The tragic September 11th attacks in 2001 killed almost 3,000 people, caused about $100 billion in property damage, and led global stock markets to plunge. But 9/11’s effects on the economy were relatively short-lived and narrowly concentrated (by geography and industry), when compared with those of the present coronavirus pandemic. Nonetheless, there are lessons we can learn from 9/11, as we chart a path to recovery from COVID-19.
- Airline reorganizations may be inevitable.
9/11 led to an immediate 30% month-over-month decline in air travel in September of 2001, and a longer-term 7% dip caused by an increase in the perceived riskiness of air travel and in the time cost of travel. Even though the federal government quickly responded with a 9/11 airline rescue package, U.S. Airways and United Airlines both ultimately filed for Chapter 11 bankruptcy, cutting their debt burdens and slashing costs (including through layoffs, pay cuts and the elimination of defined-benefit pensions).
By contrast, the coronavirus outbreak led to an immediate 97% decline year-over-year in passenger numbers and, seven months later, air travel is still down 70%. Given that COVID-19’s effects on airline revenues are orders of magnitude larger than those of 9/11 and that many more industries are competing for federal assistance this time around, an even larger reorganization may be unavoidable. Unemployment insurance, stimulus checks and emergency loan programs will have an important role to play in assisting displaced workers and businesses linked to air travel.
- We’ll probably need a federal pandemic insurance program.
9/11 led to what was the largest property/casualty insurance claim in history at the time, estimated at more than $40 billion in today’s dollars. Terrorism was a covered loss then, so insurance companies were on the hook for much of the damage. They quickly responded by excluding terrorism coverage from future policies at precisely the moment demand for terrorism insurance was surging, especially among developers of skyscrapers, shopping malls, and utilities.
Because terrorism is such a difficult event to insure against—with unpredictable odds, correlated risk, and potentially massive losses—the federal government stepped in to subsidize terrorism insurance. That program has since been extended multiple times and is widely seen as successful. The terrorism insurance program could be a model for a new federal pandemic insurance program today.
This time around, businesses nationwide have been shocked to learn that their business interruption insurance policies do not cover pandemics, and many are challenging insurers in court. Meanwhile, the staggering scale and scope of the losses have scared insurers away from offering pandemic insurance, leading companies to broaden pandemic coverage exclusions and make them more explicit going forward. The federal government will likely have to fill the gap, as it did before. Several proposals are already on the table, and the terrorism program will serve as a valuable precedent.
- COVID-19 could push us to improve the resilience of U.S. supply chains.
The October 2001 anthrax attacks raised the level of concern about the vulnerability of farms and the food supply to bioterrorism, and led to several legislative and administrative anti-bioterrorism initiatives.
The pandemic has similarly been a wake-up call regarding the vulnerabilities of our global supply chains. Private companies and the government are already rolling out plans to improve the management of supply chain risk and disruption and rethink the strategic national stockpile. Those plans could make us safer in the long run.
- Pandemic bonds could help us deal with the increase in public debt.
Congress created Patriot Bonds to help finance the war on terrorism and create ways for the public to support the effort. Pandemic bonds could serve the same purpose today and support a more generous fiscal response, without requiring higher taxes or spending cuts on other programs.
- 9/11 offers many lessons for designing effective financial assistance programs for local governments and small businesses.
Tax revenue losses and disaster response expenses severely strained New York City’s budget. In response, the federal government provided substantial aid to New York to pay for debris removal, direct aid to affected businesses and individuals, infrastructure projects, and economic development incentives. Overly stringent restrictions on the use of the funds slowed the disbursement of the money, and inadequate oversight gave rise to fraud, waste and abuse. Subsequent reviews led policymakers to develop best practices that could help policymakers today avoid similar pitfalls.
Aid for the nearly 18,000 small businesses destroyed or disrupted by 9/11 was also subject to criticism due to “insufficient funding, burdensome application requirements, arbitrariness, and delays.” In the wake of Covid, the Paycheck Protection Program was much larger and sought to reduce the application burden by adopting broad eligibility standards. But delays have been a problem at multiple stages and the government’s use of the banking system to award the funds led to perceptions of arbitrariness in the determination of who would receive loans and how quickly. 9/11’s lesson is that these programs are difficult to design and administer, and that policymakers have yet to solve execution problems identified almost 20 years ago. After the pandemic is behind us, there is a strong argument to be made for a dedicated effort to improve the design and implementation of aid programs for small businesses and local governments, and invest in the information technology infrastructure supporting them. Ideally, these programs should be tested through wargame exercises each year and frequently upgraded so we aren’t caught off guard by the next disaster in the same way.
The anniversary of 9/11 is an opportunity to study how that crisis affected the economy and to learn from our response. May we replicate the successes and avoid the same mistakes.