Commentary | Economic Growth

Don’t Blame the Economy on 9/11

Opinion pieces and speeches by EPI staff and associates.


Don’t Blame the Economy on 9/11

By Lee Price

The notion that a large part of our current economic woes is attributable to the attacks and aftermath of September 11 has become almost an article of faith for many policy makers and commentators. It’s been repeated so often, rarely questioned, that it has begun to feel like established fact. The sky is blue, and the attacks of 9/11 sent our economy into a tailspin that we are still struggling to pull out of. Reasonable people can argue about whether the sky is really blue. But it’s hard to find an economic indicator that supports the notion that today’s economic troubles can be properly explained as the backwash from 9/11. That claim simply does not withstand close scrutiny. While pockets of the U.S. economy remain worse off as a result of 9/11, the net effect on total GDP today is negligible and may well be positive.

For the last three years, we have had a substantial rise in both unemployment and idle equipment. At times like these, the biggest constraint on total output is a shortage of demand for the goods and services businesses offer. In fact, September 11 has actually boosted demand by causing both government and business to spend more on security than they otherwise would have.

Don’t get me wrong. There can be no doubt that the economy was thrown for a loop by the attacks on September 11. But it was a short-lived loop. Retail sales, travel, and the financial markets were put on hold for a number of days. Within a couple of months, however, retail sales had moved back on the strong growth trend that had preceded September 11. The stock market was closed for a period and took an immediate dive after reopening. Within a couple of months, however, the major indexes all soared past their September 10 levels.

September 11 depressed leisure travel for several months longer and caused some shift away from some destinations (such as New York) and toward others. By today, leisure travel has largely overcome the effects of September 11, with some locations gaining at the expense of others.

Businesses have not resumed traveling to the same extent as before September 11. Since much earlier in 2001, businesses have been reining in travel to keep down expenses and raise profits – the same reason that explains business caution in hiring and investment for the last two-and-a-half years. The added hassle of tighter security plays only a marginal role in explaining lower business travel.

Two years later, the nation still feels traumatized but has largely overcome the economic aftershocks of 9/11. Because of that trauma, we are spending more on security. As a result, our economic output is no lower today because of 9/11 and it may well be higher than it otherwise would have been.

One cautionary note is in order, however: 9/11’s effect on GDP could turn negative in the future as the labor force and productive capacity become more fully employed. At that point, diverting more resources into security would reduce new investment, slow additions to our productive capacity, and retard GDP growth. We remain far from that situation today, however.

After the attacks, policy makers from the President on down exhorted the American people to continue to live their lives and go about their daily business – with added care and vigilance, to be sure, but without yielding to fear. They said that to do anything else would be to hand victory to the terrorists, who wanted the blows they struck to resonate through the economy. Two years later, it seems that the people took that advice to heart. Although the current economic picture is not as strong as any of us would like to see it, the people did not succumb to fear and the impact of the acts of terror on the economy have faded.

Lee Price is Director of Research at the Economic Policy Institute in Washington, D.C.


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