Terrorism Economics

The book Freakonomics and the follow up SuperFreakonomics shed lights on a multitude of non-economic decisions and behaviors and applied economic theories about incentives to help explain their behaviors. This same scope is applied to a weekly podcast put on by Freakonomics author Stephen Dubner; recently Dubner tackled the issue of terrorism. While the podcast tackled a multitude of issues, it highlighted the need for economically correct approaches to eradicating the threat to terrorism. In this light, the best approach to accomplishing this goal is a reduction of terrorism "profits".

In the podcast, there is a discussion of return on investment, or ROI, for acts of terrorism. In the same way that you can encourage investment into projects by showing a higher ROI, you can discourage this type of behavior by lowing "profits" that terrorists may achieve. When looking at the profits of a terrorist group, they are the economic disruptive costs to the country being attacked. The analysis of this ROI can be highlighted by the September 11th terrorist attacks, with the costs and benefits (from the attacker's prospective) broken down by the New York Times article One 9/11 Tally: $3.3 Trillion. Their analysis revealed that there was a significant return for these attackers:

Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the United States? In a survey of estimates by The New York Times, the answer is $3.3 trillion, or about $7 million for every dollar Al Qaeda spent planning and executing the attacks.

A portion of these losses (i.e. terrorism "profits") were the direct results of the attack, including $55 billion from physical damage and $123 billion from economic impacts. However, a majority of these costs were on the indirect side: the response of the United States going to war in the middle-east has cost $1,649 billion, plus an estimated $867 billion in future war/veterans care costs. The US reaction to the September 11th attacks has added, and continues to add, to the gains of the al Qaeda terrorist cell that conducted the attacks through increased additions to the national debt, diverted spending from other governmental investments, and further cost of lives. It seems as if the reaction that the United States has had played directly into the hands of the terrorists, giving them an ever greater return on their investments.

It seems then that the power to influence the incentives for terrorist groups lie directly in our hands. By designing governmental policy to respond correctly to terrorist attacks, we can greatly reduce the payoffs these cells receive and reduce the equilibrium levels of attacks overall. While it seems nearly impossible to argue we should do nothing in response to attacks, avoiding an overreaction to terrorist attacks can create a more optimal response. The overreactive nature of current terrorism policy was described by Ted Koppel in his WSJ Opinion article Ted Koppel: America's Chronic Overreaction to Terrorism. Koppel links terrorism and overreaction:

Terrorism, after all, is designed to produce overreaction. It is the means by which the weak induce the powerful to inflict damage upon themselves—and al Qaeda and groups like it are surely counting on that as the centerpiece of their strategy.

This American overreaction, as Koppel demonstrates, has lead to a prolonged war in Iraq and an antiterrorism enterprise so large that "...disbanding such a construct, is an exercise in futility." If the United States government, and more importantly, its society would have had a less of an immediate reactive nature, policy could have been constructed to respond to the terrorist attacks in a significantly more targeted way. Such methods that could have been utilized could have included special operations targeted at the al Qaeda group responsible, economic sanctions, or a number of others that would be substantially responsive yet economically cost efficient.