CREATE's Chief Economist Adam Rose is cited as a source, along with Joe Stiglitz, a Nobel Laureate in Economics in this New York Times model to uncover the costs of 9/11.
Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the United States? In a survey of estimates by The New York Times, the answer is $3.3 trillion, or about $7 million for every dollar Al Qaeda spent planning and executing the attacks. While not all of the costs have been borne by the government -- and some are still to come -- this total equals onefifth of the current national debt. All figures are shown in today's dollars.
ECONOMIC RESILIENCE TO THE SEPTEMBER 11 TERRORIST ATTACKS
CREATE and SPPD
University of Southern California
September 17, 2011
During the weeks leading up to the 10-year anniversary of the 9/11 terrorist attacks, I received calls from several news organizations asking me about the economic impacts of the tragic event. The calls were related to eight studies I had coordinated two years prior, conducted by a group at the Federal Reserve Bank of New York, a leading risk management consulting firm, a leading provider of regional macroeconometric models, a leading university research center specializing in general macroeconomic impact studies, a DHS economist, and three faculty research teams in Southern California, including one of my own. The consensus bottom line estimate of five of the six studies that focused on the business interruption impacts was between $40 and $110 billion (in 2011 dollars) in lost Gross Domestic Product (GDP).
But more important is the reason behind these numbers. Most of the reporters I spoke with were surprised that the estimates were so low (even though this makes 9/11 the largest disaster in U.S. history to date). They immediately brought up the cost of the Afghanistan and Iraq wars, and the U.S. Department of Homeland Security budget, and cited figures by other analysts in the trillions of dollars. I pointed out that our group study focused on the short-run macro effects of 9/11 itself, and that one has to be careful about including the expenditures thereafter. First, were they really the costs of 9/11 or money spent to prevent future attacks? Wasn't spending on national security already following an exponential trend in the years prior to 9/11? Was the war in Iraq really a response to 9/11, or, as the Bush administration stated, mainly a concern about Saddam Hussein's possession of weapons of mass destruction. As to the DHS budget, don't forget that many government agencies included under its umbrella, such as FEMA, existed prior to the tragic event.
Still, one is struck by the focus of stories that dominated the news last week. Many articles focused on the costs of 9/11 in terms of the broader definition of related expenditures, ignoring many of the issues just mentioned. Most of the rest focused on the resilience of the U.S. and its people, but devoted very little space to the resilience of the U.S. economy itself.
Economic resilience is the missing story of the 10th Anniversary. It helps explain why the short-run macroeconomic impacts were relatively small, less than one percent of the U.S.GDP. It is why Osama Bin Laden did not succeed in achieving one of his major stated goals: to destroy the U.S. economy.
Resilience is a popular buzzword these days and not often defined. However, a consensus among researchers and practitioners in this field is that it refers to the capacity to maintain function and to recover quickly. This is accomplished by using remaining resources as efficiently as possible and investing wisely and expeditiously in repair and reconstruction. Although pre-event mitigation (stopping the terrorists before they attack) is part of the broad definition of the term, the unique feature of resilience is on minimizing losses after the event occurs. Property damage occurs at the point of the attack, but business interruption (lost GDP) just begins then and continues until the economy has recovered.
The short-run impact of 9/11 was so low because of the various facets of economic resilience. The key was that 95 percent of the firms operating in the World Trade Center area did not just fold, but reopened in new locations. Had relocation been immediate, there would have been no business interruption. However, the relocation did take time. Still, our study found that 72 percent of potential business interruption losses were avoided by the relocation effort, amounting to a savings of $45 billion in direct impacts and another $50 billion in multiplier effects throughout the U.S. What was the source of this resilience? One factor was the surplus office space in the New York-New Jersey region. Others were the inherent motivation of businesses to survive and the indomitable human spirit. Dan Chung, chief executive officer of Alger, a financial house, which lost the largest percentage of employees in 9/11, took over with a zeal to keep his company afloat as a tribute to his lost colleagues. Howard Lutnick, president of Cantor Fitzgerald, recently mentioned that his firm's customers did not abandon it, but rather quickly rallied to do business with the firm despite the fact that it was hobbled.
Other forms of resilience include the spirit of New Yorkers and Americans in general to return to life as usual, which essentially proved very successful. The one exception was the nearly two-year decline in airline travel and related tourism, which turned out to be the largest single short-run negative impact of 9/11.
Another consideration was the inherent resilience of our market economy, whereby price changes signal shifts in resource reallocations to highest value uses. Also, the U.S. economy is one large supply chain, and various improvements in supplier-customer relations over the years paid dividends.
Another typically unheralded factor was U.S. government policy. This included the Federal Reserve injecting an unprecedented $100 billion into the banking system to enable the continuation of inter-bank payments. Another wise move was closing the stock exchanges for the remainder of the week following the tragedy. Additional actions included reducing the federal funds rate to one percent through June 2003. Some on-going policies, including the Bush tax cuts, helped provide a stimulus to the economy.
In sum, economic resilience in the aftermath of 9/11 was very strong and will continue to be so in the future. While our nation has taken major steps to stop terrorist attacks before they take place, it is impossible to stop them all. In these instances, resilience is our best second line of defense.
Adam Rose is Coordinator for Economics at the USC Center for Economic Analysis of Terrorism Events and Research Professor in the School of Policy Planning and Development.