Terrorism as taxation?

John Robb thinks so.

Liz Alderman at the NYTimes reported that terrorism is squashing Europe’s first glimmer of recovery since the financial crash.  EU economic growth has been halved since spring, with France now at zero.  Here are some details:

  • Tourism is sinking.  For example:  “In France, growth in nightly hotel room bookings after the Paris attacks fell to single digits from 20 percent. After the Brussels bombings, bookings went negative, and after Nice, bookings fell by double digits.”
  • Daily security costs are spiking.  Here’s an example from a single venue, “the Paris Plage, a makeshift beach erected along the Seine, a dozen armed police officers guarded an entry checkpoint on a recent day. Army troops marched past families playing in the sand and half-empty activity points along the river. The patrols, cost taxpayers about 1 million euros, or $1.1 million, a day.”
  • Broad spectrum economic damage.  For example:  retail sales are slumping due to low traffic in stores and large numbers of entertainment events are being cancelled.

Although Europe has suffered terrorism before, this time it’s different.  Instead of big and relatively infrequent terrorist attacks, these new attacks are small, numerous and geographically dispersed.  This change is a big deal, because it makes it possible for terrorists to turn attacks into “a tax” that depresses economic activity by imposing new costs and changing economic behavior.

There’s more at the link.  Interesting reading.

It’s a two-edged sword, of course.  Terrorism hits things like tourism, retail shopping centers, and so on.  On the other hand, security expenditures increase, and even ordinary consumers will spend more on protecting themselves and their families (and, of course, their homes and possessions).  As evidence of that, witness the surge in firearms sales after every major terrorist attack or urban unrest (e.g. after the Pulse nightclub attack in Florida, the riots in Charlotte, etc.)  Also, people who might be afraid to vacation in major centers (which are more likely to be the focus of terrorists, due to their high public profile) may bring unexpectedly brisk business to less fashionable (but safer) areas that they otherwise might not have patronized.

Nevertheless, terrorism does drag down the areas where it occurs.  If attack follows attack, with no time for those areas to recover, it can have a very negative long-term effect.



  1. When looking at the "upside" of this, viz. the security expenditures, please review the Broken Window Fallacy, a basic economics concept.

    I recommend Hazlitt's "Economics in One Lesson" for an excellent presentation of this. I think it may be available for a free download.

    I just made my first ever visit to Europe and I found it noteworthy how few other tourists there were, compared to my expectations, and how easy it was to make last-minute hotel bookings and train reservations. People who depend on tourism for their livelihood have to be suffering.

  2. I don't think the broken windows fallacy quite applies to personal security expenditures. In the broken windows fallacy, the money that would have been spent on, for example, a new suit goes to replace the window. The glazier gets the money instead of the tailor, it is neutral regarding them, but the guy whose window was broken ends up with only an intact window rather than an intact window and a suit. Net result: breaking windows is bad.

    Increased attention to security after a terrorist attack is not quite the same. Some people in Charlotte ruin their city (or outsiders ruin Charlotte for the natives, whatever). People in Charlotte have to rebuild. Net negative for them. I decide to buy a concealed carry pistol and a few thousand rounds of practice ammo rather than a new computer. Taurus and PMC are happy and Microsoft and Intel are sad but unlike the direct effect, the indirect effect is a lot closer to economically neutral. I have a pistol and ammunition rather than a new desktop. I'm not worse off. Microsoft and Intels' employees have less money than they otherwise would have but Taurus and PMCs' employees have that money instead. National economy: a wash.

    Now, there may still be an effect, but it is complicated to calculate. If I were going to use the computer to produce goods and services more efficiently and the pistol just helps me feel safe, then national wealth is slightly decreased by the choice. If I were just going to use the computer to play XCom 2 but the pistol ends up saving my life, then the national wealth and well being is slightly improved by the choice. If I decide to drive to Yellowstone rather than fly to Paris for vacation, America benefits and France loses and the global or western world's wealth is largely unaffected. But if I decide to invest the money I would have spent on the flight to Paris so it generates more wealth rather than turning into a one-time shot of personal pleasure, the western world's wealth slightly benefits from my choice.

    So, while you're right and the direct effect of terrorist attacks is (almost always) negative per the broken windows analogy, the reprioritization terrorism prompts is not always negative but may be unpredictable and unmeasurable across large units though it will often be negative for the areas perceived to be dangerous.

    To use a more tongue in cheek example: Terrorists destroy San Francisco, Hollywood, New York City, and Washington DC. Obviously a bad thing for those areas. But the rest of the US might be better off without them.

  3. I look at it more simply, I'm afraid. It's opportunity cost.

    I have money to spend. I spend it on increasing my possessions to use for wealth creation or entertainment or growth. Like the computer in your example.

    Because of criminals and terrorists, I am forced instead to slow down my wealth creation to preserve what I already have. The increased risk forces me to invest in weapons, security cameras, paid patrols, bodyguards. None of which adds to my existing wealth, all of which costs. Weapons are only coincidentally investments, and their value appreciation is not guaranteed. In fact, they then become even further property at risk of theft.

    Note that there's a difference between spending money on weapons you want vs. being forced to spend on weapons you need, at the cost of some other investment you would have preferred to make.

  4. Perhaps but there's also an element of "shocked into sanity" to consider.

    If there were no criminals or terrorists, we would not need to spend any (or at least not much) money on security. On the other hand, that is not a world that exists and it's not a world that ever did or ever will exist (at least not until the return of Christ). If some of the reprioritization of security is responsive to actual threats then it is productive in the real world even if it is non-productive vis a vis the imaginary ideal world.

    In any event, it's not as though we are talking about core productive wealth here. The original article was about tourist spending which is generally a non-productive expense. If people don't fly to Paris to take selfies in front of the Eiffel Tower, it's not terribly likely that whatever else they do is less productive. Odds are fairly good it's not even appreciably less pleasurable.

  5. Screw the short term economic calculations. The big cost is the destruction of whole cultures and societies. That cost is incalculable. This is a disaster of historical proportions and it's coming to the US next. And most people remain ignorant.

  6. I was supposed to go to Germany this year. Scrubbed. Now I'm supposed to go to Germany in 2017. But . . . so that's a nice $$$$$ that remained in the US instead of being transferred to Germany. At the rate things are going, next year may not happen either.


  7. I love Paris but I won't go back to anywhere in Europe until I see some serious effort to fight terrorism. I hope the leaders of those countries learn to prioritize security sooner than later.

  8. I heard on the morning news this morning that donations for the Pulse club victims might be sent out very soon. For each victim killed, the families will receive $350,000 – $300,000. Lower costs for survivors who were hospitalized but recovered, then $25,000 for people who were there but were not injured.

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