Terror's Economics; New Political Divisions May Alter Global Financial Alliances

By Samuelson, Robert | Newsweek, August 21, 2006 | Go to article overview
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Terror's Economics; New Political Divisions May Alter Global Financial Alliances


Samuelson, Robert, Newsweek


Byline: Robert Samuelson

This is an age of glaring contradictions. It's hard to ignore the great disconnect between the rise of terrorism and the relentless advance of the world economy. After September 11, the reasonable fear was that terrorism and its nasty side effects--more anxiety, uncertainty, security checks and higher costs for moving people and cargo--might cripple economic growth and frustrate the spread of globalization. It hasn't happened. Not yet, anyway.

To be sure, terrorism has exacted some

steep costs. Airlines and tourism suffered after September 11; that could happen again. Spending for the war in Iraq was vastly underestimated. But the damage has paled before the larger effect, which is not much. Terrorism hasn't destroyed prosperity or cross-border flows of goods, money and people.

Since 2001, the world economy has expanded more than 20 percent. For the United States, the gain is almost 15 percent; for developing countries, more than 30 percent. World trade--exports and imports--has risen by more than 30 percent. Outstanding international debt securities have jumped almost 90 percent to $13.6 trillion (through the third quarter of 2005).

We ought to ask why the economic fallout has been so muted--and whether that could change. Could the backlash so feared five years ago unfold in the future?

Economic resilience partly reflects human nature. People and businesses try to get back to normal. It's what they know best. For sheer physical damage, acts of nature often overshadow acts of terrorism. Michael Mussa of the Institute for International Economics notes that Hurricane Katrina hurt the economy more than September 11.

Even when huge, terrorism's costs can get lost in a $13 trillion economy. At last count, Congress had committed $432 billion to the wars in Iraq and Afghanistan--a far cry from informal estimates of $50 billion to $200 billion before the war. The Congressional Budget Office now projects that those costs could easily exceed $800 billion by 2016. A study by Linda Bilmes of Harvard and Joseph Stiglitz of Columbia puts the war's ultimate budget costs even higher, at a minimum of $1.1 trillion in present value. Still, this spending is a tiny share of all federal spending, estimated at $47 trillion from 2001 to 2016.

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