Counting the cost of Sept. 11
By BRUCE LITTLE
The Globe and Mail
Wednesday, September 11, 2002
On that terrible day a year ago, one of the many questions asked was: "Will this drive the U.S. economy into recession?" The answer, murky at first, emerged clearly this summer: No.
The U.S. recession -- as data published only six weeks ago showed -- had begun in early 2001, but was almost over by the time the planes slammed into the World Trade Center.
Since then, the United States has lurched from rapid recovery into an expansion whose sluggishness is almost entirely the result of factors unconnected to Sept. 11.
Canada was even less affected. Our economy merely flirted with recession in the summer of 2001 and since then has been barrelling ahead at a pace faster than any other G7 country.
But any definitive assessment of the economic fallout of Sept. 11 must be left to historians. For the moment, views among economists about the long-term effects are deeply divided. For every one who dismisses the impact as minuscule in the context of a huge U.S. economy, there's another who figures we haven't even begun to count the costs to global economic growth.
The short-term effects are easy enough to spot. Specific industries were severely disrupted for weeks, with effects that still linger -- like airlines and any industry whose fortunes depend on the number of people who travel.
But the direct impact of the terrorist strikes on the broader U.S. economy was minimal and brief. In Canada, the effects were even less noticeable.
"It's all melted into the system," said Jim Frank, chief economist at the Conference Board of Canada. Don Drummond, his counterpart at Toronto-Dominion Bank, says the effects "lasted until about Oct. 11."
Consumer confidence plunged after Sept. 11, in both Canada and the United States, where a rash of unsolved anthrax attacks kept it low through October and November.
But it's also clear from the statistical record that ordinary Americans and Canadians alike got over their funk in a hurry.
In Canada, retail sales sagged in September, probably because most people were glued to their television sets rather than shopping, but the decline was only half that recorded in January, 1998, when an ice storm shut down much of Quebec. Last October, Canadians rushed back to the malls and auto dealers' lots to resume buying. Sales soared through November, December and January before levelling off.
Some of that boom, to be sure, was an indirect result of Sept. 11. Faced with massive uncertainty over how consumers and companies would respond to the new dangers that seemed to surround them, central banks slashed interest rates in an effort to restore confidence.
The U.S. Federal Reserve Board and the Bank of Canada had been cutting rates all year, but after Sept. 11, both went into overdrive, cutting their key rates in half. The Fed reduced its benchmark federal funds rate to 1.75 per cent from 3.5 per cent; the Bank of Canada lowered its comparable overnight rate to 2 per cent from 4 per cent.
Cheaper money kept consumers in a spending mood and their buying kept both economies afloat even though business investment remained weak. Sales of autos, houses, furniture and appliances -- all of which are usually financed with borrowed money -- soared toward the end of 2001 and kept growing in 2002. Mr. Drummond calls that outcome "a very vibrant statement as to the efficacy of monetary policy."
Even so, pointing to those gains as a result of Sept. 11 begs the bigger question, according to economist Ted Carmichael of J.P. Morgan Securities Canada Inc. "What would the path of interest rates have been without the attacks?"
The Fed might very well have brought rates to their four-decade lows in any case, although it would have happened more slowly, he says. In the United States, "Sept. 11 triggered a sharp drop in activity and a rebound that did not have a lot of staying power."
But it's tougher to disentangle the Sept. 11 effect from everything else that was going on. The implosion of high-tech spending that brought down the high-flying economies of both Canada and the United States had begun long before Sept. 11.
And this year, the fingers of blame for slow growth in the United States (Canada's economy has been rollicking along) have pointed mainly at the confidence-sapping effects of corporate malfeasance scandals involving Enron, Arthur Andersen and WorldCom.
If economists cannot agree on the short-term effects of Sept. 11, they are just as divided on the longer-term impact, although there is a widespread sense of disquiet that global economic growth will suffer in the years ahead as a result of the attacks.
The reason: Scads of money will be spent not on making good things happen, but preventing bad things from happening. Money that might have been spent to build new factories or buy new equipment that would boost future production will be diverted to other uses -- like the military or a wide array of security and anti-terrorism measures.
"Growth is going to be a little harder to come by," Mr. Carmichael said.
There's also the impact of what Steve Poloz, chief economist at Export Development Canada, calls "sand in the wheels," a metaphor he began using within days of the Sept. 11 attacks to describe the myriad small costs that are likely to hang over exporters and importers alike -- border delays, airport lineups, increased security checks on shipping containers and higher insurance costs.
"It's the exporter who will pay these costs because they have a hard time passing this on to buyers. That's part of Canada's fundamental competitiveness that's been given away," he says now.
"The normal that we return to might not be what we were used to. The negatives from sand in the wheels might offset the gains we got from trade liberalization in the 1990s. In the 1990s, global growth was 0.3 percentage points greater per year than it was in the 1980s because of trade liberalization."
Last June, the Organization for Economic Co-operation and Development tried to quantify the impact, although Mr. Poloz thinks the effort was not very successful. The OECD mapped out a future in which the U.S. government borrows to finance increases in military and other security spending, while the private sector also spends more on security.
Initially, it said, the U.S. economy would grow faster, but higher interest rates (a result of more government borrowing) would choke off private investment and productivity growth, leading to less growth by the fourth year.
Tim O'Neill, chief economist at Bank of Montreal, thinks some of these concerns, although legitimate, are overdone.
Insurance costs have risen since Sept. 11, he said, but property and casualty insurers had been losing money long before Sept. 11 and were planning to raise rates anyway. As for border delays, he said waiting times at the key Canada-U.S. crossing points were back to normal within weeks of the attacks.
The Canadian Trucking Alliance agrees, but adds a sting: "Normal does not necessarily equate with acceptable. One of the key factors explaining the reduced delays has been the significant decline in traveller traffic and a smaller but still evident slowdown in commercial truck traffic."
Such threats to the economy all add up to a new awareness of risk that takes many forms, both in the long term and the short term.
"Geopolitical risks and a heightened sense of physical, as opposed to purely economic, vulnerability have diminished the willingness of both investors and business executives to assume risk," John Lonski, chief economist at Moody's Investors Service Inc. of New York, said last week.
"Growth suffers whenever risk aversion becomes widespread."