The terrified economy?

In the two weeks since the terrorist attacks on New York’s World Trade Center on 11 September, claims about its economic impact have got way out of proportion.

If much of the media coverage is to be believed, the impact of the attack goes beyond terrible casualties and physical destruction – to plummeting share prices, rising unemployment, redundancies in the airline business, declining tourism, and even a shopping downturn in London.

But this discussion fails to distinguish between the direct economic impact of the attack and the anxious mood that already existed long before 11 September. In a more confident era, the reverberations of the attack would not be nearly as great. The attacks speeded up a process that was already underway, rather than creating something new.

The outpouring of grief that followed the loss of more than 6000 lives has clouded the judgement of many – with some feeling that the economic damage should in some way be commensurate with the general sense of shock. But in such an emotionally charged environment it is all the more important to take a sober, systematic look at the real economic impact of the destruction.

Direct impact

The attack on the World Trade Center destroyed not only the twin towers, but damaged many buildings in the surrounding area of Lower Manhattan – and while estimates of the cost of damage are still imprecise, there is no doubt that it will run into billions of dollars.

The estimates vary considerably. US Treasury secretary Paul O’Neill told Business Week that it could be between $10billion (£6.8billion) and $20billion, or possibly even more (1). This would make it broadly comparable to Hurricane Andrew that hit Florida in 1992 – the most expensive natural disaster the USA has experienced.

Many insurance experts put the likely value of claims as a result of the attacks much higher. A commonly quoted figure is $30billion, while the UK Sunday Times quoted an expert who thought the damage could cost as much as $100billion (2). But this was a broadly defined estimate that included the cost of the aircraft, life insurance payouts, dealing with psychological trauma, business interruption, and compensation payments.

What most commentators fail to do, however, is set the estimates of damage costs against the huge size of the US economy. According to the latest figures, the GDP of the USA – the value of its output in one year alone – is $10.2trillion. In short, even the highest estimates of the cost of the attacks’ impact still account for less than one percent of US economic output in a single year.

State spending

The US and global authorities are not sitting back and letting the economy suffer. A number of bodies around the world are taking action that should counteract the effects of the economic impact – the most obvious being the emergency spending by the US government, with congress agreeing a $40billion package to help cover the costs of the emergency aid.

In addition, particular sectors of the economy will receive aid. Congress has agreed a $15billion package to help the airline business recover – and in the longer term the likely increase in military spending should also stimulate the economy.

Then there is the action taken by central banks, not only in the USA but across the world. On 14 September alone the Federal Reserve, the US central bank, released $81billion to bolster the financial markets – while central banks in Asia and Europe have also pumped in billions of dollars.

Similarly, all of the world’s main central banks have lowered interest rates – which helps to cheapen the supply of credit, so helping to stimulate economic activity. This kind of boost, particularly one on a global scale, will do a lot to counteract the economic impact of the attacks.

Financial markets

One of the main ways in which the terrorist attacks are said to be damaging the economy is through the financial markets. Many have blamed the attack for the billions of dollars wiped off share prices in the past two weeks. But such arguments blur the distinction between the stock market and the economy.

A key distinction to make – as all financial regulators recognise – is between the function and direction of the financial markets. The attacks didn’t stop the markets from functioning (although trading on the US markets was suspended for four days), but share prices have clearly fallen recently.

It is important to point out that it does not matter if the markets close for a few days. Stock markets are not productive – they provide a mechanism for investors to buy and sell claims to the future earnings of companies. If the markets are closed for several days the same transactions can be made at a later date without any necessary damage to the economy.

When it comes to the direction of stock markets, a limited realignment makes sense. It is certainly logical that insurance companies and airline businesses have suffered, to an extent – although their substantial handouts from the state in both the USA and Europe should help to counteract the most negative effects. But then, some firms – like those that produce military equipment or are involved in the construction industry – are likely to benefit as a result of recent events.

There is no automatic reason why share prices as a whole should plummet as a result of the attacks. Such falls certainly do not reflect substantially diminished prospects for the global or even the US economy. They are better seen as a panic reaction to recent events – and in this sense, they have hastened a downward trajectory that leading stock markets have been on since early 2000.

Confidence

Perhaps the most coherent argument linking the attacks of 11 September to the economic problems that followed relates to confidence. According to this view, the assault created greater uncertainty, so causing a general fall in confidence on the part of consumers as well as business more generally.

But this argument is also unconvincing. As I have argued before on spiked, the level of activity in an economy will generally depend on the extent of production rather than consumption (3). Individuals will generally spend as much as they can afford to, with perhaps a little saving if they have sufficient disposable income.

By contrast, in an uncertain situation like that created by the attacks, it is conceivable that individuals will cut back on consumption – making it possible that some individuals will decide to not take holidays and avoid air travel in the wake of the attacks. But it is wrong to simply blame such behaviour on these terrorist attacks. There is no necessary reason why a family in Alabama should avoid going on holiday to Disneyland simply because of recent events – rather, it is in a society which is already predisposed to panic that such behaviour can become widespread.

In the case of business, it is even possible to identify a substantial incentive to react to the attacks in a certain way. For example, the airline industry was already suffering economically before the attacks – so the events of 11 September could be seen as giving the industry an excuse to make cuts that it would have made anyway.

Overall, the current economic turmoil is best seen as the result of a generalised lack of confidence in the financial and business worlds. The attacks on the World Trade Center were a catalyst rather than the cause of the business world’s response – accelerating trends that already existed before the attacks.

It was already clear that the world economy was slowing before 11 September. Although the world was not about to conform to the most popular textbook definition of a recession – two consecutive quarters in which the economy shrinks – the economy certainly looked like it was going to grow more slowly than in 2000. The US economy in particular, which enjoyed relatively rapid growth in the late 1990s, looked set for a reversal.

Before 11 September, there was already a tendency for financial and business panics to develop at any sign of difficulty. So towards the end of the Asian financial crisis of 1997/98 it was widely assumed that the world might experience a depression on the scale of the 1930s (4) – and from March 2000 many argued that the problems facing technology companies would have a damaging impact on the rest of the economy.

The current discussion of the economic impact of the terrorist attacks on America looks like a rewriting of recent economic and financial history, as many commentators seem to have forgotten that there was an economic slowdown before 11 September. In a more confident era, the broader economic impact of the attacks would likely have been far more muted.

Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001 (buy this book from Amazon (UK) or Amazon (USA)). He is also a contributor to Cultural Difference, Media Memories: Anglo-American Images of Japan, Continuum International Publishing Group, 1997 (buy this book from Amazon (UK) or Amazon (USA)).

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(1) ‘Treasury’s O’Neill on bailouts and building confidence’, Business Week, 1 October 2001

(2) ‘US terror claims may hit $100bn’, Sunday Times, 16 September 2001

(3) The myth of the two-tier economy, by Daniel Ben-Ami

(4) See Daniel Ben-Ami, Cowardly Capitalism: The Myth of the Global Financial Casino (published by John Wiley), p9. Buy this book at
Amazon (USA) or Amazon (UK)