Terrorism is a form or warfare typically used by a smaller and weaker opponent of a larger and stronger enemy. (A state may also use terrorism to control some of its citizens.) Terrorists may be local and home-grown, they may be agents of states engaged in international contests or they may have worldwide ambitions. It is the latter type that has most of our attention today, although we have seen recent cases of the home-grown type (Oklahoma City) and the state-sponsored type still occurs.
The economic impacts of terrorism are varied and complex. Let us confine this discussion to the response to global terrorism. The shock of the 9/11 attack, and following events, has produced a response that is at once psychological, behavioral and political. There are economic impacts at each level.
The political response is at local, state and national levels. The economic consequences are in how revenues are spent and how new regulations are applied. These result in increased business activity for some industries and companies and increased costs for others.
The impact on behavior and psychology varies with events and passage of time. Psychologically, our worldview is now partly shaped by global terrorism. There is underlying fear and distrust. Yet there is curiosity about the enemy—why do they hate us? There is self-questioning—is there something deeply flawed about our consumption-oriented lifestyle? How safe is mass transportation?
There are economic consequences to these new fears and doubts. We stopped spending immediately after 9/11 and the economy teetered close to recession. Then we were encouraged to spend as a patriotic act. And we certainly did, in a big way. Our period of national introspection was brief. Yet some nagging doubts about how long our present lifestyles can last persist. We will have to deal with the government debt created by the War on Terrorism sometime soon, along with the costs of Social Security, Medicare and the rising costs for energy, food and other things. And the threat of terrorism will remain for some time.
Many specific industries are involved in either the response to terrorism or stand to be heavily impacted by major terrorist events. Immediately after a major event stock prices fall, in general. But gold, bonds and defensive sectors tend to do well in the short term.
Major defense contractors have certainly benefited from the War on Terrorism. By some estimates total military spending is nearing one trillion dollars. The official DOD budget has increased by 132% since 2000 (current dollars). The proposed 2009 DOD budget is $651 billion. There is some possibility that defense spending will decline over the next several years as the political winds change and as supplemental spending on the wars in Afghanistan and Iraq ease.
At home, companies that provide security have also benefited. It is notable that some large defense contractors have also moved more generally into all types of security services and development. Even news media benefit, to the extent that more people watch news programming during times of crises.
There are also losers in the response to terrorism. Public and private entities have had to spend a great deal on security since 9/11. Acts of terrorism have a direct impact on individuals, businesses, government agencies and insurance companies.
The Terrorism Risk Insurance Act was extended through 2014 in December of 200.
Trends in war on terrorism
Acts of terrorism have changed from targeting political symbols, such as embassies, to symbols of the world economy (World Trade Center) and to the economic infrastructure (trains, subways, the Internet). The use of weapons of mass destruction to kill thousands of people has been threatened.
Little has been done over the past seven years to limit the conditions that generate terrorism against western targets. Some would argue that the War on Terrorism has actually increased the ranks of terrorists. It is likely that the War on Terrorism will continue for many more years, under one name or another, and that private companies in the defense and security industries will continue to thrive.
It has been proposed that terrorism is actually good for the economy to the extent that it promotes spending to replace what was lost and to defend against a future attack. But this is probably a short-sighted view.