How much did the attacks of 11 September 2001 really cost the USA? Dr Bill Swan, Boeing Marketing's chief economist, has been doing his best to find out, and concludes that the price is huge both in terms of short-term impact and long-term economic growth.

Loss of confidence after the attacks of 11 September 2001 clearly caused a cycle of economic decline in the years that followed. Savings were also diverted from investment in productivity to paying for the costs of security, which may cause an additional decline in GDP growth in years to come.

At Boeing, we have tried to estimate both of these effects based on figures from economic forecaster Global Insight, which cover US real GDP growth for the years 2001-4. The starting point was two sets of annual forecasts - one made on 10 September 2001, the other on 11 July 2003. Based on this data, both effects are huge.

Missing out

We take as the immediate economic impact the differences between the two forecasts for the five years 2001-4. By 2004, both forecasts have a strong and similar level of "recovery" growth. However, the four-year loss was $711 billion. That implies that the population of the USA missed out on $2,500 per person during this period - the equivalent of 7% of one year's GDP.

This was because lower confidence led to a deeper recession during 2001 and to slower recovery in the years that followed. This loss was mainly a reduction in consumption - less spent on wine, significant others, and other similar, discretionary luxury goods.

A sum of $711 billion may be taken as a first estimate of the "cost" to society of a large terrorist event. This is not the total loss during the recession - it is the loss due to the re-estimate of the depth of the recession. The downturn was deeper because the loss of confidence was sudden, deep and difficult to counter.

This loss is only an estimate and it may be on the high side. The forecast on 10 September 2001 was just that - a forecast. The values on 11 July 2003 were estimates for the years 2003 and 2004, and forecasts tend to be higher than outcomes. Correction for forecast biases might set a low-side estimate not less than $500 billion.

However, this is not the end of the story. Normal economic theory suggests that the GDP forecast for distant years is the product of growth in the workforce/ population and in productivity.

Unless there is a structural change in the economy, neither population nor productivity in distant years is changed by an intervening recession cycle. However, society's reaction to 9/11 was to increase expenditure on security, both public and private.

This diverted significant resources from more pleasurable activities, but those resources still count towards GDP. However, the resources diverted from investment lead to lower future productivity. And that leads to lower future growth. In the pre 9/11 report, the growth rate for 2010-15 averaged 3.4%, but stood at only 3.2% in the July 2003 forecast.

The 2016-25 growth rate dropped from 3% to 2.6% in the forecast. These represent significant reconsiderations of the rate of US GDP growth in the future. Distant GDP levels are 4-5% lower than earlier estimates, each year.

Growth factors

Four effects played into these calculations. Two of these tend to increase the growth rates. Firstly, population growth in the USA was observed in the recent census to be higher than estimated in 2001, due to immigration, largely of mature workforce participants.

Secondly, high productivity gains observed during the 1990s growth spurt persisted even during the 2001-3 slowdown. Adding over 1% population growth to over 2% productivity growth gives at least a 3% annual GDP growth.

Two effects reduce GDP growth. First, tax changes leading to government debt crowd out investments for productivity.

Global Insight agrees that this effect is counteracted by the investment-favouring form of the specific tax changes. Second, diversion of resources to security also reduces moneys available for productivity investments. When they are put together, the effects would seem to lower US GDP growth by 0.2% a year or more.

These losses are unavoidable. The deeper recession cycle 2001-4 is all but a fact of history. The expense of security is intended to prevent repeats of the terrorist interruptions and thereby repeats of such losses. Essentially, the lower US GDP is a result of the "new world" in which the costs of terrorist destruction are borne either as events or as preventative effort.

So what price have the terrorists imposed? Firstly, a loss of $711 billion due to the deeper down cycle caused by the immediate events of 11 September - meaning less pleasure during these years. Secondly, a loss of 0.2% or more each year in GDP growth - meaning shortfalls in income, increasing year after year. Thirdly, expenses spent on security itself - meaning diversion of work from producing pleasurable consumption to preventing unpleasantness from terrorists.

Fewer backrubs, more searches. All in all, three big losses. Compared with these losses, the immediate destruction of property was a small item.

Source: Airline Business