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Dateline: The Cost of Terrorism - 2001-09-25


On Monday, President Bush called for what he termed a "strike on the financial foundation" of terrorists. But the September 11 terrorist attacks against Washington and New York also struck the "financial foundation" of the United States.

The week after the attack, the Dow Jones industrial average fell more than 1,300 points; the largest weekly drop in the U.S. stock market's history. Still some experts are hopeful that the economy will rebound thanks to new businesses and increased levels of defense spending spurred by what the U.S. media is calling America's "new war."

The largest economic impact of the terrorist attack was felt by the U.S. airline industry. Many airlines have been struggling all year, but as Paul Dempsey, Director of Transportation Law Program and Professor of Law at Denver University says, the terrorist strikes and subsequent grounding of all flights cost airlines billions of dollars in expenses and lost sales. "What has happened since then is that the air traffic demand has really gone down the tubes. Some airlines are seeing 20, 30 or even 40 percent load factors. Traditionally in this time of the year the load factor should be in the 60s as a percentile so traffic has fallen off by about half. Number of carriers are responding to that by laying off the employees and reducing the number of flights by up to 20 percent, it's not clear whether even this is enough," says Mr. Dempsey. "What happened last week caused a lot of people who are perhaps sensitive about flying, some of whom have an unnatural fear of flying, to endure a psychological impact which was profound. And I think it will be some period of time before the airline industry recovers in terms of flying flights full again. In the interim, what they have asked Congress to do is to provide them with some economic relief to see them through what is a very dark period for them financially."

Help for the airlines, a vital component of the transportation system and the economy, has emerged as one of the most pressing issues in Congress and is already being intensely discussed. Senator Kay Bailey Hutchison of Texas is one of the Senate's leaders in aviation issues. "What we're trying to do is to formulate policy by which we can judge what they really need and what is the right approach to this. We've never done it before, but I think Congress definitely will help the airline industry, we will prop it up [support it] because it is such a part of our economy and it affects everything else; there is a domino effect [affects so many others]," says Mrs. Hutchinson. "I think if we can work with this [airline] industry then all of the fallout perhaps might be mitigated and that's what we want to do."

Last week, the U.S. Congress approved a $15 billion measure to buttress the nation's airline industry to limit carriers' liabilities as a result of the terrorist attacks. The so-called "domino effect" mentioned by Senator Hutchison, in which a negative impact in one sector of the economy affects many others, is showing up in state economies. The attacks have damaged tourism and travel-related industries in the states. Don Hunter, Manager of Information for the Council of State Governments, explains there were several ways that states were affected by the terrorist attack. "I talk about the public confidence aspects which is the fear factor, the fear that there might be something else going on. People not wanting to go to work, people not wanting to travel and then there is the consumer confidence aspect of it which is, if the public confidence is not restored, it certainly is going to affect the consumer confidence," says Mr. Hunter. "How does it impact states? So many states rely very heavily on revenue from state sale taxes if people are not traveling. Especially for those states that rely heavily on tourism, they're to lose a lot of sale tax revenues; if people are not out buying goods, those states are going to lose sales tax revenues."

Some states are concerned that cotton, soybean and sugar cane producers may lose crops because crop-duster planes, which spread insecticides over large fields, were banned from flying after the attack. But the effects of the terrorists' strikes were most acutely felt in states that rely on tourism for their economic survival. "Well, a state like Hawaii that relies so heavily on tourism is going to be impacted because of the loss of tourism," says Mr. Hunter. "But then if you look at it, if the flight schedules are reduced, if there are not as many flights, people in Hawaii are not only going to have trouble flying back and forth where they need to go, but so many of the goods that are provided for the state of Hawaii, many of those are flown in by air, so they can be impacted there. Then you look at states like Texas where several of the large cities are hub airports for major airlines. We've seen cutbacks of 20-30,000 people at these airlines. Not only does this affect the airlines directly but it affects the areas where these employees live."

Since the attacks took place, the U.S. government has taken measures to calm the financial markets. The Federal Reserve System, the nation's central bank, cut interest rates by half a percent. Administration officials are also focusing on other steps that can rebuild confidence among investors and consumers. Some of the steps being suggested are reducing business taxes, which would allow accelerated depreciation on new plant equipment.

Don Evans, Secretary of the U.S Department of Commerce, says that a $40 billion economic package passed by Congress will also help. "The economic recovery plan that was already underway with respect to a tax cut; it's now out to the American people," he says. "But look, this has hurt the economy and we're going onto ways to stimulate it; the fact of the matter is that Congress and the president have come together already in a bipartisan way and passed supplement to a budget of $40 billion which a sure economic stimulus in here."

Some economic analysts are optimistic there might be some good news on the horizon. Increased military and national security may fuel job creation and business expansion. Reports indicate that since the stock markets re-opened on September 17, videoconferencing and trading in defense shares, for example, have risen. According to Stephen Gollub, Professor of Economics at Swarthmore College, the United States shouldn't be worrying about a recession just yet. "No I don't think so, maybe a very short one, but I think we're going to have fairly large stimulus because of increased defense spending and I don't see any inevitability… I think the interest rate cuts should start to kick in after a few months," says Mr. Gollub. "I think we're going to have a lot of dislocation but I don't think a recession is inevitable. There is a lot of uncertainty of course and I wouldn't rule anything out but usually what happens when there is a military build up that the economy recovers and this is the experience we had many times in the past."

Stephen Gollub also says when it comes to the attacks, it is important to distinguish between short-term responses in the markets and the long-term impact on the economy. And although share prices overall in the technology-heavy NASDAQ markets have been falling, Professor Gollub does not believe the drops are indicative of a failing economy. "I don't think one should pay to much attention what Wall Street does in the short term," he says. "I mean all you have to do is to look at NASDAQ - there are a lot of ups and downs, a lot of volatility in the market, it's very jittery but I don't think it necessarily has the huge impact on economy and I think it's likely to turn around once people realize economy is not going to be in such disastrous shape."

If economies are driven by psychology as well as finance, President Bush's nationally-televised speech to a joint session of Congress last week may help reassure American consumers about the resilience of the U.S. economy. "I ask your continued participation and confidence in the American economy. Terrorists attacked a symbol of American prosperity. They did not touch its source," said Mr. Bush. "America is successful because of the hard work, and creativity, and enterprise of our people. These were the true strengths of our economy before September eleventh, and they are our strengths today."

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