The Economist points out that the economic effects of 911 have been much smaller than many of us feared. Of course, the terrorists have also proved much more inept than I, at least, feared. If you'd asked me in late September what the chances were that Al Qaeda would not successfully strike at American civilians again within a year, I would have put those chances at one percent.
Of course, in the initial aftermath of the terrorist attacks, the world Of course, in the initial aftermath of the terrorist attacks, the world’s stockmarkets plunged still further. Economists were unanimous: the events in New York and Washington delivered an enormous blow to confidence. Airlines were on the brink of collapse as passengers vanished, afraid to fly. American retail sales virtually dried up in the days after the attacks as people stayed at home, glued to their televisions.
But economists could not agree on how prolonged these short-term effects would be. Previous experience with massive economic shocks suggested that their impact tended to be relatively short-lived and relatively modest over the medium term. On September 12th last year, though, it was impossible to know whether that pattern would be repeated. Nobody knew what would happen next, and whether America would face a prolonged campaign of terrorist attacks.
The one thing most economists could be sure of, even at that stage, was that the events of September 11th would provide a useful scapegoat for whatever subsequently went wrong with the global economy. About this, at least, they were right. A year later, plenty of people are quick to blame al-Qaeda for sluggish recovery in America, slow or non-existent growth in many parts of the world, for the prolonged global bear market—and even for America’s ballooning budget deficit.
But it is hard to square this view with the facts...
Counting the cost
From The Economist Global Agenda
A year on, opinion is still divided about the full economic impact of last year’s September 11th terrorist attacks against America. Both America and the global economy are still struggling to regain momentum. But how much of that is a direct result of the attacks?
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IT WAS an unprecedented shock. The human cost of the terrorist attacks on America is clear for all to see: lives lost, people injured, families bereaved, a nation suddenly made to feel vulnerable. More easily forgotten are those whose livelihoods depended on the thriving financial centre of New York that the twin towers dominated. Thousands of jobs have been lost and businesses closed. Many other businesses still totter on the brink of bankruptcy, as financial firms move many of their operations away from lower Manhattan. Local demand for pizza deliveries, dry cleaning and dozens of other services has dropped off. For the individuals directly affected, the catastrophe was huge. Working out the impact on the American economy as a whole, though, is far more complicated: partly because of the unprecedented nature of the events a year ago, and partly because of the point in the economic cycle at which they happened.
September 11th last year was such a black day that it is hard now to remember the global economic mood on September 10th. It was gloomy. Stockmarkets around the world fell sharply that day: Japan’s Nikkei 225 index, for example, dropped by 3.1% to a 17-year low. And the falls were cumulative. By September 10th, America’s Dow Jones Industrial Average had fallen by 10% since the beginning of 2001; the more broadly-based Standard & Poor's index was down by almost 20%. It was a similar pattern in Europe: London’s FTSE 100 index slid below 5,000 for the first time in three years.
Of course, in the initial aftermath of the terrorist attacks, the world’s stockmarkets plunged still further. Economists were unanimous: the events in New York and Washington delivered an enormous blow to confidence. Airlines were on the brink of collapse as passengers vanished, afraid to fly. American retail sales virtually dried up in the days after the attacks as people stayed at home, glued to their televisions.
But economists could not agree on how prolonged these short-term effects would be. Previous experience with massive economic shocks suggested that their impact tended to be relatively short-lived and relatively modest over the medium term. On September 12th last year, though, it was impossible to know whether that pattern would be repeated. Nobody knew what would happen next, and whether America would face a prolonged campaign of terrorist attacks.
The one thing most economists could be sure of, even at that stage, was that the events of September 11th would provide a useful scapegoat for whatever subsequently went wrong with the global economy. About this, at least, they were right. A year later, plenty of people are quick to blame al-Qaeda for sluggish recovery in America, slow or non-existent growth in many parts of the world, for the prolonged global bear market—and even for America’s ballooning budget deficit.
But it is hard to square this view with the facts. Some types of economic activity, it is true, were badly affected by the terrorist attacks and have been slow to recover. Air travel is the most obvious example, in part because so much of it takes place within America, and between America and the rest of the world. Tourism is picking up only slowly. Insurance companies are still reeling from the impact both of the terrorist attacks themselves and from the need to reassess many of the risks they underwrite.
But many other economic sectors recovered more quickly than expected. Retail sales in America picked up as people started shopping again. Americans started to buy cars again, in close to record numbers, spurred on by low and zero-interest deals. Industrial production continues to recover. Home sales are strong, and many American consumers are taking advantage of low interest rates—the lowest for 40 years—to remortgage their homes and to use some of the money raised to pay for consumer purchases.
Recent official statistics indicate that last year’s recession was worse than was thought at the time, with nine months of economic contraction rather than the three months previously thought, and yet it is difficult to attribute this solely, or even primarily, to the September 11th attacks. In fact, America’s economy began to grow again in the final three months of last year, soon after the attacks. And it posted an impressive annual growth rate of 5% in the first quarter of this year.
Since then, growth has slowed again. The threat of a second downturn, the second half of a so-called “double dip” recession, remains. Share prices have continued to fall, and much of the data emerging from government and private agencies continues to give out confusing signals. Consumer confidence is wavering, according to the latest surveys; yet figures published on September 6th showed that unemployment fell in August.
 |  The burgeoning budget deficit cannot be blamed primarily on the terrorist attacks |
The Federal Reserve—America’s central bank—was quick to cut interest rates last year, both at the first signs of serious slowdown and, again, immediately after the events of September 11th. The last reduction was in December and it is a sign of how much more subdued the recovery has become in recent months that speculation about the Fed’s next move shifted over the summer from when rates will start to rise to whether another cut is in the offing. Some clue about the Fed’s state of mind will come when rates are next reviewed on September 24th.
But is this year’s weakening of confidence a throwback to September last year? Confusing the picture has been another big blow to confidence in America: corporate scandal. As people naturally focus this week on remembering the September 11th attacks, it can be easy to overlook the impact on economic confidence generally, and on the stockmarkets in particular, of the stream of corporate scandals which has dominated the financial pages in recent months. Enron, Andersen, WorldCom—the cumulative impact on investors’ confidence in corporate America, and on the value of their shareholdings, has been considerable, and probably much larger than the effects of the terrorist attacks.
Even America’s burgeoning federal budget deficit cannot be blamed primarily on the terrorist attacks. It is true that the surpluses projected when President George Bush took office in January 2001 have all but vanished. But the shift in the fiscal position owes more to the tax cut Mr Bush introduced in the summer of 2001, before the terrorists struck, than it does to increased spending, though just over a third of the increase is related to the cost of the war against terrorism. Nevertheless, the fiscal deterioration is also a result of the recession which started in early 2001, and a sharp drop in government revenues which, as yet, nobody can satisfactorily explain.
The September 11th attacks killed thousands and irrevocably damaged the lives of thousands more. But the American economy is too large, and resilient, to be thrown off course even by such shocking and tragic events. It is impossible to quantify exactly the effects of the attacks. But it seems clear that other factors have played a bigger role.
Posted by DeLong at September 11, 2002 04:46 PM | Trackback