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Overview
Harrigan and Martin assess the viability
of major cities, and New York in particular, in the face of
catastrophes such as terrorist attacks by considering why
cities exist in the first place. They conclude that the same
forces thought to lead to the formation of cities—namely,
the economic gains derived from the proximity of firms to
markets, suppliers, and a large labor pool—help to preserve
cities at risk of terrorism and other catastrophic events.
Furthermore, given the considerable size of the economic gains
generated by major cities, New York and its counterparts
should be extremely robust in the event of future occurrences.
Background
Economists generally agree on several
theoretical explanations, or models, for the existence of
cities. One well-known explanation, the labor pooling model,
centers on the idea that cities “pool” labor (that
is, offer workers and firms an easy way to find each other).
Another, the core periphery model, is based on the notion
that cities lower transport costs (for goods shipped between
producers and consumers). These rationales for the existence
of cities, observe the authors, are known as agglomeration
forces. In both models, the stable outcome—a city in
equilibrium—is indeed very stable, because the agglomeration
forces that create the city also tend to preserve it.
Argument and
Methodology
The authors simulate the labor pooling
and core periphery models, using data that approximate the
characteristics of a large U.S. city. By doing so, they examine
whether terrorism could overcome a city’s agglomeration
forces, thereby causing firms and workers to scatter and the
city to decline. Central to the analysis is the distinction
between a onetime terrorist attack and an ongoing threat of
terrorism. Although a onetime attack can have a severe impact,
the effect could conceivably be limited to a short horizon.
An ongoing threat of terrorism, however, presents longer term
consequences in the form of what the authors describe as a
“terror tax” on a city’s firms or residents.
This tax—which reflects the costs associated with such
hardships as fear, higher insurance rates, and security-related
delays—detracts from firm profits or worker income without
funding improvements in infrastructure or services, as a typical
tax might.
Findings
The consequences of a onetime terrorist
attack on a major city are found to be similar in the labor
pooling and core periphery models: as long as the attack does
not increase the ongoing costs of doing business in the city,
there will be no long-run economic effect. The reason for
this is that the agglomeration forces leading to city formation
will be unaffected by physical damage to the city.
However, a continuing terrorist
threat that imposes ongoing costs may have decidedly different
consequences. The authors calculate that an ongoing terror
tax that exceeds a critical level (around 7 percent in
the labor pooling model and 6.3 percent in the core periphery
model) can disrupt a city’s agglomeration forces. That
is to say, if firms must pay more than the critical level
to counter the effects of an ongoing threat, they can no longer
offer workers a wage premium for living in the city and workers
will begin to move away, setting in motion a vicious circle
that could end in the loss of a city’s economic rationale.
The authors attach several important
caveats to their findings. For one, the model simulations
potentially understate the resilience of city life substantially,
because each model examines just one motive for agglomeration
in isolation. In addition, the critical level of the terror
tax that might cause cities to decline, as identified in the
models, is much higher than any plausible amount suggested
thus far by the war on terrorism. Finally, most of the costs
associated with U.S. homeland security are being borne by
the nation and are not disproportionately burdensome to individual
cities; the costs are therefore not an urban-specific terror
tax of the type analyzed by the authors.
Looking ahead, Harrigan and Martin
explain that the future viability of urban life would be threatened
only if all of several conditions existed:
- firms were unable to obtain any private
insurance,
- the nation offered no financial
assistance in the event of an attack,
- an incident of the destructiveness
of September 11 was expected to occur every year, and
- the balance of forces that sustains
agglomeration is even more fragile than the model simulations
suggest.
The authors contend that such a scenario
is unlikely to occur. New York and other major cities
are therefore apt to continue to thrive despite any ongoing
terrorist threat.
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