DISASTER RECOVERY Economists at the Anderson
School at UCLA have compared attacks on the World Trade Center with
natural disasters and point out that Florida, California and North
Carolina bounced back quickly after devastation struck. SOURCE: The
Anderson School at UCLA Original graphic by JARRETT QUON/Daily
Bruin Senior Staff Web adaptation by STEPHEN WONG/Daily Bruin
Senior Staff
By Kelly Rayburn
Daily Bruin Senior Staff Terrorist attacks on Sept. 11 destroyed a
symbol of American capitalism when they made rubble out of the
World Trade Center towers in New York City. Since then, many have
been concerned the attacks will send an already limping national
economy tumbling into recession. But economies are not like
buildings, top economists at The Anderson School at UCLA said in a
report on the impact of the attack ““ the American economic
system will survive. “It’s a spec from an overall
economic perspective,” Christopher Thornberg, a senior
economist with the school’s economic forecast, said of the
attacks. “Economies are like big pools of water,” he
said. “You throw a rock in, yeah, you get some ripples. But
eventually the water covers it up.”
An (un)natural disaster
In the report, “The Economic Impact of the Terrorist Attack
on the World Trade Center Will be Minor,” Thornberg and
Edward Leamer, director of the Anderson forecast, equate the
attacks to a natural disaster. The total value of losses, when the
value of the World Trade Center itself is added to the value of
human capital that perished, is approximately $14 billion,
Thornberg said. That number is in the same neighborhood as the
dollar amount of damage caused by natural disasters, such as
Florida’s Hurricane Andrew, which caused $40 billion in
damage in 1992, or the 1994 Northridge earthquake, which caused $23
billion in damage. “This is a disaster,” Thornberg
said, “but not of unprecedented proportions.” Neither
natural disasters nor the starts of wars have long-lasting economic
effects, Thornberg said during the Anderson forecast on Sept. 12.
During his presentation, Thornberg used graphs to show that a
complete recovery in personal income in states ravaged by
earthquakes or hurricanes in the 1990s happened within one economic
quarter. “The process of society rebuilding itself is
actually a form of economic stimulus,” Thornberg said.
Additionally, consumer psyche is not fragile enough to have
long-lasting economic consequence, Leamer and Thornberg’s
report stated. But since the attacks, not all economists ““
and surely not all stockholders ““ have been as confident in
the economy. “There is a big interest in how this will affect
the economy, and no one really knows,” said macroeconomics
professor Martin Scheider the day after the attacks.
Falling stock markets
While U.S. stock markets remained closed for the remainder of the
week following the attacks, markets in Europe and Asia tumbled
after the WTC collapsed. Scheider at the time predicted the foreign
market losses indicated the U.S. market would experience similar
drops. But on Sept. 16, President George W. Bush spoke
optimistically about the U.S. economy and the reopening of the
stock market. “I have great faith in the resiliency of the
economy,” he said. “No question about it, this incident
affected our economy, but the markets open tomorrow, people go back
to work. And we’ll show the world.” When the U.S.
market did open ““ after its longest closure since the Great
Depression ““ the Dow Jones Industrial Average lost a record
684.81 points, finishing below 9,000, the lowest it had been in
two-and-a-half years. The airline, insurance and entertainment
industries were especially hard-hit, while the defense industry was
among the few winners. Responding to the drop, the Federal Reserve
lowered interest rates one-half point to encourage consumer
spending. The market appeared to stabilize somewhat, dropping only
17 points on Sept. 18. But the Dow fell 144.27, or 1.6 percent, the
next day, after being down by as many as 423 points at one point
during the day. UCLA professor of international business economics
Sebastian Edwards at The Anderson School predicted the market would
fall and that the Fed would respond with interest cuts. He said
there is a chance the U.S. could be “speared by a
recession” in the aftermath of attacks. The stock markets
will recover, Thornberg said, and if they don’t, it will not
be because of the attacks, but because the market was artificially
too high beforehand, and it is natural for stock prices to
drop.
A pending recession
As for whether the attacks will launch the United States into a
recession, Thornberg and Leamer said the nation was already headed
in that direction. “It’s an unhealthy economy,”
Leamer said during the Anderson forecast Sept. 12, his portion of
which was prepared before the terrorist attacks on Sept. 11.
“If you don’t like the word “˜recession,’
call it what ever you want, but we’re not in a well-behaving
economy.” Leamer acknowledged he was going out on a limb by
saying the nation is entering a recession. But UCLA was correct in
predicting the current economic slowdown in its previous forecasts,
while many other forecasts missed it. Leamer said that fact was the
context of his message: “We are in a recession.” Leamer
also challenged what many regard as the definition of a recession:
two consecutive quarters with negative economic growth. Two
consecutive quarters of economic growth are symptoms, not the
definition, of a recession, Leamer said. The economy can be in a
recession without displaying these symptoms yet. Leamer compared a
recession to the flu. One might say a temperature of 102 is a
symptom of the flu, “but I’m thinking, if you’re
at 101.9, you’re not feeling good,” he said.
Airline industry hit hard
While mostly confident about the economy, at least in terms of how
it will be affected by the terrorist attacks, Thornberg and
Leamer’s report did address the negative changes the airline
industry might have, noting that increased security measures may
affect business travel in an adverse way. Thornberg said if people
need to wait in line for three hours to make short domestic
flights, like from L.A. to San Francisco, they will choose not to
fly. “Overreaction can be as bad as underreaction,” he
said of increased Federal Aviation Administration security
measures. The airline industry itself, already weak before the
attacks, is in trouble, Thornberg said. American Airlines, United
Airlines, Continental, Delta and Northwest Airlines said they would
scale back schedules 20 percent. Continental laid off 12,000
employees, or more than one-fifth of its work force. The parent
companies of American Airlines and United Airlines, AMR Corporation
and UAL Corporation respectively, announced last week they each
would lay off 20,000 employees. The Seattle-based Boeing company
announced Sept. 18 it would lay off 30,000, or nearly one-third, of
its employees. The layoffs did not encourage investors. “This
is not a ripple effect,” said U.S. Rep. Jennifer Dunn,
R-Wash., whose suburban Seattle district includes thousands of
Boeing workers, “This is a tsunami.” The layoffs did
not encourage investors either. “It’s hard to look at
headlines of 30,000 layoffs and more and not worry about what the
impact is going to be on an economy that is already slowing,”
said Charles White, portfolio manager at Avatar Associates, an
investment council firm. Thornberg said it would probably be best
for the government to step in and help keep airline industries
afloat in order to prevent too many companies from folding and to
ensure better competition in the industry in the future. But even
with the damage to the airline industry, Thornberg is confident the
American economy will manage. “Economies are
adaptable,” he said. “People can find ways to
adapt.”
With reports from Robert Salonga, Daily Bruin Staff, and wire
reports.