Right and wrong ways for the state to intervene

As the world assesses the cost of last week's terrorist attacks, the economic price to be paid comes a long way below the human suffering inflicted on an unprecedented number of people. But the financial impact will be substantial, and will produce predictable calls for government intervention to stabilise the economies of the US and the world.

As the world assesses the cost of last week's terrorist attacks, the economic price to be paid comes a long way below the human suffering inflicted on an unprecedented number of people. But the financial impact will be substantial, and will produce predictable calls for government intervention to stabilise the economies of the US and the world.

The federal authorities in the US have taken steps to try to ensure that there is no catastrophic loss of confidence in the markets when they re-open this morning. Meanwhile, some American airlines are already asking the government to rescue them from impending bankruptcy.

The first form of state intervention in the "new war" economy is entirely sensible; the second should be treated with suspicion.

It is reasonably well understood now that markets, although they are a better way of allocating scarce resources than any other system, are volatile. They can overshoot, or suffer from irrational losses of confidence which can become self-reinforcing and which can drag down the so-called real economy. At moments like these it is quite right for the state to use its ability to act as a lender of last resort in order to limit any possible damage.

When it comes to subsidising particular sectors of the economy, however, policy-makers should proceed with extreme caution. There is no doubt that Tuesday's tragedy will depress demand for US domestic air travel in an already highly competitive market. That effect may be temporary, but the new security measures being brought in will make flying – both within the US and internationally – permanently more expensive. Even so, the additional cost of locked double doors to the cockpit, and of thorough searching and screening of passengers cannot be that great. And it would be quite wrong for the taxpayer, either in the US or elsewhere, to pick up that bill for better security. The cost must be borne by air travellers themselves through the price of their tickets.

We should not feel too sorry for the US domestic operators. After all, they blocked attempts by the American government to tighten security on internal flights on the grounds that it would damage their commercial interests. In the end, they and their customers must bear the costs of that mistake.

There is, however, a case to be made for limited one-off assistance for airline companies, just as there was for farmers in the wake of the foot-and-mouth outbreak here. The three-day grounding of flights was ordered by the federal government, which should share the cost of that immediate response.

Equally, if as we report today British Airways is forced into cutting large numbers of jobs as a result of a sudden fall in world air travel, the British Government should look sympathetically – but very sceptically – on the case for limited, short-term support.