11th level.47 A second concern was that if individuals withdrew U.S. dollars from banks and other accounts across the country and world, the United States would face liquidity shortfalls. In the immediate aftermath of the attacks, however, the United States’ Federal Reserve provided liquidity through the banking and financial sector in order to calm and stabilize the economy.48 These and other actions in the financial sector helped limit the economic impact of the 9/11 attacks.

The long-term economic impacts of 9/11 have been more significant than the short-term impacts. New York City lost a significant amount of its office space and a number of businesses ceased to exist. Close to 200,000 jobs were destroyed or relocated to other cities, at least temporarily.49 In a survey of New York residents after 9/11, 14% of respondents indicated that they or a family member had lost work as a result of 9/11.50 Insurance premiums have increased throughout most industries, perhaps another reflection of the focus on vulnerability and security described earlier. The 9/11 attacks inflicted the biggest single loss— currently estimated at $50 billion—ever sustained by the global insurance industry. A survey conducted by the Conference Board after 9/11 found that insurance costs had risen on average 33% since 2001, while costs for 20% of companies surveyed had doubled.51 Rescue, cleanup and related costs in New York and Washington, DC have been estimated at over $27 billion.52 Huge sums of money are also being spent on government reorganization and other initiatives in the name of improving homeland security. Defense spending in particular grew by about 9.25% in real terms in the fourth quarter of 2001, and the costs of military intervention in Afghanistan and Iraq have been enormous.53

According to the aforementioned 2002 CRS report, “large amounts of resources are and will be committed to making production, distribution, finance, and communication more secure in the United States. Resources that could have been used to enhance the productive capacity of the country will now be used for security. Since it will take more labor and capital to produce a largely unchanged amount of goods and services, this will result in a slower rate of growth in national productivity, a price that will be borne by every American in the form of a slower rate of growth of per capita real income.”54 The private sector is bearing some of these costs. The President’s Council of Economic Advisers has estimated that private business spent an estimated $55 billion a year on private security before 9/11; since then some experts forecast that corporate America may have to increase that spending by 50-100%.55

A number of low-cost airlines—already operating precariously close to the profit margin—have gone out of business, leaving fewer choices, fewer flights, and less competition in the airline travel market. Increased border security has in some cases slowed shipments of goods, including those used in the production of finished goods in the U.S. For example, some automobile assembly plants along the U.S.-Canadian border had to stop temporarily or slow operations because cross-border shipments necessary for just-in-time inventory systems were delayed at the border.56

Overall, the short-term direct impact of the 9/11 attacks on the U.S. economy were not as significant as the financial costs of the long-term response that is still underway. Two overseas military interventions, combined with a plethora of homeland security initiatives at the federal, state, and local levels, have made it an almost impossible task to accurately calculate the full economic impact of 9/11. As discussed in the next section of this essay, these initiatives are largely focused on preparing communities for future terrorist attack. The American people responded to the 9/1 attacks with courage and conviction, and these initiatives are meant to strengthen our resilience in the face of the global terror threat.

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