February 2003, Vol. 126, No.2
Effects of September 11
Précis from past issues
Effects of September 11
Not long after the first anniversary of the terrorist attacks of September 11, 2001, the Economic Policy Review published by the Federal Reserve Bank of New York released a special issue on the economic effects of the events of that day. The issue contained an introduction signed by the Review’s editorial board and six articles covering three broad themes: accounting for the costs, understanding the impact on financial systems, and the implications of terrorism for the future of the city (in both upper and lower case).
Jason Bram, James Orr, and Carol Rapaport look at the direct costs to New York of the assaults on the World Trade Center. One finding is particularly stark: The lost prospective lifetime earnings of the nearly 3,000 persons who died at work that morning added up to nearly $8 billion. The other quantifiable losses were substantial, to be sure—$4-6 billion in earnings lost among other workers and more than $20 billion in property damage and clean up costs—but seem almost immaterial in comparison.
Bart Hobijn speculates on the total eventual costs to the U.S. economy. The direct costs, generally increased spending on security on the part of both the private and the public sector, he projects will amount to perhaps $72 billion per year, about two-thirds of one percent of gross domestic product. Hobijn finds that the redirection of resources that this represents will not have much of an effect on productivity. For example, he estimates that doubling security-related labor inputs would lower multifactor productivity levels by approximately one-half of one percent and that the total effect of all security-related changes in spending would be about one-and-one-eighth of a percent of the level of labor productivity and perhaps two-thirds of a percent of the level of multifactor productivity.
Michael J. Fleming and Kenneth D. Garbade open a section on the effects of September 11 on the payments and settlements systems with an examination of the market for treasury securities and how it operated in the wake of an event that not only damaged the communications infrastructure of the Treasury market, but killed participants in the market and destroyed brokers’ offices and business records. The most visible and immediate symptom was an increase in the value of settlement fails from a daily average of about $1.7 billion during the week ending September 5 to $190 billion in the week ended September 19. Despite efforts by market participants to reconcile accounts and policymakers to provide liquidity, the daily volume of fails remained high—$105 billion in the week ended September 26 and $142 billion the week after that. On Thursday, October 4, the Treasury Department found it necessary to announce a "snap" auction to reopen the current 10-year Treasury note. This action helped re-solve the imbalances in supply and demand for Treasury securities that had left a key interest rate so low that failing to deliver was, in the words of Fleming and Garbade, "not an unattractive alternative to borrowing securities to make a delivery."
James J. McAndrews and Simon M. Potter chronicle the effect of the events of September 11 on bank payments and clearing operations. The same telecommunications infrastructure damage that had affected the securities market also impaired payments processing at many banks and some were unable to use the Federal Reserve’s Fedwire system to execute large payments. However, contrast to the situation in the securities markets, the Fedwire system’s volume and value of transactions returned to near-normal within a few days and aggregate opening balances at the Fed were back to pre-attack levels by September 21. The Federal Reserve had provided what McAndrews and Potter decribed as "abundant" liquidity to the system through massive discount window lending on September 11 and 12, and open market operations thereafter.
The final two articles in the Review address the future of New York and of the concept of a city in a post-September 11 world. Jason Bram, Andrew Haughwout, and James Orr find that the city’s industry mix, growing attractiveness as a place to live, and consequent value to firms as a place to find high-value employees should lead to a continuation of recent growth trends. Among the indicators they look at are declining crime rates, increasing relative earnings per worker, and re-bounding relative housing prices. They point out, however, that to maintain momentum, New York City must rebuild a severely damaged infrastructure, close a sizable municipal deficit, and use Federal emergency assistance wisely.
James Harrigan and Philippe Martin point out that the economic forces—labor pooling, market access, transportation costs, and so on—that lead to the formation of cities are very strong and these same forces make cities highly resilient as well. It could very well be that these forces and the quality of resilience are stronger in New York than in the average city, thus Harrigan and Martin conclude that "cities in general, and New York in particular, are unlikely to decline in the face of even a sustained terrorist campaign."
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