Economist's Corner – The Economic Risk of Terrorism

by Dr. Lynn Reaser

The attempted Christmas attack on a Detroit-bound jetliner has again raised the national consciousness around terrorism.  In 2001, the 9/11 attack was the tipping point for an economy already teetering on the brink of recession.  Could another attack in 2010 prevent a fledgling economic recovery from developing during the next twelve months?

In September, 2001, economists were still debating whether the economic slump would be deep or widespread enough to be declared an official recession.  The horrific attack on New York’s World Trade Center quickly changed all forecasts into expectations of a serious downturn.  Consumers hunkered down, fearful of venturing out to malls, as they remained fixated on watching CNN.

The U.S. displayed its exemplary resilience, highlighted by a surprising return to economic growth by the fourth quarter.  The Federal Reserve acted swiftly, pumping an additional $20 billion of reserves into the banking system to shore up the financial structure.  General Motors launched an innovative “zero interest rate” program for new auto loan purchases to revive auto sales and consumer spending.  Car sales surged and the economy rebounded.

Another major terrorist attack in 2010 might prove much more difficult for the economy to overcome.  The Federal Reserve has already increased its injection of reserves into the banking system by more than tenfold to $1.2 trillion over the past two years.  The auto industry is in no position to provide a solution to any major economic distress.  Fiscal policy might be tapped, although a projected deficit this year already projected to exceed $1 trillion could limit its latitude.

As we enter 2010, consumer and business confidence appears to be gradually firming.  The stock market reflects investors’ optimism, the housing market is stabilizing, and even the job market is exhibiting some signs of improvement.  A successful attack by Al Qaeda could quickly derail these promising signs—another reason why the U.S. must be increasingly vigilant.


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