Monday, November 16, 2015

LOSS | Terror Attacks – Paris vs. 9/11

The Physical-Human Losses to Paris Were Smaller than to NYC
 on 9/11, but Economic Losses May Be Greater Relative to Size.
November 16, 2015–As the chief economist for two different New York City Comptrollers in 1993 and 2001, I was required to prepare official numbers for the economic loss to New York City of both of the terrorist attacks on the World Trade Center.

A colleague has asked me – "How do the economic losses from the Paris attacks compare with the New York City numbers for 9/11?"

NYC,  2001. Business leaders in New York City were fearful after both attacks.
  • In 1993 it had been comforting that the attack could be dismissed as "the gang that couldn't shoot straight" because the explosives did relatively little damage to the World Trade Center (one post protected the next) and the driver of the rented truck used in the bombing tried to get back his deposit! He was of course quickly apprehended.
  • In 2001, it was 100 times worse. The cost of higher insurance premiums and deductibles in 2001, the cost of installing new security protections in offices and residences all over New York City and alternative sites in suburban areas, was far greater. That doesn't take into account the national response of launching a military attack on Iraq. The first official estimate in 2001 of the economic loss to New York City of 9/11 was made within two weeks. It was in a range of $95 to $105 billion, approximately 100 times the economic impact of the 1993 attack. 
The first estimate was made when the loss of life from the World Trade Center alone was believed to be close to 6,000 people. The approach was to estimate the one-time loss of buildings, property and lifetime earnings of people who were killed, and then to add to this the present value of adverse business-location decisions.

Within three months, by the end of 2001, the business consensus on the economic impact settled at about $80 billion, about 8 percent of NYC's current gross product.  The drop in the economic impact estimate occurred because:
  • As more survivors were identified, the estimate of the number of dead was lowered from 6,000 to 3,000 (including deaths from the Pentagon attack and all four crashed planes).  
  • Early on, the fear was that many businesses would relocate to New Jersey and Westchester County. In fact, many large companies acquired alternative office space in these areas. But few moved out.
  • With the election as Mayor in November of a successful member of their own fraternity – Michael Bloomberg – business leaders believed that their fears would be addressed fully and competently.
Paris, 2015.  The threat to Paris and to France from terrorism is greater than in New York City and the United States:
  • France is more dependent on Paris than the United States is on New York City. The NYC metro area accounts for 8 percent of U.S. gross product, whereas Paris accounts for one-fourth of French gross product. 
  • France is much more dependent on tourist revenue than the United States, and Paris is the main gateway.
  • The $17 trillion U.S. economy has well-monitored borders with Mexico and Canada and has invested heavily in Homeland Security. The less-than-$3 trillion French economy must cope with borders – in places porous – with Belgium, Luxembourg, Germany, Switzerland, Italy and Spain, not to mention the high volume of traffic to and from Britain. France has reportedly  suspended its commitment to the Schengen Agreement on open borders, which will entail new costs.
On the other hand, the regional and national alternatives to NYC for large American businesses are greater than for businesses in Paris that wish to remain in a francophone environment. It would probably be harder to pull up stakes from Paris and move to a suburban location or another French city because Paris uniquely dominates France, as London dominates Britain.

Based on these considerations, the Paris of the Hebdo and November terrorist attacks could add up to an economic loss for Paris less than but approaching the percentage estimated for the 9/11 attacks. The 8 percent figure applied to the metropolitan Paris economy would come to nearly $6 billion.

The USA and France.  The attack imposed large costs on the Federal Government – on the Federal Reserve System to fund the liquidity crisis immediately after the attack as well as a $20 billion commitment of grants and loans by the Federal Government to compensate New York City for losses in what was properly considered an act of war.

The cost of the damage to New York City was also spread to the rest of the country via private insurance payouts (insurers were not allowed to hide behind Act of God or Act of War clauses) and higher insurance premiums,

An interesting 2010 article in the journal Peace Economy, Peace Science and Public Policy by USC and Claremont economic professors Adam Z. Rose and S. Brock Blomberg, “Total Economic Consequences of Terrorist Attacks: Insights from 9/11”, concludes that the initial economic loss to the USA from 9/11 was at least $75 billion, or three-quarters of a percent of GDP.  This is not necessarily inconsistent with the New York City number because migrations of businesses out of New York City within the United States would not be a loss to the United States, so the national number could well be smaller than the local number at the center of the attack.

The authors make an important point that was always clear to me, namely that psychological factors are crucial for determining the ultimate economic loss from an attack. As they say:
[W]e, rather than the perpetrators, are the major determinant of the consequences of a major terrorist attack. After 9/11, our resilience was high, but so was our fear [... ]. [S]ubsequent anti-terrorist initiatives at home and abroad were more costly than the direct damage caused by the attack.
The United States has invested $650 billion since 2001 in Homeland Security. The French commitment before the latest attack was a little more than one-thousandth of that. France will have to spend more, and the United States needs to assist. American concern about terrorism is greater now than it was after the Boston Marathon attack.