Effects of Sept. 11 on Economy Likely to Prove Long-Lasting

To many economists, the terror attacks of Sept. 11 were like an earthquake or other natural disaster-- devastating at the moment but having no lasting effect on the U.S. economy.

That is not the case.

The attacks were a man-made disaster, not a natural one. And the effects on the U.S. and global economy are profound and likely to be very long-lasting.

On a global level, major changes have begun in the military posture of the United States and in regulations of domestic commerce and foreign trade. The U.S. is making new economic commitments in countries and regions where it has not had a presence before.

The attacks have returned the U.S. to an era of concern for security and high military spending resembling the 1950s.

Some important consequences of Sept. 11 are more visible and immediate. The slowdown in travel and tourism this year has taken a toll on the airline industry. The future of prominent airlines is in question.

In Southern California, the downturn in foreign tourism has been severe this year and poses a big question mark for the next few years, as tourist authorities in Asia report a reluctance of travelers to visit the U.S. when it is under threat of terrorism.

It is true, as economist Edward Leamer of UCLA’s Anderson School says, that the boost in federal spending and the drop in interest rates immediately after Sept. 11’s attacks helped end last year’s recession. Promotional sales in December and a buildup of inventories in the first quarter of 2002 helped keep the economy growing this year.

But new costs are being imposed on the economy. On foreign trade, for example, new legislation and regulations require that U.S. Customs know the contents of each container coming into the ports of Los Angeles and Long Beach.

U.S. Customs officials now are stationed at foreign ports, and foreign government officials are going to be stationed at ports here to help check cargoes. Importers must certify that they know the contents of each container and many other matters. Surcharges may be imposed on containers to pay for such security services, which undoubtedly will be extended to air cargoes coming through Los Angeles International and other airports.

Defense spending has accelerated since Sept. 11, with $30 billion added in supplemental budgets in the last year to pay the costs of the war on terrorism and $366 billion scheduled to be appropriated in the coming fiscal year.

Southern California’s defense contractors and suppliers are benefiting from new projects in advanced communications and intelligence systems. The region’s expertise won a significant award Tuesday, for example, when NASA awarded the contract to develop the next-generation space telescope to TRW Inc.

Still, employment in aerospace and defense industries, nationally and in Southern California, has continued to decline because production of commercial jets at Boeing Co. and Europe’s Airbus has been hard hit by the plight of the airlines in the aftermath of Sept. 11.

Commercial aviation accounts for more industrial jobs than military aerospace, particularly among Southern California manufacturers that supply parts to Boeing and Airbus.

Related to defense are expenditures for homeland security, roughly $38 billion in fiscal 2003, which begins next month. Widespread security precautions at airports, power plants, water systems and workplaces already are creating large numbers of jobs for guards, screeners, security specialists and the like.

Not only the federal government but state and municipal governments also are contracting for “assessments of how vulnerable their water systems are and what can be done to make them secure,” says Diane Creel, president of Earth Tech Inc., a Long Beach-based water treatment firm.

But expenditures on homeland security, not to mention the delays due to searches and security checks, impose a cost on the economy. Money spent on screening passengers, cargoes, water supplies and such represents resources taken away from more-productive purposes.

Moreover, “taxes will have to be raised to pay for those security efforts,” says economist Daniel Mitchell of UCLA. “And because the war on terrorism will not end with a signing of a surrender agreement, all of those costs will go on indefinitely.”

Of course the reason for greater homeland security is that Sept. 11 showed the United States to be vulnerable to attack. That has changed American attitudes.

But the nation and the economy are not withdrawing into isolation. Rather, U.S. commitments are increasing around the world, with new emphasis on Pakistan and India, Afghanistan and the republics of Central Asia, Russia and, most of all, the Middle East.

The commitment is not to war in the Middle East but to rebuilding and new building after war. A “Marshall Plan” is being urged by former Sen. George Mitchell, whose forebears came from Lebanon, and by many businesspeople in Israel and Jordan. The term recalls the U.S. aid to Germany and Japan after World War II that helped those countries restart their industries and reform their economies.

Similar moves are being urged to end unrest in the Middle East. “The people of the Middle East are bright and hard-working,” Mitchell testified to Congress recently. “They don’t want a handout; they want to work.”

In fact, after the attacks of Sept. 11 by educated young men from societies that offered them little but fanaticism, the U.S. has no choice but to fix the Middle East.

As historian Bernard Lewis, author in the last year of “What Went Wrong? Western Impact and Middle Eastern Response,” puts it: “The U.S. must either get tough or get out”--end its dependence on oil or put the region right so the U.S. and the world is not living with a constant threat.

Sept. 11 changed the economy and the world.

James Flanigan can be reached at jim.flanigan@latimes.com.