Economic Effect of the Tragedy Is Yet to Be Seen
King, Stephen, The Independent (London, England)
AMERICA'S TRAGEDY is so awful, so painful, that economic analysis seems almost to trivialise the event. What can anyone usefully say after such a huge loss of life? Yet, to write about some other subject - to avoid the issue - would be even worse, callously ignoring an event that will become one of the defining moments of our generation. The dominant feature of last Tuesday's tragedy remains the human cost, the loss of life, the painful bereavements. We know, however, from previous "world- changing" events that human tragedy can be followed by economic costs that may spread far around the world.
In the immediate aftermath of Tuesday's horror, perhaps the best that we can do is to dwell on the tragedy and think about it in some form of historical context. Even then, there is a danger of providing a parade of awfulness. My intention, therefore, is simply to think about why only some "world changing" events have apparently had significant economic effects whereas others, no matter how traumatic, have left economic behaviour relatively unscathed.
There have been plenty of "world changing" events over the last 40 years. Some have been positive: the first moon landing, the collapse of the Berlin Wall. Sadly, however, it is easy to recall other events that were either negative in themselves or, alternatively, had negative consequences. In the 1960s, the defining moments included the Cuban missile crisis in 1962, the assassination of President John F Kennedy in 1963 and the Arab- Israeli Six Day War in 1967. In the following decade, the 1973 Yom Kippur War and the Iranian revolution in 1979 are obvious "global" events as was the Soviet Union's invasion of Afghanistan in late 1979. The 1980s, perhaps, were less eventful but, by the beginning of the 1990s, another "world changing" event took place in the form of the 1990 Iraqi invasion of Kuwait and, subsequently, the 1991 Gulf War.
Do any of these events stand comparison with the events of the last few days or, indeed, with each other? The answer must be "no": each is specific and of its own time. Moreover, there is no common thread in terms of the economic consequences which stemmed from them. Neither the Cuban missile crisis nor the assassination of President Kennedy had much discernible impact on the United States or, for that matter, the global economy. In contrast, the Yom Kippur War and the Iranian revolution were associated with recession both in the US and elsewhere. Given these contrasting reactions, it is unwise to draw strong conclusions from the carnage in New York and Washington. There may be risks and dangers but previous episodes hardly provide an unambiguous guide.
Nevertheless, placing each of these events into their specific economic context makes it a little easier, perhaps, to disentangle likely effects. In each of these cases, two issues need to be clarified. First, on each occasion, to what extent were the US and other economies already vulnerable to economic dislocation? In other words, to what extent did each "world- changing" event simply add to what was already a domestic economic crisis where both business and consumer confidence were already falling? Second, to what extent did each event change the economic landscape through a change in supply conditions? Was there, for example, a sudden shift in the relative scarcity of a particular resource and, if so, was the subsequent trajectory for the economy altered?
Using this approach, the various world-changing events can be categorised in economic terms more easily. In the case of the Cuban missile crisis and the Kennedy assassination, the US economy had been picking up strongly from earlier recession. Moreover, there was no obvious supply disruption. As a result, the economic impact of these events was small. …