Sept.11: The impact of Terrorism on American Economy

After the Sept. 11 attacks, the economic slowdown has extended to all parts of the American economy. This is only the middle-term impact.

The long-term impact is that America is now facing the pressure to give back the peace dividend.

By Fang Fang

The time is 9:28 on Monday Sept. 17. The New York Stock Exchange is now making its last preparation before the first resumed trading day after Sept. 11. On the stage, stand Paul H. O'Neill, the Secretary of the Department of Treasury, Senator Hilary Clinton, police fire department.

They are here to show support for the American stock market. After the Sept. 11 attacks, the New York Exchange was forced to close for four days and other major stock markets experienced a horrible free fall. All eyes were riveted on the American stock market, a symbol of the country's ability to return to a more normal state.

All the Big Board traders and the guests on stage are now singing "God Bless America." All of them know the good news: a few minutes ago, the Fed decided to cut its benchmark Federal Funds rate by half of a percentage point to three percent, corporations pledged to buy significant amounts of their shares, and the big brokerage firms refrained from issuing negative investment opinions on individual companies.

"God bless America, our home…" After the opening bell, the selling wave spreads to the shares listed on the exchange. Within 45 minutes, the Dow Jones industrial average has shed more than 600 points. By the end of the day, the Dow has fallen 7.1 percent, or 684.81 points, to its lowest level since December 1998. By the end of that week, the Dow drops 14.3 percent, the biggest weekly loss since 1933, and $1000 billion evaporates from the market.

"No terrorist will ever be able to decide our fate," Mr. Bush said in his weekly radio address on Sept.22. "They brought down a symbol of American prosperity, but they could not touch its source."

American people are willing to hear such words. And it was so heart-stirring that by Nov.30, the last trading day of November, the Dow Jones industrial average closed up at 9,851.56, which had risen more than 20 per cent since its Sept. 21 low.

"The good news is that the market is still hanging in there," said Stephen Carl, head trader at the Williams Capital Group. "But the GDP was the weakest in 10 years."

The Commerce Department reports that GDP declined at a 0.4 percent rate in the third quarter, but grew at an anemic 0.7 percent annual rate in the second quarter. Fourth-quarter results aren't expected until after the first of the year.

A recession is often defined as two straight quarters of declining gross domestic product, the total value of goods and services made in the country. So, up to now, no number indicates a factual recession of America. But the current slowdown ends an expansion that began in March 1991.

Before Sept.11 attacks, American consumer confidence already seemed to be in an uneasy decline. The attacks caused consumer confidence to plunge further and destroyed any chance for a quick return to growth. November's survey run by the Conference Board shows that the index of confidence has fallen to 82.2, the lowest point since 1993. Only one year ago, the index was still around 107, close to the record point. The slump diminishes people's anticipation for quick rebound.

Loss: direct and indirect

American congress has approved a federal compensation fund to provide $150,000 to $180,000 to each victim's family, the fund estimates to pay no more than $700 million. The weekly expense of clearing the World Trade Center debris is about $100 million and it will likely cost $1.2 billion over the next three months. Pentagon needs $1 billion to fix the building and if the WTC is to be rebuilt, $4.5 billion is needed. According to the New York Times, the companies that had offices in the WTC estimate that they will need $4 billion to rebuild the information infrastructures. Although the totally direct loss is close to $12 billion, that's only 0.1% of the American annual GDP and even less than the loss of the California earthquake. According to researchers the American economy usually recovers a few weeks after major disasters.

But the impact of Sept. 11 attacks is far beyond that of natural disasters-airplanes were grounded, factories couldn't deliver goods, cinemas closed, baseball games were postponed. In Shanghai, Fudan University's economist Zhang Chungguo said, "The consequence is far beyond the clash of the WTC. It will largely affect the confidence of global investment and many industries."

The first victim is the American airline industry. It loses more than $200 million a day as a group, and estimates $7 billion in combined losses for the year. In the week of Sept.11, more than 100,000 workers lost jobs. If it were not for the $15 billion federal bailout, the whole industry may have needed to seek bankruptcy protection.

The insurance industry is another victim. The losses from the attacks are estimated as high as $ 50 billion to $ 70 billion. Although insurers have enough money to cover the losses, they have warned lawmakers that they cannot expose their companies to the incalculable costs of future terrorism. On Nov.29, the House approved legislation that would provide property and casualty insurers with billions of dollars in loans to help pay claims from future terrorist attacks.

Tourism industry has encountered difficulties too. It's hard to estimate the indirect losses in its relevant industries, but it's clear that both national and international travel singular has fallen.

Will the domino effect spread to all the parts of the economy? The answer seems to be "yes." By the end of November, the National Bureau of Economic Research panel has concluded that the economic slowdown has extended to all parts of the economy after the Sept. 11 attacks.

To head off a possible recession, the federal government has already approved $55 billion -- $40 billion of emergency appropriations to aid in recovery and rebuilding from the attacks, and $15 billion to support the reeling airline industry. Meanwhile, Washington is considering proposals for additional tax cuts.

But the money that the American government preparing to spend is the money doesn't exist- the $55 billion is a temporary raid on the Medicare and Social Security surpluses. After all, it should be paid by the expecting $173 billion surplus of 2001 fiscal year. But along with the downturn of economy, it's hard to be confident on that. At the same time, a multiyear, multifaceted war on terrorism will impose substantial new costs.

How will the federal government pay for additional tax breaks or spending increases to stimulate the economy, and how will it finance a broad and effective war on terrorism? These are all big questions.

End of the peace dividend

Despite all the problems raised before, the long-term consequence of the attacks is the end of the 10-year peace dividend period.

Before Sept. 11, defense spending as a share of GDP was down to a record post-World War II low of 3%, vs. 7% in the Reagan years. The peace dividend since the end of the cold war in 1989 was unquestionably important in shifting capital from Washington to the private markets to finance business investment, higher productivity, and the entrepreneurial burst of the New Economy.

After Sept.11, the U.S. has to recalibrate the balance between private and public sectors. "Terrorism introduces a new, systemic risk into the U.S." said Zhang Shaoguang, analyzer of the China-America Strategy Research Center, " for the sake of safety-both military and economic safety, the sway will go towards public sector undoubtedly."

A news analysis in the Business Week also thinks that defense will play a bigger role in the economy and consume a greater share of GDP after attacks. At the same time, the cost of doing business may be going up; productivity gains, in the short run, could become more difficult to generate and consumer confidence may come to depend more on foreign policy and military success than ever before. What's more, the federal government will step deeper into the economy later on.

Although, the Business Week claims that in the past, not including the recent decade, "The U.S. has recalibrated the balance between private and public sectors many times." But this time, with the downturn of economy even before Sept. 11, the job seems much more difficult.

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