How did 9/11 Change the Economy?

From Economics Happy Hour Podcast · 52:04

Show by Matt & Jadrian

Twenty-five years after the September 11 attacks, we look at a difficult question: can economics help us understand terrorism? We start with Gary Becker’s rational model of crime and Alan Krueger's research to consider the incentives, opportunity costs, and motivations behind terrorist activity. From there, we consider whether 9/11 was a “small” or “large” economic shock, looking at everything from financial markets and travel to government spending, immigration, and consumer behavior. In this episode, we talk about:* Whether the rational-choice framework economists use to study crime can tell us anything useful about terrorism* The case for viewing 9/11 as a relatively small short-run macroeconomic shock, and why that framing needs important context* How fear and uncertainty changed travel, spending, investment, and everyday behavior after the attacks* The longer-run economic consequences, including security and defense spending, immigration policy, health effects, and changes in governmentIf you liked this conversation, you might also enjoyThis Week’s Drinks 🍻Jadrian took a chance on a Boardwalk Orange Creamsicle that looked promising in the can and became much less promising as soon as it hit the glass. The smell was...not great. Fortunately, it tasted better than it smelled. Matt kept things simple with a light Moscow Mule. The drinks arrived amid the usual beginning-of-semester chaos combined with a short week thanks to Labor Day. Name That Stat 📊We kept both stats tied to this week’s topic. Jadrian offered up the total amount of money the Transportation Security Administration spent in the most recent fiscal year. What started as a fairly crude response to the attacks has become part of an enormous security infrastructure that is now a normal part of flying in the United States.We then turned to financial markets. Matt offered up a measure of how much the Dow Jones fell during the first week of trading after September 11. The markets were initially closed for several days after the attacks, but investors had to process an extraordinary amount of fear and uncertainty all at once when they reopened.Show NotesBefore getting into a summary of this week’s episode, we want to be clear about what this episode is and what it isn’t. September 11 was first and foremost a tragedy. Thousands of people were killed, families lost loved ones, first responders made extraordinary sacrifices, and the effects of that day continue to be felt 25 years later. Talking about the attacks through an economic lens isn’t meant to reduce those lives to statistics or suggest that GDP is the measure that matters most. We believe looking at this event through an economics lense gives us one additional way to ask questions about why terrorism happens and how an event like this can reshape the economy.We started with Gary Becker’s rational model of crime. The basic idea is surprisingly intuitive: people respond to incentives even when they’re deciding whether to do something illegal. Someone considering a crime weighs potential benefits against the probability of getting caught and the consequences if they do. Terrorism pushes that framework to an extreme. If someone is willing to die for a cause, the usual idea of increasing the punishment suddenly doesn’t work very well. Some of Alan Krueger’s past work used economics to explain who participates in terrorism. We didn’t get to talk about it much on the episode, but one of the important takeaways is that the familiar story connecting terrorism simply to poverty doesn’t hold up particularly well.From there, we turned to the economic impact of 9/11 itself and an interesting challenge of determining whether it had a small or big shock on the economy. The argument for “small shock” focuses on the loss relative to the overall size of the U.S. economy. Businesses relocated, damaged physical capital could eventually be rebuilt, and some of the decline in industries like travel was offset by growing demand elsewhere, particularly in security and counterterrorism. The economy was also already in a recession that had begun months earlier, making it especially difficult to separate a distinct 9/11 effect from everything else happening in 2001. Zooming out makes the “big effect” argument much stronger, especially with the benefit of twenty-five years of hindsight. Travel and conventions were hit especially hard, government spending on defense and security expanded, the Department of Homeland Security was created, and new security policies became part of everyday life. Fear itself also mattered economically. People pulled back from travel and other activities because they understandably perceived the risk of another attack as much higher. Some substituted driving for flying, even though driving carries greater accident risk. Immigration restrictions may also have reduced an important source of long-run economic growth. These are harder effects to capture with a single GDP number because they…

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