09/06/2002: "September 11 -- An Economic Retrospective"
Like most of you, I was stunned, horrified, and deeply saddened by the events this past September 11. There haven’t been many times in the past quarter-century when my thoughts didn’t at least partially drift toward things economic, but such matters were far from my mind that fateful day as I sat riveted to the tube the remainder of the morning as one shocking event after another unfolded. I was frankly amazed that before the first building fell, my phone rang with a reporter wanting to know what impact these events would have on the economy. I soon discovered that I had better get used to it—that even in the midst of the horrific tragedy, questions about the economic fallout needed to be asked and answered. I fielded several hundred such calls over the next few days.
Looking back about a year later, it is safe to say that no corner of the world went unscathed. The short-term effects were without a doubt negative, though I believe some of the ultimate economic impacts will be positive (there is, of course, nothing positive about the tragic human effects).
What have we learned thus far? Perhaps the most encouraging thing we know is that our fundamental institutions are strong. Despite close proximity and massive damage, the markets opened the next week without a hitch. To be sure, stock prices fell sharply in the wake of the unprecedented uncertainty and the obvious negative impacts on some sectors (such as airlines). The important thing, however, was not the value of the Dow; it was the simple fact that the markets opened and functioned as they should have, accurately reflecting equity values as they were perceived by investors at the time. That is as it should be. Within a few weeks, the overall market had indeed surpassed its September 10 levels with only those sectors with genuine damage to their long-range prospects being left behind. (The subsequent drops in the major stock indices to levels below those immediately following the attacks are clearly attributable to largely unrelated factors, most notably the corporate scandals and their effects on the perceived integrity of market information.)
Another remarkable feat was the emergence of positive economic growth in the fourth quarter of 2001, just weeks after the attacks. I, not uncharacteristically, was an optimist relative to many of my colleagues and predicted increases in the first quarter. But no one believed it could happen as soon as it did. In fact, subsequent data revisions have shown us that overall business activity has actually been much better since September 11 then it was in the prior three quarters.
That is certainly not to say that these events and their aftermath haven’t taken their toll on economic conditions. In their absence, current momentum would have been much stronger. Costs have increased due to security concerns, both in the public and private sectors and the resulting war effort has adversely impacted the federal budget. The extra security has reduced efficiency and productivity in measurable ways. Our analysis indicates that the rate of expansion in gross domestic product is 0.3-0.5% less than it would have been, therefore dampening the momentum and resiliency of the recovery. Viewed more formally, September 11 has added a subtle risk premium to many aspects of our lives (economic and otherwise).
Over a more extended time period, accelerated cooperation among nations, refocusing priorities, new incentives for research and development to solve security problems, and a greater emphasis on our culture are but a few of the many reasons to expect net economic gains from our national tragedy. In the interim, deal realistically with the challenges, recognize the opportunities, and revel in the underlying strength of our national economy and its institutions.