On cost of terrorism

Ever since the terrorist attack in Paris, there have been a spate of articles discussing the cost of terrorism. Major costs of terrorism are victim costs, tourism decline, higher insurance premiums, increased security costs etc.

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Before we start on the costs or terrorism, here is a monetary riddle to consider.

“It’s a slow day in some little town……..
The sun is hot….the streets are deserted.
Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich tourist from back west is driving thru town.
He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.
The pig farmer takes the $100 and heads off to pay his bill at the feed store.

The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit.
She, in a flash rushes to the motel and pays off her room bill with the motel owner.
The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything.

At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves.

NOW,… no one produced anything…and no one earned anything…however the whole town is out of debt and is looking to the future with much optimism.”

Source : http://econlog.econlib.org/archives/2012/01/an_answer_to_a.html

In the above riddle, there were no real goods produced, but the flow of currency erased all the debts. In an experiment tight scenario, where the entire money comes back to the tourist, this might work but in real world such a scenario would be highly unlikely.

Let’s think about the increased security costs because of terrorist threats. We can safely assume that people spend more on security post terrorist attacks. Now, in an Indian scenario let us consider two characters – a rich businessman (has a factory, a big bungalow, a big car and so on) and a security guard (from a poor village in India, is semi-literate and is unable to make any extra money for his family if he stays in his village).

Because of terrorism threat, the rich guy employs the poor guy and pays him Rs8,000 per month. The security guard effectively sits on a chair for the whole month but gets his monthly salary at the end of it. He consumes some of it and sends some of it to his family in his village. His family use that money for better food, education of children and so on.

With the guard sitting on his chair for the whole day, no real work is done. But when he gets his salary, the capital flows from the rich guy to the poor guy and the poor guy spends all of it and he and his family are better off compared to the scenario where he would be under disguised employment in his village.

In an alternate scenario where there is no terrorism and no security is required, the rich guy would not have to spend Rs8,000 per month on security. With the amount saved, the rich guy could have,

  1. Invested the money in some asset
  2. or could have created more jobs by investing in his business
  3. or many other mixed uses

Among all the above scenarios, it is difficult to imagine a scenario where the capital (Rs8,000) would flow to the poor guy. Unpleasant and undesirable terrorism has created an opportunity for the poor guy to earn a steady monthly income, which would otherwise not be possible given the limited skills of the poor guy.

Terrorism has huge costs for many, but not necessarily for everyone. Even something as hated can have an unintended positive effect on the life of someone.

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