War is good for the economy, but terrorism is fatal.  Or so it would seem with the benefit of hindsight.  Is 9/11 the underlying reason the economy is in collapse?

The 1% Doctrine

A few years back I read Ronald Suskind’s book The One Percent Doctrine about Dick Cheney’s approach to fighting terrorism.  To paraphrase the philosophy, if there was even a one percent chance that a perceived threat was real, the policy was to treat that threat as a certainty and act on it.  It was a philosophy that was enormously appealing in the highly emotional wake of terrorist attacks on American soil that seemed designed to “shock and awe.”  And it led to our own expensive campaign of “shock and awe” in response on foreign soil.  But when we stand back and look at the costs associated with our actions over the last ten years, a sobering picture emerges.

We are all aware of some of these obvious costs, but as with all spending, we soon got used to a “new normal.”  The costs associated with fighting terrorism became invisible through familiarity, and to question those costs was equated with being weak in the “war” on terror.  What are those costs?  There were immediate costs in the aftermath of the attacks, including:

  • Gold prices spiked upwards, from $215.50 to $287 an ounce in London trading.  Oil prices also spiked upwards.  Gas prices in the United States also briefly shot up, though the spike in prices only lasted about one week.
  • The dollar fell sharply against the Euro, GBP, and yen.  European stock markets fell sharply (4.6% in Spain, 8.5% in Germany, and 5.7% in London).  Stocks also fell in Latin America (9.2% in Brazil, 5.2% in Argentina, 5.6% in Mexico). 
  • Insurance losses due to 9/11 were over 1.5 times greater than than Hurricane Andrew, including business interruption ($11B), property ($9.5B), personal liabilty ($8B), workers compensation ($2B), and others ($2.5B).
  • Flights were grounded in various places across the United States and Canada and airlines were also required to refund ticket purchases for anyone unable to fly.  This was a huge blow to an industry that is often running on a razor thin margin.  Midway Airlines was one early casualty.  All airlines and airplane manufacturers suffered from plummeting stock prices.  The federal government had to provide $10B in loan guarantees and $5B for short term assistance.
  • Tourism in New York City (a $25B business employing 280K Americans) suffered major losses.  Throughout NYC, there were 430K lost job months and $2.8B in lost wages in the 3 months following the attacks.  Export businesses were hit hardest.  NYC’s GDP was estimated to have declined $27.3B.  The government provided $11.2B in immediate aid to NYC and $10.2B in 2002 for economic development and to address infrastructure needs.  Approximately 18K small businesses in Lower Manhattan were destroyed or went out of business.
  • Driving fatalities dramatically increased as Americans were too nervous to fly.

One analysis shows that the immediate impact of the attacks was a GDP growth reduction of 0.5% and an increase to the unemployment rate of 0.11% (or 589K jobs).  Those immediate costs are nowhere near as concerning as the long-term costs of our new normal, though.

Today in charts: defense spending | Ben SchillerThere are also long term, ongoing costs:

  • Wars in Afghanistan, Iraq, and Pakistan.  The cost is estimated between $3.2 and $4 trillion, including medical care and disability for war veterans. This does not include future interest on war-related debt. Additionally, more than 31,000 people in uniform have died in these conflicts (including our soldiers, military contractors, and Iraqi and Afghan allied security forces).  At least 137,000 civilians have been killed in these conflicts.  7.8M refugees have been created among Iraqi, Afghan and Pakistani peoples.  Because war financing has been based almost entirely in borrowing, $185B in interest has already been paid and another $1T (yes, that’s one trillion dollars) could accure through 2020.  Additional federal obligations to veterans of these wars will likely total between $600 and $950B, peaking around 2050.
  • Homeland Security (DHS).  An entire division of government was created in the wake of 9/11 and has continued to this day.  In 2010, the DHS was allocated a budget of $42.7B.  Operating costs at the end of 2010 totalled $56.4B.  Due to looseness in financial accounting of the department, KPMG was unable to complete an effective audit of the DHS’s finances.
  • Increased airport security.  The costs include TSA agents (as well as snazzy new uniforms for many – or so I noted in my travels), air marshalls on flights, additional procedures that lengthen wait times for travelers, and high tech screening equipment (thanks to the underwear bomber) to essentially see what’s under our underwear!
  • Anti-Terrorism Regulations.  The USA PATRIOT Act is one example of anti-terrorist legislation that added expensive and procedurally burdensome bureaucracy to businesses which also put a drag on productivity.  Some measures were doubtless wise, but others strained common sense in their application (e.g. common names flagged as potential terrorists). The slowdown in commerce associated with additional inspections costs the US (and other nations) millions of dollars.
  • Innovation Loss.  Making immigration more difficult deprives us of labor and innovative minds.  Between 2001 and 2003, educational Visas fell by 100,000 applicants.  Tourism is also diverted to other nations.  America hunkered down and became a less friendly place to visit (and spend your foreign cash), to do business or get an education, and to pursue the American dream.
  • Opportunity Cost.  Because resources and funding are not limitless, spending more in one area always equates to trade-offs.  What might we have done with a portion of this money if wisely directed elsewhere?  Defending Iowa from terrorist attacks is not worth it once you factor in the other ways that money could have been spent.

Not surprising, perhaps, that the national debt was $5.73 billion when President Bush took office, and stood at $10.7 billion when he left the White House.

And were these costs necessary to combat terror?  No.  In fact, they far exceed the actual risks for several reasons:

  • Terrorists have to get here.  Local terrorist cells are usually essential to success.  Other countries that have had terrorist attacks have had internal extremist cells in their borders (London, Spain, Indonesia).  Not so in the US, despite fears to the contrary.
  • Human nature leads us to overestimate the likelihood of novel and uncontrollable dangers.
  • Feeding the fear machine – reporters, politicians and profiteers benefit from fear-mongering, whether well-intentioned or not.  Being on constant alert may adversely impact consumerism.  Contractors and lobbyists have disincentives to tell us how safe we are.
As one news source put it (linked above), “a handful of desperate men set the world’s greatest hyper-power on a path of self-destruction.  Beijing has been the greatest beneficiary of the “war on terror.””
There were also psychological costs.  Feelings of grief, fear gave way to nationalism (and protectionism), a heightened state of alertness and vigilance (even paranoia at times), and most persistently, the loss of a sense of security.  And our economic decline has insecurity (or lack of confidence) written all over it.  Did a national funk color our judgment in the decade that followed and cause us to take our eye off the ball?  Did we spend too much attention to terrorism prevention and not enough to regulating the banks?  Did banks take bigger risks to compensate for losses due to counter-terrorism legislation?  Did more people desire to own homes because fewer people wanted to live in large vulnerable cities and more Americans felt prone to “nest”?  Did 9/11 change our judgment?  Did we focus so much on preventing further terrorist attacks that we forgot to protect our real assets:  the strength of our banks, our innovative edge, our appeal to immigrants and tourists, our adaptive workforce?
So, what do you think?  Is 9/11 responsible for America’s financial decline?  Did we let the terrorists win after all?  Were the measures taken excessive or necessary?  What measures do you think went too far?  Did some not go far enough?  If you were in charge, what cuts, if any, would you make to defense and homeland security spending?  Discuss.