Monday, November 02, 2009

From the Archive: Terrorism and Economics

Given our brief discussion of terrorism and economics in metrics on Friday, here's an old post on some the stuff we talked about:

Today, we will discuss terrorism. Economics provides a great deal of insight into the problem of terrorism. The decision to commit a terrorist act is just that ... a decision. As such, we can identify the relevant tradeoffs and design policies that should reduce the probability of terrorist acts.

Terrorism has its roots in group level hatred. The suppliers of group level hatred are frequently the demanders in the market for terrorist acts (though they needn't be the same people), and the people who demand hatred are usually the people who end up actually carrying out (or supplying) terrorist acts. The whole thing is further confused by the fact that frequently demanders and suppliers of terrorism are the same people.

As such, if we hope to be successful in our "War on Terror", we need to focus on policies that dramatically change either the supply or demand of terrorists. And this ultimately requires reducing the supply and demand of hate.

To begin, focus only on the market for terrorist acts. A key component in our current strategy is negative deterrence. Gary Becker's classic model of criminal behavior suggests that criminals tradeoff the expected benefits (probability of success * value of success) of a criminal act against the expected costs (probability of being caught * penalty). Much of our current terrorism policy is designed to increase the probability of detection and increase the penalties associated with participating in terrorism. This effectively raises the price of terrorist acts by shifting the supply curve up.

The effectiveness of supply side polices is limited, however, by the amount of substitution available in the terrorism production function and the low price of terrorist acts. If we raise the price of attacking a government building, terrorists can attack shopping malls; if we profile all middle-eastern looking men, terrorists can recruit people who look different. Ultimately, the biggest cost faced by terrorists is probably the lives of any suicide attackers. Reducing the supply of suicide bombers would likely making committing terrorism more difficult. However, consumers of terrorist acts have done a good job of convincing their "employees" that there are substantial eternal rewards for their sacrifice. But even reducing the number of willing suicide bombers won't make a huge impact. Killing people in public places is unfortunately cheap. Benn Steil and Robert Litan estimate:

...acts of terror are cheap to carry out. The truck bomb used at the World Trade Center in February 1993 cost $400. The cost of training and support of the 19 individuals who participated in the 9/11 airline hijackings is estimated at only $500,000. Terrorist operations since 9/11 have been even cheaper: the October 2002 Indonesia bombings cost $50,000; the November 2003 Istanbul attacks cost less than $40,000; and the March 2004 Madrid bombings, carried out with dynamite and cell phones, cost less than $10,000. As Defense Secretary Donald Rumsfeld admitted in a memorandum leaked to the press in October 2003, "The cost-benefit ratio is against us! Our cost is billions against the terrorist cost of

(Source) Ultimately, there is not a whole lot that we can do to make the price of terrorist acts prohibitively high.

Even if we were successful at increasing the price of terrorist acts, the reduction in the equlibrium quantity of terrorist acts depends on the elasticity of demand. Peter Boettke and Christopher Coyne argue in their paper "Liberalism in the Post-9/11 World" that the demand for terrorist acts is highly inelastic (this approach is similar to Becker, Murphy, and Grossman's work on the failure of the "War on Drugs"). As such, supply-side policies are unlikely to reduce terrorist acts.

Reducing terrorism, then, requires fundamentally changing preferences for terrorist acts and prompting an inward shift in the demand curve. Unfortunately, this is extremely difficult. Some of the policies Glaeser outlines in the "Political Economy of Hatred" (e.g., increase ties between groups, promote hating the haters, etc.) will likely have some effect. However, it is important to note that blanket prescriptions like reducing poverty and increasing education are not likely to automatically improve things (Krueger and Maleckova document no relationship between income and education and individual decisions to be terrorists and only small relationships between country level poverty and education and terrorism). Indeed, some rich dude can always set up and fund his own terrorist group (see Al Queda and SPECTER).

So how does the war in Iraq fit into all of this? Initially, it was about reducing the probability of attack by raising the price of engaging in terrorism. The fear was that Saddam Hussein would provide WMD to terrorists, so we needed to intervene in order to "raise the price" of this type of terrorist attack. At the same time, we would "shock and awe" other states who might be willing to sell weapons to terrorists. Thus further raising the price of terrorist activities.

After this rationale turned out to be based in fantasy, the rationale changed to "bringing democracy to the middle east". Setting aside the question of why you would choose to promote democracy from the barrel of a gun in Iraq rather than working to increase democracy in semi-democratic places like Turkey or Egypt, the idea of reducing terrorism via democracy, I guess, works like this -- Creating a democracy in Iraq is supposed to generate more freedom and tolerance. This, in turn, should increase ties with the West and lead to less hatred of the West and more intolerance of terrorists and terrorist groups. This should reduce the supply of terrorists, reduce the demand for terrorism, and make it harder for those who do still demand terrorist acts to operate.

This is not a crazy theory in the abstract, but, in practice, there are a number of problems. The historical record for producing liberal democracies at will is not very good. Boettke and Coyne also consider this issue. They point out that of the 15 times the US attempted reconstruction efforts from 1898-1996 only four were democracies after 10 years. As they remind us, economics predicts that "conflict should not persist where gains from exchange exist." However, in most reconstruction efforts (and Iraq in particular) a number of barriers exist that prevent peaceful bargaining. I encourage you to check out their interesting arguments.

I thought that improving education and reducing poverty would substially decrease terrorist acts. Besides, it's shocking to know that "of the 15 times the US attempted reconstruction efforts from 1898-1996 only four were democracies after 10 years".
I don't think education or reducing poverty would substantially decrease terrorist acts. I think that hatred remains inelastic mainly because of 'interventionist' policies. If the US (or other developed nations) did NOT try to promote democracy, increase education, prevent poverty, or enforce settlements (aka Israel v Palestine land negotiations), terrorist acts would significantly decrease. It's the fact that nations get involved and try to enforce unwanted ideology/policy that terrorism or war occurs.
If affecting the supply curve is fruitless, that must mean that we should try to shift the demand curve. But how does someone impact the demand for hatred?
I think it is unclear whether or not US anti-terror policies actually increase the likelihood of being caught for terrorists.
Raising threat levels serves only to amplify the fear and negative stereotyping that leads to hatred in the first place, and the strict security measures enforced in airports,etc always seem to be one step behind. We increase security in places that have already been attacked or take measures to prevent methods of attack that have already been used.
Although the anti terror sentiments sparked by Sept 11 have led to harsher punishment for criminals, I don't think the likelihood of getting caught(a crucial component of calculating a terrorists' supply curve) has changed.
As long as terrorists can stay one step ahead of the US government (which they have been able to do so far), the "war on terror" won't shift the terrorism supply curve by a substantial amount.
I really don't think that decreasing terrorism or making peace in the middle east comes down to economics. You must look elsewhere. Look at the history of the people, look at the religious reasoning. When someone believes in something to a great extent or has a history that involves conflict and hatred towards certain people, there is no cost associated with the situation in the eyes of the terrorists. At that point it's a no brainer, almost instinct for the terroists.
Lacy I think has it right. I believe that if a group of individuals given enough determination and perseverance would be able to meet the financial requirements of conducting a terrorist act.

If that passion (demand) is reduced through education and the improvement of living conditions, then there is less to be resentful about. Wars cause pain and loss which could increase demand for retribution.
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