Tuesday, January 26, 2016

COST OF 9/11 | Gulf War II–a Non Sequitur?

New York Times, Sept. 12, 2001.
New York Times story by Andrew Ross Sorkin published online on Nov. 16, 2015 and in print on Nov. 17 (pp. B1 and B4) estimates the total cost of 9/11 to the USA as potentially "as high as $3.3 trillion."

$3.3 Trillion?

That seemed like a lot to me. The final estimates of the total cost to New York City came in at $70-$80 billion, after the initial estimates of deaths were cut in half and the damage to the hotel next to the World Trade Center was found not to be as bad as feared.

Much of the damage was, of course, paid for by insurance payouts–and, of course, terrorism insurance premiums then soared, or deductibles, or both.

Federal assistance to the City also helped, with $20 billion promised and a good portion of that delivered.

The Basic Costs: Physical and Economic

The total cost is defined as the "economic cost of Sept. 11" to the entire United States. The estimate starts with $178 billion for the physical and economic costs–$55 billion for physical losses and $123 billion for economic losses. These numbers are in the ballpark, although shifting the focus from New York City to the nation cancels out economic costs to NYC that were premised on corporations moving jobs out of New York City (e.g., for New Jersey or Westchester). Many of these jobs came back, but that was not at all the most likely scenario back in 2001 when I worked on these numbers as chief economist for the NYC Comptroller's Office.

These two basic physical and economic cost numbers are relatively easy to understand from examples:

  • When buildings are destroyed, America's wealth declines and resources are diverted from the rest of the economy to replace them. 
  • When airports are closed all across the United States, the impact on the national economy is also obvious (think about the impact on tourism in Hawaii and Nevada, for example).
Costs of the U.S. Response to 9/11

Sorkin goes on to hike the number from $178 billion to $3.28 trillion, with two other "costs"that are the sum of the consequences of two decisions by the then-President of the United States:
  1. To go to war in Iraq ($2.516 trillion). The Second Gulf War began with the President's decision to retaliate against Iraq for building alleged weapons of mass destruction. The decision was controversial at the time and still is. The $2.5 trillion price tag for the second Gulf War may even be a lowball estimate if the United States stays in Iraq and Afghanistan and keeps spending in this arena. Whether one considers the decision war as justified or not, the spending on it cannot be described as an inevitable consequence of 9/11. It was a consequence of how the nation responded.
  2. To create the Department of Homeland Security ($589 billion). The new department is a reshuffling of existing agencies. Something had to be done at the Federal level to respond to the failures of intelligence that allowed successful acts of destruction on 9/11. But the size of new domestic security spending grew because of the same controversial information that led to the Second Gulf War. 
These "costs" are real. The numbers are in line with those that Linda Bilmes and Joe Stiglitz put forward as the cost of the Second Gulf War (the beginning of the First Gulf War just celebrated its 25th anniversary). But it is inappropriate to call them the "costs of 9/11". The 9/11 attack may have created a climate that created support in Congress for going to war again in Iraq and overhauling domestic security agencies. But it was not a sufficient cause. It was not a consequence of 9/11 in the same way as destruction of buildings and interruption of economic activity. It was a non sequitur.