The lingering costs of 9/11

Looking back on the economic aftermath of the terrorist attacks on the World Trade Center is a difficult process because so much of it involves speculation as to what might have been.  How would the US have spent, or better yet, not spent, the one to two trillion dollars required to fund the wars in Afghanistan and Iraq?  How much growth has been denied to the developing world because of curtailed investment out of the fear of continued attacks on first world assets abroad?   What opportunities have been missed because of travel avoidance in our personal and professional lives?  All of these hypothetical and theoretical alternative economic scenarios are challenging to quantify but are worth considering if we are to chart an economic course through what looks to become a decades-long war against international terrorism.

The costs absorbed by New York City in direct and indirect losses have been estimated at $105 billion.  In an interesting coincidence, about the same money has been spent in first-world airports on increased security since that event.  Travelers should consider the investment in airline security as well spent.  Since 2001, there has been no repeat of the use of an aircraft as a weapon of mass destruction and several attempts to innovate by the terrorists have been detected and foiled.  The result, however, was a further loss of convenience to passengers due to restrictions on carry-on items such as large liquid containers.  I was recently in Singapore and viewed an art film that focused on the aircraft hijackings of the 1960s and 70s, and several of the events were familiar to me from my childhood.  What really struck me is how many of those aircraft were Pam Am, America’s premier international carrier of the era.  Any rational traveller boarding an overseas flight on Pan Am during that time had to consider that a terrorist event was a potential, though remote possibility.  Travellers today complain about the delays and indignity of the airport security clearance process and are concerned about the privacy compromises of advanced passenger information requirements, but once they are through into the gate area few, if any, believe that a hijacking is in their future.  Travellers may not like the new system, but it works well, and authorities are trying to improve throughput to minimize the inconvenience.

What we will never know is how large the economic opportunity costs are associated with travel avoidance by air that were not replaced with alternate travel arrangements such as car or train travel; literally, the road not taken.  While technology exists today like Skype that allows face to face contact and more sophisticated programs like WebEx and NetMeeting that allow for document exchange, there is no substitute for in-person personal interaction.  Humans are still socialized to develop trust and reliance through close personal contact and teleconferences are not a perfect substitute, especially in Asian cultures where repeated face to face meetings are the foundation of sustained long tern relationships.

It took three years for air travel to recover to its pre-2001 levels and is has continued to grow since – what we do not know is what air travel would have been in the absence of the 9/11 attacks.  The reticence to travel has been most pronounced in the United States where the increases in airport security were the most severe; this is the nation that most needed to grow its economy to fatten the tax base to support the two foreign wars that followed.  Economists can calculate the effect of $80-$100 foreign oil on economic growth, but creating a speculative model on what growth was lost due to less travel is hard to quantify.  Suffice to say that the loss was real, and there are unemployed who would not be had the US enjoyed an alternate history.

International investment was another casualty of 9/11.  The developing world was crying out for capital to develop its resources and infrastructure and American and European enterprises were obliging.  With the threat of attacks on US assets abroad and those of other nations involved in the wars in Afghanistan and Iraq, their investment in the developing world outside of the resource sector was slowed.  China has stepped in as a major investor around the globe, and is creating partnerships in the developing world, notably in Africa, where they are seen more as a savior than a threat to national sovereignty and are untouched by the unpopular wars.

One cannot ignore the costs of the wars in Afghanistan and Iraq.  The difference between the 2001 US war effort and that mobilized after the attack on the Lusitania in 1917 and Pearl Harbor in 1941 was that the modern citizenry was not called upon to sacrifice financially, i.e. “pay as you go” for the war effort.  In 1917, the income tax was introduced as a “temporary” war financing measure, and we are all waiting for its repeal.  In 1941, the US was galvanized on a massive scale, men called upon to join the armed forces, women pressed into the workforce to build armaments, those who could not serve compelled to buy war bonds, and all households collected scrap metals, oils, and other materials to be recycled.  In the post-2001 era the war was funded via deficit spendingthat was deepened by another round of tax cuts under Bush.  Sacrifice was replaced by entitlement to guns AND butter, the pain of paying the bill passed on to future generations.

The reduced financial capacity of the United States today is coupled with its diminished diplomatic standing in the world, though it remains its greatest military and economic power.  The current efforts to reduce US budget deficits going forward attempt to repair some of the financial damage.  Maybe they will succeed, maybe not. One thing is forsure, they will not restore American leadership.  The US is now one of many players at the table, along with the European Union, Russia, China, and the other members of the G20 that have decided to play a greater role on the diplomatic stage like Brazil and Turkey.  In the absence of the 9/11 attacks, the answer to the question of how the trillions spent on the wars would have been spent otherwise is simple – they would not have been spent because the US would not have borrowed them from China, and either the deficits would have been smaller or the US political leadership would have been focused on more productive efforts to create wealth, foster investment and concentrate on more positive international diplomatic efforts.  Perhaps there would have been no deficits at all as a result.  The great thing about alternative historical scenarios is that you get to believe in the best possible outcome, as implausible as it may seem.