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Don’t Blame the Economy on
9/11
By Lee Price
from the Economic Policy Institute
The notion that a large part of our current economic woes is attributable to the attacks and
aftermath of September 11 has become almost an article of faith for
many policy makers and commentators. It’s been repeated so often,
rarely questioned, that it has begun to feel like established fact.
The sky is blue, and the attacks of 9/11 sent our economy into a
tailspin that we are still struggling to pull out of. Reasonable
people can argue about whether the sky is really blue. But it’s hard
to find an economic indicator that supports the notion that today’s
economic troubles can be properly explained as the backwash from 9/11.
That claim simply does not withstand close scrutiny. While pockets of
the U.S. economy remain worse off as a result of 9/11, the net effect
on total GDP today is negligible and may well be positive.
For the last three years, we have had a substantial rise in
both unemployment and idle equipment. At times like these, the biggest
constraint on total output is a shortage of demand for the goods and
services businesses offer. In fact, September 11 has actually boosted
demand by causing both government and business to spend more on
security than they otherwise would have.
Don’t get me wrong. There can be no doubt that the economy was
thrown for a loop by the attacks on September 11. But it was a
short-lived loop. Retail sales, travel, and the financial markets were
put on hold for a number of days. Within a couple of months, however,
retail sales had moved back on the strong growth trend that had
preceded September 11. The stock market was closed for a period and
took an immediate dive after reopening. Within a couple of months,
however, the major indexes all soared past their September 10 levels.
September 11 depressed leisure travel for several months longer and
caused some shift away from some destinations (such as New York) and
toward others. By today, leisure travel has largely overcome the
effects of September 11, with some locations gaining at the expense of
others.
Businesses have not resumed traveling to the same extent as before
September 11. Since much earlier in 2001, businesses have been reining
in travel to keep down expenses and raise profits – the same reason
that explains business caution in hiring and investment for the last
two-and-a-half years. The added hassle of tighter security plays only
a marginal role in explaining lower business travel.
Two years later, the nation still feels traumatized but has largely
overcome the economic aftershocks of 9/11. Because of that trauma, we
are spending more on security. As a result, our economic output is no
lower today because of 9/11 and it may well be higher than it
otherwise would have been.
One cautionary note is in order, however: 9/11’s effect on GDP
could turn negative in the future as the labor force and productive
capacity become more fully employed. At that point, diverting more
resources into security would reduce new investment, slow additions to
our productive capacity, and retard GDP growth. We remain far from
that situation today, however.
After the attacks, policy makers from the President on down
exhorted the American people to continue to live their lives and go
about their daily business – with added care and vigilance, to be
sure, but without yielding to fear. They said that to do anything else
would be to hand victory to the terrorists, who wanted the blows they
struck to resonate through the economy. Two years later, it seems that
the people took that advice to heart. Although the current economic
picture is not as strong as any of us would like to see it, the people
did not succumb to fear and the impact of the acts of terror on the
economy have faded.
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