The Economic Consequences of September 11th

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University Degree Business and Administrative studies

        

The Economic Consequences of September 11th

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,”1 causing the loss of around 30% of Lower Manhattan’s office space.2 Industries occupying this space, mainly financial services and retail, were directly affected.3 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.”4 

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.”5 “Destroyed was half a million square feet of retail.”6 Many businesses occupying this space were small, which tend to be under-insured, making resurrection unlikely.7 

Also affected were local tourism and non-profit organisations.  Many non-profit organisations are reliant on government support.8 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.9 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.”10 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.”11

“An estimated 125,000 (New York) jobs will be lost in the fourth quarter of 2001 as a direct result of the attack.”12 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.”13 

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.14 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.15 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.”16

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.”17 Demand and supply theory states that this reduced supply of labour will lead to a subsequent increase in salaries within the sector.18

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.”19 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.”20 

The attacks not only affected New York, they accelerated the economic slowdown throughout the whole of the United States.21 Air travel throughout the nation saw a major reduction in turnover as a result of reduced passenger numbers.22 This had a subsequent effect on the tourism industry, with hotels, restaurants and attractions reporting falling numbers.23 “Several Broadway plays were forced to close within the first two weeks after September 11.”24 Even sales of photographic film and toilet paper fell.25 “The Fiscal Policy Institute assumed a 3% drop in media advertising revenues” as constant, uninterrupted television coverage meant commercials were cut.26 

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Previous to the attacks, the US economy was in a slump following recent boom years.27 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.28

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.”29 Consumer spending and investment are a vital part of the economic cycle.  If consumers stop spending, then companies do not ...

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The Economic Consequences of September 11th
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    Business and Administrative studies
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