Another day of infamy

Posted: Sep 12, 2001 12:00 AM
Many years ago, I wrote a book about the Pearl Harbor attack. Now I know how people felt on that fateful day, Dec. 7, 1941. The date of Sept. 11, 2001, will now also go down in history as a "day of infamy." Since my area of expertise is the economy, I have been thinking about what the economic impact of this horrendous terrorist attack will be. Much depends on the reaction of policymakers to the events. Just looking at the loss of the World Trade Center in isolation, the economic loss is significant. Destruction of the building is the least of it. A huge number of investment banks and other financial services companies were based there. No doubt, backup systems will ensure that depositors and shareholders will be protected. But the deaths of perhaps thousands of our brightest bankers, financial analysts and investors will have long-term consequences. There will be spillover effects, as well. Probably every building and worker in lower Manhattan is impacted by the World Trade Center's collapse. This encompasses many of the most important banks and financial institutions in the United States, including the New York Stock Exchange and the NASDAQ market. Even those buildings, companies and workers unscathed by the disaster will not be able to operate at full capacity for months to come. More significant, from an economic point of view, will be the ways in which the air transport system copes with the situation. I remember the significant changes that occurred after the first wave of hijackings in the 1970s and after the Gulf War in 1991. Future changes will be an order of magnitude larger. It is impossible to say, at this point, what those changes will be. It is safe to say that whatever they are, they will increase the cost of flying. In the near term, there will probably be a sharp cutback in flights. Landing routes into major cities may change drastically. It may be that Washington's National Airport will have to be closed permanently for security reasons. Although massively inconvenient for those who live in D.C., it is just about impossible to protect the city from the air as long as it is operational. More important, as far as 99.9 percent of the country is concerned, is how policymakers react. Unfortunately, these kinds of catastrophes often lead to the implementation of new policies and the passage of new laws that affect everyone forever. The tax laws we live under today are still largely based on the Revenue Act of 1942, passed in the wake of Pearl Harbor, for example. The political consequences can be long-lasting, as well. As this is written, George W. Bush has pretty much been invisible. He seems to be acting as if the nation were attacked by nuclear missiles from Russia, rather than terrorists with limited, if devastating, capabilities. It seems to me that Bush's reaction was inappropriate. Instead of acting as if the nation were at war, he should have reacted as if an earthquake or hurricane had hit New York. Instead of hiding out at a military facility in Nebraska, he should have gone to New York and directed the relief effort. Rather than looking like the commander in chief, Bush looks out of touch or, worse, cowardly. Part of the problem is that the federal government's machinery for responding to external attack is still based on the assumption of nuclear missile attack and war in the traditional sense. When I worked at the Treasury Department, I used to have to work on the continuity of government program, which was always based on the assumption of several thousand nuclear warheads hitting simultaneously. I found these war games to be absurd and anachronistic even then, in the early 1990s. It seemed obvious to me that a much more limited terrorist attack was far more likely. But the people who ran the program were only interested in studying worst-case scenarios. As a consequence, unless things have changed radically since I left government in 1993, little has been done to prepare for the events of Sept. 11. Bush's reaction tells me that this is probably the case. Markets will, no doubt, react negatively to what has happened. But it is important to remember that the American economy is almost entirely untouched, and has recovered from far worse setbacks in the past. Unless policymakers react by doing something really stupid, the economy will recover and life will go on for the vast majority of Americans. The events of Sept. 11 will never be forgotten and will have some permanent effects on the lives of all Americans, just as Pearl Harbor did. But there is no reason to panic or to believe that our nation's standard of living won't continue to rise for years to come.