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Kevin M. Murphy (foreground) and Steven N. Kaplan
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COVER STORY
What's Next?
The Economic Effects of September 11
Was October too soon to predict
the economic fallout from September 11? Not for three University
of Chicago professors who ventured to estimate the damage done
by the terrorist attacks and predict the rate of recovery at a
time when Alan Greenspan was still silent.
At a packed public forum at
Gleacher Center, Gary S. Becker, Steven N. Kaplan, and Kevin M.
Murphy declared uncertainty the economy’s greatest enemy.
Along with moderator dean Edward A. Snyder, panelists wrestled
with historical models and potential indicators to gauge the short-
and long-term effects of these unprecedented events.
The panelists had some contradictory
opinions, but all agreed on the role unknown factors would play.
“In the present situation, the biggest unknown is how successfully
we will be able to control future terrorism,” Becker said.
Murphy agreed that uncertainty has a predictable effect on people’s
behavior, causing a natural contraction in both investment and
consumption.
Measuring the Loss
While Murphy acknowledged the uncertainty, he said it was reasonable
to expect recovery to occur within about 15 months. “The
total value of productive physical assets in the United States
is approximately $30 trillion. So if you lost, say, $60 billion,
that is about 0.2 percent of the physical assets,” he said.
Still, he pointed out, physical assets are really a small part
of overall productive assets in a modern economy. “Total
assets—physical and human—are about $100 trillion in
the U.S. economy. So if you lost $60 billion, that would be 0.06
percent. In terms of the loss of assets themselves, a very small
part of productive capacity was lost.”
Recovering lost assets will not
be as difficult as overcoming the ongoing threat of future attacks.
“The biggest risk is probably concentrated on air travel
itself,” Murphy said. “We’re going to have more
security; that’s going to be a cost. [I’ve heard] a
number in the $2 to $3 billion range per year, but that’s
likely to be the smaller part of the cost. If every person going
to the airport was delayed half an hour, that’s a much bigger
number. We’re talking numbers closer to $20 billion.”
| “We still have retained
basically all the human capital we had prior to this event,
and that's going to enable us to recover—and recover
fully.” —Gary S. Becker |
A major disruption to air travel
could impose costs of $20 to $25 billion on the travel industry.
But compared to the size of the economy, it would mean a 0.2 to
0.25 percent shock, a figure not unprecedented in recent history.
“The closest analogy is with
the oil shocks in the 1970s and early ’80s. It’s a nice
comparison. With the airline shock, people think that airlines
are central to the economy because they’re everywhere. Well,
so is oil, and the energy shock is very similar,” Murphy
said. “Actually, the energy shocks were much larger. They
were about 1 to 1.5 percent of the GDP, just in terms of the increased
cost of imported oil. The total shift in cost, including the cost
of both domestic and imported oil, was much greater. If we’re
right in calibrating these numbers, the effect of the airline
shock is likely to be significantly less than the oil shocks.”
This is good news, because the
oil shocks demonstrated that economies can and do adjust even
to permanent changes in the cost structure they face, he said.
At the start of the oil crisis, experts predicted long-term woes.
But Americans were able to find ways to reduce their dependence
on oil, and the shocks diminished over time. “That’s
important here,” Murphy noted, “because even if the
terrorist threat remains—that is, if we continue to have
some losses, if we continue to have to spend more on security
and if we have some inconvenience for passengers—it’s
likely that we will be able to reduce that cost over time.”
Negative Effects of Ongoing
Uncertainty
Kaplan predicted a more pessimistic outcome, suggesting a significant
short- and medium-term impact. “I’m not sure if this
is going to happen, because the uncertainty is huge,” he
said. “In other circumstances, like the Gulf War, the uncertainty
did clearly end. Now, it’s hard to know when the uncertainty
will end.”
As a result, companies are facing
lower cash flows while they battle higher costs for insurance,
transportation, and security. But Kaplan said the biggest concern
is the postponement of decisions and investments. Giving an example
of a hypothetical investment in software, Kaplan explained, “After
September 11, the expected value of the investment probably went
down, the positive cash flow this year almost certainly declined,
and the possibility that it would turn out to be a bad investment
increased. All of those factors tell you that you should wait.”
This waiting creates problems
of its own. “If everybody starts waiting and you have a decline,
how long does it continue?” Kaplan asked. “In the short
run, you would expect a fairly large decline in investment, and
I’m not sure it’s going to be for such a short period.”
Continued
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