A Shock to the System

Could the terrorist attacks really have been twice as damaging as the onset of global war?

By John Browning

On December 8, 1941, the New York Stock Exchange opened as scheduled, and, as President Roosevelt asked Congress to declare war on Japan, the Dow dropped sedately from 116 to 109 - roughly 6 percent. For the rest of the week following the bombing of Pearl Harbor, while war was being declared on Germany, the index held steady. By contrast, the events of September 11 caused the markets to close for a week. When they reopened, the Dow fell 7 percent on the first day and closed out the week off 14 percent.

The comparison prompts two questions: Could the terrorist attacks really have been twice as damaging to the American economy as the onset of global war? And, more important, what do such numbers tell us about the vaunted dynamism and resilience of the new economy? The answers: in the short term, yes; and, a lot.

In the information age, shuttering the markets may have seemed quaint - like Roosevelt declaring a bank holiday - but it needed to happen. The Nasdaq, especially, could have marshaled on; it has no physical trading floor. But countless Wall Street players were displaced - people who had built leveraged positions assuming that they could trade out in minutes. For them, uninterrupted trading would have been financially disastrous - and unfair.

The market's extreme reaction upon reopening came for several reasons. For starters, these are different sorts of wars. Unlike the bombing of Pearl Harbor, the acts of terror offer no promise of the economic benefits of classic warfare, in which governments buy expensive stuff and blow it up. As President Bush put it, "I'm not going to fire a $2 million missile at a $10 empty tent and hit a camel in the butt."

Our economic makeup has also evolved a great deal in 60 years. Today's economy has a greater percentage of service companies - which react more nimbly to shock, quickly shifting their offerings and adjusting workforces. And thanks to richer and faster information flow, their need to do so is made apparent all the more quickly. Bad news races through supply chains, spreading shock at lightspeed. The advantage of such an economy is that it absorbs blows quickly, diminishing the risk of accumulated damage. But that inevitably means that the early response looks severe.

The most immediate economic impact of the terrorism was on the finance sector and the already troubled airline industry, which quickly cut 120,000 jobs and slashed schedules. Within weeks, they were joined by companies from Sun to Nordstrom, bringing the number of reported layoffs in the month after the attacks to more than 236,000. And it wasn't just US firms. It was British Airways, Swissair, and Sabena; Agfa, Matsushita, and Nokia.

Which brings us to globalization. With pain and rationing, 1941 America could produce from its resources almost everything it needed to live and to fight. Today, oil comes from the Persian Gulf, circuit boards are shipped from Southeast Asia, and back-office accounting is done everywhere from Ireland to India. The destruction of the World Trade Center and the Pentagon brought that dependence tragically home. Around the world, business stopped to watch the horror on the TV screen and then slowly returned to work in a world transformed. British insurance giant Lloyd's of London calculates its collective loss at £1.3 billion ($1.9 billion). Due partly to the attacks, the International Monetary Fund cut its forecast of global economic growth for 2001 by about a fifth, to 2.6 percent, and admits that 2002 growth will be "rather lower" than its forecast of 3.5 percent.

"What we see today is much more of a binding of the world's economies," says Lloyd Dumas, a professor of economics and political economy at the University of Texas at Dallas. Which now complicates the matter of any military response. "If we cause a shock that creates severe problems in the Muslim world - or brings revolution - the economic damage will wind up at our doorstep, too," says Dumas.

The natural reaction to the tragedy of September 11 may well be a retreat from globalization into comfortable - and safe-seeming - national markets. That would be a defeat for the world. Ultimately, human capital is the source of economic growth. The free exchange of people, ideas, and goods through open economies is the best way to promote that growth.

Therein lies the best reason for hope. Information networks spread the shock of terrorism instantaneously across the world. But information networks also keep everybody talking afterward, as the horror fades.

As tragic as September 11 was, the attacks didn't fundamentally alter the economy. By early October, even as bombs rained down on Afghanistan, the markets had already begun to soak in this truth - and the Dow had recovered nearly all of its losses. Ultimately, the best antidote for shock is information. For an information-based economy, that's truly good news.

John Browning (jb@poplar.com) is a Wired contributing editor.

