Economic Responses to Terrorism

By Weidenbaum, Murray L. | Executive Speeches, October-November 2001 | Go to article overview

Economic Responses to Terrorism

Weidenbaum, Murray L., Executive Speeches

The terrorist attack on September 11 and its aftermath is causing the American people to reexamine and revise their expectations of the future, both short-term and long-term. Under the circumstances, some economic perspective is needed. First of all, the United States remains the world's economic and financial superpower. There is no close second. Moreover, even during the terrorist attacks, the basic infrastructure of the country, as well as that of the immediate regions directly affected continued to function effectively -- electric and gas utilities, radio and telecommunications, banking etc..

The direct damage was dramatic and substantial (an estimated $40 billion in the vicinity of the World Trade Center), but localized. The initial effects were readily contained, except for traveling by air. Most Americans maintained their regular activities. In striking contrast, the indirect repercussions of the unprecedented attack on the United States continue to reverberate and to generate a variety of economic impacts and challenges. One measure of those reverberations is that the U.S. gross domestic product for the year 2001 is likely to be about 1 percent lower than it otherwise would have been (a reduction of approximately $100 billion).

Macroeconomic Policies. In view of the long-term nature of the struggle against terrorism, it is vital to maintain the capacity of the economy to function at a high level and in an increasingly competitive global marketplace while supporting the expensive new commitments involved. Given the high degree of globalization that has been achieved in recent years, the effects of a weak U.S. economy are quickly transmitted around the globe. Reductions in U.S. imports and new overseas investments means that the already vulnerable economies in East Asia and Latin America will be hit particularly hard.

The short-term economic effects of September 11 did not occur in a vacuum. They were superimposed on an economy that already was on the brink of recession, if not in actual decline. The negative impacts did not have to be substantial in order to tip the economy into the actual downturn that occurred. Consumer spending had been the mainstay of the economy before September 11. The new uncertainties unleashed by the event (which included lack of knowledge about the U.S. military response as well as terrorist counter actions) were sufficient to deter enough postponable consumer purchases to constitute the decisive change. Fortunately, the key financial agencies of the Federal government -- the Federal Reserve System, the Treasury Department, and the Securities and Exchange Commission -- responded quickly and with an unusual display of cooperation. Thus, ample supplies of liquidity were injected into the financial system, while investors learned that the regulatory authorities were closely monitoring the status of the stock exchanges and the other key financial market mechanisms.

Simultaneously, government policy makers in the United States, Western Europe, Canada and Japan, were closely coordinating their activities, notably reducing interest rates at about the same time.

This timely display of intergovernmental coordination was especially helpful in view of the unfortunate coincidences of economic weakness that had been occurring in many parts of the world, including Europe, Japan, Korea, and Southeast Asia, as well as the Western Hemisphere. In the absence of an obvious engine of economic growth, weak economic conditions can be expected to linger at least through the middle of 2002.

The major continuing uncertainty facing economic decision makers in both the public and private sectors relates to the nature of the U.S. response to the terrorist attacks. Normally, a major military operation provides an economic stimulus, with new production contracts for a host of goods and services plus an expansion of the size of the armed services. The struggle against international terrorism, in contrast, is likely to be far more complex. …

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