Costs of terrorist attacks haunt U.S. economy a decade later

The most visible costs can be seen in the heightened security at airports, government buildings and office complexes. Shipping and insurance rates climbed after those jets rammed into the twin towers and haven't descended to pre-9/11 levels. The attacks also have something to do with why motorists are paying twice as much for gas as they did before 9/11, although other factors, such as the increased consumption of oil in other parts of the world, have played a bigger role.

The economic burden is much larger if the costs of the war on terrorism are included. That crusade increased military spending and drove up the nation's deficit, threatening to erode the country's standard of living and making higher taxes more likely in the future.

“I don't think 9/11 itself changed the economy that much,” says Anita Dancs, an economics professor at Western New England University. “It's was how we responded to 9/11 that changed the economy.”

Experts who have studied 9/11's economic impact disagree on the costs that should be factored into the equation. That's why estimates on 9/11's damages vary so widely, ranging from $35 billion to $4 trillion. The lower estimates confine the costs to the disruptions that occurred during the first few months after the attacks.

The higher numbers tie 9/11 to the conflicts in Afghanistan, Iraq and Pakistan, along with all the spending – and government borrowing – required to finance the military.

It's the first time since the Revolutionary War that the U.S. has relied mostly on debt to finance its wars, says Linda Bilmes, a Harvard University public finance

professor who co-authored a book about the costs of the post-9/11 wars with Nobel Prize-winning economist Joseph Stiglitz. They concluded the wars will cost the U.S. at least $4 trillion.

Dancs joined about 20 scholars on another study that assumes U.S. would not have ramped up its military spending and waged war in three different countries if not for 9/11. The report, released in June, pegs the costs between $2.3 trillion and $2.8 trillion during the past decade.

Those trillion-dollar figures seem like a gross exaggeration to economists who think it's wrong to lump the wars and military spending into the ongoing costs of 9/11.

The direct costs of the attacks are more like $100 billion to $130 billion, according to Adam Rose, coordinator for economics at University of Southern California's National Center for Risk and Economic Analysis of Terrorism Events. That works out to about one percent of the U.S. economy's gross domestic product of roughly $10 trillion in 2001. “It was a blip,” Rose says.

Investors reached a similar conclusion within a few months of the attacks. After initially plunging 14 percent during the first week after the attacks, the bellwether Dow Jones Industrial Average had rebounded to its pre-9/11 levels by early November. (The Dow Jones Industrial Average is just 19 percent higher nearly a decade later, a paltry gain that illustrates the challenges that the economy has faced during that that period.)

Rose and other economists don't think it's possible to figure out how much 9/11 has cost businesses and consumers after 2002 because so much has happened since then. Among other things, there has been a real estate bubble followed by a mortgage meltdown that led to a financial crisis that fed the Great Recession — the most severe economic downturn since World War II.

Bilmes believes some of those problems are part of 9/11's legacy. “There were many poor decisions made after 9/11,” she says. “The consequences of spending so much on the war left us with weaker economy than we might have had and a financial crisis that was worse than we might have had.”

There's little dispute 9/11's aftermath contributed to the higher spending on security and military over the past decade.

The U.S. government has spent an additional $401 billion on security measures spurred by 9/11, according to calculation in the report that Dancs co-authored.

Some of that spending on security may have helped the U.S. economy by preventing more terrorist attacks in the country, reasons Brock Blomberg, a Claremont McKenna College economics professor who studies the costs of terrorism. That prevention may have been worth about $60 billion to the economy or about 15 cents on every

dollar spent, says Blomberg, who was not involved in Dancs' research.

Businesses also increased their security budgets after 9/11, although the total amount is difficult to quantify because it's not a figure that even publicly held companies are required to report.

The increased military spending since 9/11 has been a bigger drain.

Even if all the spending can't be directly linked to what happened that day, 9/11 marked the turning point in the post-Cold War era. “It caused a jitteriness that amplified the voices for going to war,” Bilmes says.

After years of cost cutting, the military became a top budgeting priority again at the expense of other projects that the government might have funded to create jobs and stimulate the economy, says Neta Crawford, a Boston University political science professor who worked on the same study as Dancs.