The Economic Costs of September 11, 2001

Filed Under (Other Topics, U.S. Fiscal Policy) by Jeffrey Brown on Sep 11, 2011

Today, September 11, 2011, we remember the terrible human tragedy that occurred 10 years ago.  What started out as just another beautiful Tuesday morning was devastatingly interrupted by the sights and sounds of four commercial aircraft being intentionally flown by terrorists into the World Trade Center, the Pentagon, and a field in Shanksville, Pennsylvania.  In the hours and days following, we learned of countless acts of courage and selflessness, such as the stories of first responders who were on their way up when the Twin Towers came down.  Or the brave passengers on United 93 who fought back and most likely prevented their plane from crashing into the White House or the Capitol.

A lot was lost that day.  Thousands of innocent lives.  Our nation’s sense of security.  Clearly, relative to those human costs, the economic costs seem almost inconsequential.  Indeed, as someone who feels personally indebted to the heroes of United 93 for quite possibly saving my life (if their flight had hit the White House, I would have been among the victims that day), I will be among those who spend this day remembering their heroism.

Nonetheless, a decade out, it is indeed appropriate that we consider the broader implications of these terrorist attacks.  There are few aspects of our lives, culture and economy that have been left unchanged.  As an economist, I feel most qualified to speak to the economic issues, so this post is about the economic impact of 9/11.

This is a far more difficult exercise than it may seem.  Any numbers I cite here should be taken with a grain of salt, but I felt it useful to at least give a sense of the order of magnitude of the economic implications.

Let’s begin with the easiest part – the direct financial costs of that day.  This includes the loss of buildings and properties, such as the World Trade Center and surrounding buildings and the cost of the four aircraft.  According to an estimate in the Insurance Journal, the direct insured costs from 9/11 were approximately $40 billion in today’s dollars.  But this number includes things like business interruption insurance, which is a real cost to the insurers, but may double count some of my other numbers below.   So if we limit the numbers to property (WTC, other property, worker’s compensation claims, and the like), we are looking at something on the order of $20-25 billion.  A big number, but small in comparison to the indirect costs.

Second, the loss of life.  Economists are often accused of being insensitive, or worse, by trying to place a dollar value on human life.  Without getting into the debate here, suffice it to say that we feel that we can at least measure the value of a  “statistical” life.  Individuals, families, businesses and governments implicitly do this all the time (such as when a worker accepts higher pay in return for taking more risk to his or her life.)  There is a large literature on the “Value of a Statistical Life,” and it is clear that the measure varies by context and by how one models the analysis (if you are interested, you can read more about the difficulties in this nice article by economist Orley Ashenfelter.)  Just for the sake of conversation, let’s use a $5 million per life.  Then we are talking about a $15 billion “economic cost” associated with the lives lost.  Note this is much higher than the $1.2 billion of losses as measured by the value of life insurance payouts.

 

Third, and much more difficult to measure, there are the ongoing costs of slower economic growth as a result of these events.  In the short-run, the 9/11 attacks exacerbated the weakness of an already weak economy (recall that we were already in a recession).   But figuring out how much of the economic slowdown in the period was due to the attacks is notoriously difficult.  A paper put out about a year after the attacks by the Congressional Research Service discusses the many reasons it is so hard to measure, include the fact that we were already in recession, and that there were policy responses to the attacks (both in terms of monetary and fiscal policy) that helped mitigate the short-term impacts (but in some cases at longer term costs).  Even so, it is worth noting that, given the size of U.S. GDP at the time, even a 0.5% reduction in economic growth over the subsequent year would have resulted in output losses on the order of $50 billion, a number larger than the prior to estimates of the direct effects combined.  If the effects persisted more than one year, or if the effect was larger, then the estimates would go up even more.

Fourth, there are the ongoing costs of our investment in additional security measures.  Think about the extra time spent each traveler spends in airport security lines taking off their belts, shoes, removing liquids and gels, getting full body scans, etc.  Now multiply that by the millions of travelers.  And then think about the value of that time.  I have not seen reliable estimates of this, so I won’t attempt to quantify it, but it is a big number.

Finally, perhaps the largest cost of all – our wars in Afghanistan and Iraq.  Without getting into the debate over whether the war in Iraq was really justified based on a terrorist attack by a non-Iraqi terrorist group, I think it is plausible that if the 9/11 attacks had never occurred, the Iraq war would not have occurred either.  In 2007, the Congressional Budget Office made news with an estimate that the cost of these wars could total $2.4 trillion (projected through about 2016 or so).  And, yes, that is trillion, with a t.  That is just the direct costs of these wars – if one includes indirect costs, such as the value of the military lives lost, the numbers would be much higher.

Some of these costs – indeed the most tragic ones, such as the loss of human life, the permanent destruction of the Twin Towers, and so forth – are costs with no corresponding benefit.  Other costs – such as those associated with ridding the world of a horrible dictator (Hussein) and the head (bin Laden) of the world’s leading terrorist organization – also bring enormous direct and indirect benefits.

But no matter how you look at it, the true economic cost of 9/11 was orders of magnitude greater than the direct costs incurred on that day.

 

You are Worth your Weight in Gold!

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jun 18, 2010

It’s an old expression.  But, ARE you worth your weight in gold?  New record-high gold prices on Tuesday – along with Nolan Miller’s column on gold – inspired me to take another look.

On the face of it, valuing an average life sounds like a morbid, if not impossible task.  However, governmental agencies at all levels use a concept called the Value of Statistical Life (VSL) when making many different kinds of safety and regulatory decisions.  At its heart, the VSL tells us how much society should be willing to pay to reduce mortality risks over an affected population.   For example, guardrails make highways safer, yet they only appear on curved sections of road, because the extra cost of installing rails along the rest of the highway does not justify the relatively few fatalities averted.  In other words, we have NOT found it worthwhile to spend what would amount to $20 million to save one more life! 

Different agencies and regulatory bodies use different VSL numbers, calculated using different methodologies.  But a new study by Kniesner, Viscusi, and Ziliak (2010) estimates that what we ARE willing to spend to save an average American life is between $7 million to $8 million (2001 dollars).  THEY are not making a moral judgment, they are just reporting the moral judgments that actually get made.  The estimated value of statistical life (VSL) is $7-8 million.

To be clear, when it comes to a specific life, not a statistical one, we often are willing to pay any price.  For instance, when Baby Jessica fell down a well in Midland, TX, no one asked how much it would cost to save her.  The U.S. military takes this principle one step further with their doctrine of “leave no man behind”, which effectively places an infinite price on saving a comrade’s life and retrieving the fallen.

This brings me back to the original question, are you worth your weight in gold?  In short, yes!  An average adult American’s life is valued at more than TWICE his or her weight in gold on the open market.  The Center for Disease Control (CDC) reports that the average American adult (male and female), ages 20-74, weighs approximately 175 lbs.  At its high nominal price on Tuesday of $1245 per troy ounce, that 175 lbs of gold would sell for about $3.16 million.  (Note: 14.583 troy ounces per pound.)  Compared against Kniesner, Viscusi, and Ziliak (2010)’s VLS estimate, humans seems quite valuable relative to gold!