The Economic Consequences of September 11th

Topic: BusinessInternational Marketing
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Last updated: April 21, 2019

On September 11th 2001 two aircraft were hijacked by terrorists and flown into the towers of the World Trade Center, New York. The towers collapsed and thousands of people were killed. Additional to the tragic loss of life, economic consequences were felt by the micro-economy of Lower Manhattan New York, the US economy, and the global economy as a whole.”More than 700 businesses located in the World Trade Center complex were either destroyed, or sustained extensive damage”(Economic Impact of the September 11th Attack on New York) causing the loss of around 30% of Lower Manhattan’s office space. “Industries occupying this space, mainly financial services and retail, were directly affected.” (Fiscal Policy Institute, Sept 28 2001, Economic Impact of the September 11 World Trade Center Attack) As a result of the attack, “from September 11th through to the end of year, New York financial services will account for $4.

2billion in losses of economic output.” (Economic Impact of the September 11th Attack on New York)Consumer demand in the local economy weakened dramatically whilst people grieved. “The Fiscal Policy Institute assumed a 10% reduction in consumer spending for one month for non-essential items.

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” (Fiscal Policy Institute, Sept 28 2001, Economic Impact of the September 11 World Trade Center Attack) “Destroyed was half a million square feet of retail.” (Economic Impact of the September 11th Attack on New York) Many businesses occupying this space were small, which tend to be under-insured, making resurrection unlikely.Also affected were local tourism and non-profit organisations. Many non-profit organisations are reliant on government support. With the government and other large business contributors concentrating their finances on the city’s restoration, and individuals donating to the September 11th disaster fund, their revenues fell tremendously. The World Trade Center attracted international tourists and business travellers, who stayed in the local hotels, ate in local restaurants and spent money in local shops. With increased security risks such people were no longer inclined to visit Lower Manhattan. “The Harris Interactive survey of consumers in Britain and Canada suggested that travel to New York from those countries would decline approximately 40% in the fourth quarter.

” (Economic Impact of the September 11th Attack on New York) The loss of trade had a knock-on effect throughout the surrounding area. “Numerous restaurants were forced to close and others cut staff due to the spill-over effects.” (Fiscal Policy Institute, Sept 28 2001, Economic Impact of the September 11 World Trade Center Attack)”An estimated 125,000 New York jobs will be lost in the fourth quarter of 2001 as a direct result of the attack. Although in the long run many of these jobs are likely to return, it is estimated that there will still be a net loss of approximately 57,000 jobs attributable to the attack at the end of 2003.” (Economic Impact of the September 11th Attack on New York)Many of the short-term effects on New York will also last into the medium and long-term.

The restoration of the city will be on going for years to come, at great cost both to the private sector and the government. For many companies it will be more cost effective to permanently re-locate their business. Normal business activity was severely disrupted on September 11th with a negative impact on profits. Relocating back to New York will disrupt activity further.Lower Manhattan attracted many businesses because of its low rent.These rents will undoubtedly rise in the long-term, as investors look to recoup the billions of dollars invested in the restoration of the area. Augmented security risks will lead to increased expenditure as insurance premiums rise.

This will notably affect small businesses and “Smaller stores are likely to suffer cash-flow difficulties and may encounter problems with creditors”. (Economic Impact of the September 11th Attack on New York)When the World Trade Center collapsed many large companies’ headquarters were destroyed and devastating amounts of financial and human capital was lost. Many of the thousands who died were highly skilled professionals. The cost of training and replacing these people will be heavy. About 1,700 of the civilians killed worked in the financial services industry. Demand and supply theory states that this reduced supply of labour will lead to a subsequent increase in salaries within the sector.

The tourism and retail industries will also feel the economic effects throughout the medium and long-term. “By 2003, revenue from retail business in the city is expected to drop by $7.6 billion and the New York travel and tourism industry is likely to lose $7-13 billion in revenues”.

(Economic Impact of the September 11th Attack on New York) Therefore for New York’s long-term survival it is essential to protect the city’s status as a world capital of commerce and finance and retain the financial services industry.The attacks not only affected New York, they accelerated the economic slowdown throughout the whole of the United States. Air travel throughout the nation saw a major reduction in turnover as a result of reduced passenger numbers.

This had a subsequent effect on the tourism industry, with hotels, restaurants and attractions reporting falling numbers. “Several Broadway plays were forced to close within the first two weeks after September 11. The Fiscal Policy Institute assumed a 3% drop in media advertising revenues as constant, uninterrupted television coverage meant commercials were cut.” (Fiscal Policy Institute, Sept 28 2001, Economic Impact of the September 11 World Trade Center Attack)Previous to the attacks, the United States economy was in a slump following recent boom years.

The attacks led to two consecutive quarters of contraction. By the National Bureau of Economic Research’s definition, the economy fell into recession, which in normal circumstances the US had been expected to avoid.This was caused by a lack of confidence in the economy, and changes in consumer behaviour nationwide. September 11 caused people to be less inclined to consume, lowering the velocity of money. Consumer spending and investment are a vital part of the economic cycle. If consumers stop spending, then companies do not receive the capital they need to continue producing and investing.

The less producers produce, the less consumers consume and a downward spiral begins. Gradually the flow of money begins to dry up, GDP figures drop, and, eventually, if the government do not intervene, the economy comes to a standstill.To avoid this happening the government must reduce uncertainty and stimulate growth. It is argued, “consumption is entirely a function of income.”( Bruce Bartlett Wednesday October 17 2001, Rebates Won’t Stimulate The Economy), Hence the US government implemented fiscal policy to raise disposable incomes and encourage spending, by issuing tax rebates. “This was teamed with monetary policy where interest rates were cut to discourage saving and encourage investment.” ( Bruce Bartlett Wednesday October 17 2001, Rebates Won’t Stimulate The Economy)Although such policies will help in the short-term and create investment through the multiplier effect, they cannot be sustained long-term.

Teamed with the cost of war, the increased demand for transfer payments due to increased unemployment, and the “federal reimbursement for rescue, cleanup and infrastructure repair costs,” (Economic Impact of the September 11th Attack on New York) they would create enormous government deficits.President Bush shifted federal resources to the war against terrorism at a cost to many other government reliant schemes. This is not merely a short-term plan; he has proposed spending increases of $48 billion in fiscal year 2003 and $120 billion over the next five years. Increased security costs and insurance premiums will raise expenditures in the private sector as well. These costs will not increase the quantity or quality of production and will probably be passed onto the consumer through higher prices. The transformation into an always-on war economy will not only make the recession more severe but will drag on economic growth for years to come.Following the attack many firms have re-evaluated the geographic concentration of their talent and facilities.

Therefore, in the longer-term, areas outside of New York are likely to see further private investment. This may result in reduced turnover for the small New York firms who supply specialist services to the larger ones. Their market will no longer be concentrated in the immediate vicinity and their large clients will switch to other, more local and cost-effective suppliers.Globalisation meant that the economic consequences were felt across other global economies as well. Many of the companies situated in the World Trade Center had international insurers, who, particularly in Great Britain, suffered major losses.

Insurance claims are estimated at about $37 billion. In the long-term the multiplier effect is estimated to have a positive impact of $47 billion, of which foreign insurers are unlikely to benefit.In spite of the sharp downturn in business travel, many European business travellers paid more for trips than before September 11. The airline industry had to cover their fixed costs. Fewer passengers meant increased costs per head and therefore higher prices per person. Despite these higher prices, the large international airlines were reporting extensive losses. The small, “no frills” airline carriers, which do not fly to America, have lower overheads and weathered the short-term storm more easily.

They gained market share from the larger firms, which is likely to last into the medium and long-term. However all airfares will increase in the long-term, as airline industries pass on additional costs of new security.The downturn in economic activity and air travel has “noticeably reduced world oil demand… The OPEC cartel is negotiating to reduce production so as to stabilize prices.

“(Likely Outcome For The Economy; Demand Effects and Oil Prices) Confidence in the global financial market also plummeted, causing a bare market as share prices fell worldwide. The threat of recession spread and investment markets weakened. The result was a short-term rise in the demand for gold as investors looked for security.Property owners in big US cities are being asked to pay up to 10 times as much for terrorism insurance as they did before September 11, and property deals are beginning to fall through as a result. This may also happen globally in the long-term. With the increased risk of terrorist attacks, firms producing security devices will see a sudden surge in demand, and investment in research and development will become more profitable.The long-term impact of the terrorist attacks will be to reinforce the pressures of the current US slowdown, and to extend it globally.

The United States import a lot of goods from abroad. Due to the recession, demand for these goods will fall, affecting foreign producers’ profit margins. This could lead to the lay-off of workers, and in the long-term, the spread of recession. “Growth through innovation will slow down” and many suppliers developing new or untested products will suffer. Badly hit will be the developing countries that produce commodities for the States, because as demand for commodities fall, prices will follow. The attacks may also result in a slowdown of future globalisation.In conclusion, the economic consequences of September 11th will be felt worldwide for many years to come and they highlighted the importance of government intervention within a market driven economy. The attacks were a shock to many industries and created uncertainty.

In order to minimise these effects the government and private enterprise must pull together and invest. Globalisation and the growing trend towards a single, interdependent, global market meant that shock waves were felt internationally. September 11th showed firms how such reliance can be detrimental, and reinforced the need to spread risk.

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