Economic Impact of the Terrorist Attacks of September 11, 2001

By Virgo, John M. | Atlantic Economic Journal, December 2001 | Go to article overview

Economic Impact of the Terrorist Attacks of September 11, 2001


Virgo, John M., Atlantic Economic Journal


Introduction

The International Atlantic Economic Conference was held in Philadelphia just one month after the September 11 terrorist attacks on the World Trade Center in New York and on the Pentagon in Washington, D. C. A plenary panel was held at the conference to discuss the economic impact of the attacks. John M. Virgo, the International Economic Society Executive Vice President, chaired the session made up of panelists William J. Baumol of Princeton and New York Universities, William W. Lang, Deputy Director for Policy Analysis at the Office of the Comptroller of the Currency, Chris P. Varvares, President of Macroeconomic Advisors, and M. Peter van der Hoek from Erasmus University in the Netherlands.

The first panelist, William J. Baumol, provided an overview of the terrorist attacks and their long-term economic impact. The long-run benefits for the economy of the catastrophe are a Keynesian stimulus and a replacement of obsolete facilities thereby improving efficiency and effectiveness.

The second panelist, William W. Lang, analyzed the economic impact of the terrorist attacks on the financial and banking sectors. He addressed concerns over the health and vitality of the banking industry, the immediate and short-term reaction of banking customers, and how the payments clearing and settlements system functioned under such stress.

The third panelist, Chris P. Varvares, evaluated the macroeconomic impacts of the terrorist attacks and the implications for business. A model developed by Macroeconomic Advisors shows the direct effects, immediate knock-on effects, and the medium-term effects on the economy. He evaluated the impact on such measures as capital stock, risk premiums, consumer confidence, fiscal policy response, and tax policy.

The last panelist, M. Peter van der Hoek, provided the European view of the impact of the attacks on public finance and polcy. Since September 11, political coalitions in Europe have changed and the U. S. has brought political and economic pressure to bear in order to build a coalition with other countries to fight terrorism. New allies in the war on terrorism expect to be rewarded for siding with the U. S. The world economy is now more integrated then ever before. With central banks on both sides of the Atlantic moving to stimulate their economies, it is hoped that the economic downturn will be short.

Much has happened to the economy since the October conference. The original introductory remarks have been expanded to bring the reader more recent economic information to help place the panel discussion into a clearer perspective.

Consumer Confidence

Before September 11 the economy was already slowing down, leaving it vulnerable to the direct and indirect effects caused by the September 11 attacks. The index of leading economic indicators showed a deteriorating economy in the month before the attacks, falling 0.1 percent for August. Second quarter GDP figures reinforced concerns that the country was in a downward spiral, showing a mere 0.3 percent growth rate for the April-June period. Consumer confidence plunged in September to the lowest in five years, sinking to 97.6, compared to 114.0 the previous month. This was the largest one-month point drop since the 1990 Persian Gulf War.

At the same time, there were large swings in stock prices and options, an increasing gap between short- and long-term interest rates, falling airfares, and rising insurance premiums. The estimates of risks were quickly being repriced, further adding to a depressed economy. The insurance, airline, banking, travel, and services industries were repriced because of the higher costs of doing business due to the threat of terrorism. It was not just these industries that were affected. A trickle-down effect occurred for companies upgrading security systems and backing up their computer systems at offices and businesses throughout the nation.

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