We treat terrorism as more costly than it truly is

The deaths from terrorism are unspeakable tragedies. It goes without saying. But the mortality due to terrorism — total deaths per capita — are very low, lower than car-wrecks or traditional murder. Likewise, the costs from terrorism — damage to physical structures, damage to economies — are high, but, when you look at the numbers, you find they're just not that high.

Writing in the Financial Times before the Paris attacks, Tim Harford reviewed the published economics literature on the monetary costs attributable due to terrorism — and, importantly, how those costs compared to the monetary costs of the War on Terror.

These costs are indeed high (the physical damage to NYC on 9/11 is estimated at up to $30B), but the long-term economic fallout of that damage is surprisingly low — those economic losses were absorbed inside of a year. This is surprising at first blush, but on closer examination, it makes sense: it's very similar to the recovery pattern of industrialized nations from earthquakes and similar disasters.

Even the psychological costs of terrorism are relatively low in the long term. Though surveys found high levels of anxiety in New Yorkers immediately after 9/11, these levels fell sharply in six months.

Why do terrorists bother, then? Not because of the terror they evoke, and not because of the damage they do — but because they can stampede governments into spending blood and treasure in massive overreactions that convince some who are hostile to the terrorists' goals to change sides.

But it is less clear that the US economy has suffered much from terrorism, even from the enormity of 9/11. Official estimates were that the attack on Manhattan destroyed more than $13bn of office space and damaged almost $17bn more. Perhaps 75,000-100,000 jobs were lost in the immediate wake of the attack, particularly in travel and tourism. Yet the received wisdom — summarised in a 2005 book, Resilient City — is that New York bounced back rapidly, recovering the obvious economic losses within about a year. Rebuilding physical infrastructure took longer but in a city such as New York, buildings are demolished and replaced all the time. In the interim, people squeezed into tighter spaces, or companies rented space in suddenly empty hotels while things were sorted out. New York adapted.

This is encouraging and should not be entirely surprising. Natural disasters such as earthquakes can do far more damage, and economies recover from them, too. The classic study here is economist George Horwich's analysis of the impact of the earthquake that devastated Kobe, Japan, in 1995. The earthquake destroyed 100,000 homes and made 300,000 people homeless. Yet 15 months after the disaster, Kobe's manufacturing output was back to 98 per cent of pre-quake levels.

The recovery was not complete: there was no serious effort to resurrect industries that were already under pressure from foreign competition, such as the plastic shoe business. But many of the industries that were flourishing before the disaster were flourishing again in time.

Nothing to fear but fear itself?
[Tim Harford]

Feb 2013 One World Trade Center, Cathy Baird, CC-BY)