Economics and Terrorism

The Costs and Benefits of Terrorism and Counterterrorism

Terrorism, especially in its transnational variant, is a complex global challenge. Both averted and realized terrorist acts are costly, sometimes exceedingly so. According to a 2004 estimate by Joshua Goldstein, the average U.S. household pays $500 per year to fight the “war on terror.” The “terrorism bill” includes the costs of lives lost, of the military operations, and of the damage done to infrastructure, as well as the opportunity costs for the economic interactions that do not take place in the aftermath of a terrorist attack or because of the fear of a potential incident.

One helpful assumption for an understanding of terrorism is that both the attacker and the defender are goal oriented, and therefore are, in the economic sense, rational actors. While the terrorist organization tries to maximize the benefits attached to a particular incident in comparison to the costs of this act, the potential target attempts to increase the costs to the terrorists of an attack, hoping to induce terrorists to refrain from using force in the first place. This deterrence model has [Page 174]proven useful for the analysis of the actions of the perpetrators and their real or potential victims.

A key problem for deterrence is the wide range of modes of attacks from which the terrorists can choose. The pioneering article of W.M. Landes, who analyzed the impact of U.S. aircraft hijackings from 1961 to 1976 using intervention analysis, illustrates the problems that this embarras de richesse creates for the defender of terrorist attacks. Landes originally found that the installation of metal detectors in 1973 decreased the number of skyjackings. Subsequent empirical work, however, qualified this positive initial assessment of counter-terrorist measures. A series of articles, masterfully summarized in The Political Economy of Terrorism (2006) by Walter Enders and Todd Sandler, showed that terrorist organizations can quite often substitute one “instrument” of terror for a cheaper, and possibly more deadly, alternative. In this light, it is not surprising that al Qaeda switched from attacks using skyjacked airplanes as missiles to blowing up commuter trains in metropolitan areas, for the counterterrorism strategies that became effective after September 11, 2001, rendered it nearly impossible for terrorists to conduct a similar type of attack as that used on the World Trade Center and the Pentagon.

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