Economic Policy Review Executive Summary

Terrorism and the Resilience of Cities

Recapping an article from the November 2002 issue
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of the Economic Policy Review, Volume 8, Number 2 View full article PDF

20 pages / 204 kb

Authors: James Harrigan and Philippe Martin

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Index of executive summaries

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, NewYork 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 7percent in the labor pooling model and 6.3percent 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 September11 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. NewYork and other major cities are therefore apt to continue to thrive despite any ongoing terrorist threat.


Disclaimer

The views expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.