After any major disaster-September 11, the Afghan war, a hurricane-attention turns to rebuilding, and, as midnight follows nightfall, all eyes turn to government. How much will the politicians shell out? Which government should bear the burden, federal, state, or local? How much must taxpayers be willing to suffer to restore the shattered infrastructure? How much new money should the central bank provide?
These are the wrong questions, and the amazing recovery of New York’s economy shows why. Seven months ago, the city’s two largest skyscrapers, hosting firms that ranked among the world’s most important financial players, fell to the ground, killing thousands. The hijackers who steered airplanes into the buildings believed that they would smash the New York economy.
Not even close. The rebuilding, mostly by the private sector and the market economy, has been as spectacular as the initial devastation. The core meaning of the word economics means finding the least-cost ways to produce and channel resources to their most desired ends. Lacking a system of profit and loss, based in private property, government is incapable of doing that. At the same time, there is a constant tendency to underestimate the productivity and efficiency of the market economy.
For starters, the costs associated with the destruction ($29 billion) were lower by $6 billion than the initial estimates. Insurance (a market sector) covered $15 billion of the costs, leaving between $10 and $14 billion needed for recovery. The reason that these figures are lower than the initial estimates is that rebuilding has taken place far more rapidly than anyone expected-precisely because private enterprise wasted no time in clean up and construction, and otherwise refused to be set back by terrorism.
What was not destroyed in the attacks picked up the slack for the losses. The retail and real estate sectors in New York kept consumers coming in despite the destruction and threat of terrorism. Other manufacturing kept pace. Firms that rented space in the World Trade Center towers were quickly able to find other space in the region to set up shop, and the urgent economic need for their services provided the incentive to pick up the pieces. This economic activity provided the impetus for getting on with the clean up and reconstruction very quickly.
At the same time, let’s be clear on what has not caused the recovery. As absurd as it sounds, in the days following September 11, a number of commentators said that the need for clean up itself would stimulate the economy. This is nonsense because the resources diverted to rebuilding had to be taken from somewhere else. It is sheer cost. On the other hand, private enterprise has every incentive to minimize those costs and to steer resources to fully productive use.
Others credit the low interest rate policies of the Fed or the federal aid that poured into New York. The truth is that interest rates of zero and tens of billions of dollars accomplish nothing absent the price system and private enterprise. You could put a Fed and a US Congress in every third world country but unless the structures of the economic system were changed, these countries would be no more prosperous after a decade than they were before.
Indeed, the New York recovery is especially spectacular when you compare the pace of rebuilding with that found in the third world. If you travel in poorer countries (most of which are hobbled with socialist institutions), you find the ruins of civic buildings, churches, or schools that were destroyed in wars or natural disasters decades ago. There are always plans on the books to rebuild, but government has no incentive to use money for this purpose. Once politicians and special interests get their hands on the loot, they tend to use it up right away, and for purposes other than those that serve the public.
In New York, it as a different matter altogether. The market economy serves as the heartbeat of this city, no matter how much the political class tries to stifle it. It is the city’s value as a commercial center-not as a haven for bums, beggars, and leftist intelligentsia — that is its primary value. If the financial industry and the retail sector is harmed or abolished, the city becomes nothing more than a shell of its former self. Millions of people in New York refused to let that happen after September 11.
The fact of New York’s recovery is the greatest poke in the eye to terrorism one can imagine. The plain fact is that the hijackers underestimated the resilience of finance and the free market to bounce back. They believed they were killing the thing we love the most, American prosperity, but their ilk has been sent the message that the gears of capitalism are very resilient. After all, the American political class has similarly targeted the market for a very long time, but has not managed to stamp out its productive power.
We see these forces at work anytime a natural disaster hits a town in America. People immediately get to work on clean up. Commercial enterprise makes available labor and materials, and quickly provides substitutes for the resources destroyed. The capital made available by private enterprise steps up to the plate long before FEMA is able to send its investigators to see how much and what kind of aid is needed. And whereas government aid is riddled with corruption, private rebuilding is targeted like a laser beam on where it is needed most.
In retrospect it is clear that the terrorist attacks did less to set back American productivity than the recession that was already mature by the time the attacks took place (by all reliable indicators, we still aren’t out of the recession). Yes, they were costly, but the real story is the resilience of American productivity and the miraculous ability of capitalism to bounce back.
Here’s to New York, New Yorkers, and private enterprise: a toast with privately produced and purchased champagne.