Undercover Economist

Nothing to fear but fear itself?

‘It is not clear that the US economy has suffered much from terrorism, even from the enormity of 9/11’

This article was published before the November 13 terrorist attacks in Paris.

On a long-haul flight recently, I was jerked from the usual concerns over legroom and a power socket by a memory. I recalled the flight I had taken a few weeks after watching the Twin Towers of the World Trade Center collapse on television. It was an eerily quiet journey from London to Cape Town. I was in a state of mortal fear. But despite occasional grim reminders that terrorists can kill, my dread then seems foolish to me now.

Every violent death is an awful thing but there are many other ways to die a violent death, even in a rich country. Each year, one in 8,000 Americans kill themselves — and each year an American citizen has a one in 9,000 chance of dying in a motor vehicle accident, and a one in 20,000 chance of being a victim of murder or manslaughter. Even in 2001, the chance of an American being killed by a terrorist was less than one in 100,000. In more typical years the figure is one in 10 million. For Americans, terrorists are about as dangerous as lightning strikes.

These dry statistics do not diminish the anguish of those who have lost a loved one to a terrorist attack. Terrorism is no trivial thing; but losing a daughter to suicide or a son in a motorcycle accident is not trivial either, and it is something many more people must endure.

There are other costs to terrorism, deftly surveyed in Alan Krueger’s 2007 book, What Makes a Terrorist. In 2003, economists Alberto Abadie and Javier Gardeazabal published an estimate of what Eta’s terrorist campaign — which at the time had killed 800 people — might be doing to the economy of the Basque Country. Abadie and Gardeazabal estimated that the attacks had, over time, reduced the gross domestic product of the region by 10 per cent. A year later, Zvi Eckstein and Daniel Tsiddon applied a different method to a different country — Israel — but produced the same estimate of the costs: GDP down by 10 per cent because of terrorist attacks. If correct, these are very large costs. (Even the suspicion of an attack on a Russian passenger plane over Egypt — still unconfirmed as I write — is damaging the tourism industry in Sharm el-Sheikh.)

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.

Perhaps the true impact of terrorism is psychological — the clue is in the name. A few months after 9/11, a small plane flew into the Pirelli Tower in Milan. The news that this was not a terrorist attack provoked widespread relief. That relief (which I shared) is strange. The Pirelli crash killed three people; knowing that the crash was an accident does not make them any less dead. But it makes their deaths less unsettling.

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There have been attempts to measure the psychological impact of terrorism. One plausible finding, from a team led by psychologist Roxane Cohen Silver, is that 60 per cent of Americans suffered some symptoms of anxiety in the weeks immediately following the 9/11 attacks — but that figure soon ebbed to 30 per cent within two months and 10 per cent within half a year. The attack seems to have had the same effect on the American psyche as it did on the New York economy: a severe but transitory impact.

Despite all the evidence that even the most grotesque acts of terrorism have a transitory effect, it remains a popular tactic. The reason for that is perhaps best summarised in Eric Frank Russell’s 1957 novel, Wasp, about a terrorist. The title refers to the tale of a tiny wasp, armed with a sting it does not even use, causing the deaths of four people. They’re in a car; the driver, agitated by the wasp, crashes and kills them all.

The terrorists’ best hope lies in provoking an overreaction. Too often, they succeed.

Written for and first published at ft.com.