The Disconnect Between Terrorism and Economics

Robert Samuelson wonders why the economic impact of terrorism and its aftermath has been so small:

To be sure, terrorism has exacted some steep costs. Airlines and tourism suffered after Sept. 11; in the wake of last week's foiled bomb plot, that could happen again. Spending for the war in Iraq was vastly underestimated. But terrorism's damage has paled before the larger effect, which is not much. It hasn't destroyed prosperity or cross-border flows of goods, money and people.

Since 2001 the world economy has expanded more than 20 percent. For the United States, the gain is almost 15 percent; for developing countries, more than 30 percent. World trade -- exports and imports -- has risen by more than 30 percent. Outstanding international debt securities have jumped almost 90 percent, to $13.6 trillion (through the third quarter of 2005).

The figures are interesting, but the question is misplaced, for (at least) two reasons.

First, there is an issue of scale. Think of the total impact as the product of (number of terrorists) x (damage per terrorist). The product is small because the number of terrorists who are specifically looking to do damage to us outside of our presence in the Middle East is very small--small enough to overcome the fairly large amount of damage each terrorist can do. In their propaganda war, the terrorists market themselves based not on total damage, but on the sensational amount of damage that they can do with such a small presence (i.e., not that they hit every key building in New York, just that they were able to hit the most symbolic ones).

Second, the terrorists do not appear to have the reduction of prosperity, commerce, or international trade as their key objectives. If they did, they wouldn't focus their attention primarily on the U.S., Western Europe, and Israel. They would expand their reach to other major economies, like India and China. They also wouldn't be so fixated on passenger air travel--they would expand their reach to international shipping, for example. And perhaps most importantly, they would focus their attention on key strategic, as opposed to symbolic, assets: ports, bridges, and tunnels.

If the terrorists changed their focus, or if they recruited more people willing and able to die for their cause, they could do a lot more economic damage.