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The Terrorism Tax hits Europe

September 5, 2016 - 07:50 -- Admin

This is big news.  This is the first large scale demonstration that the "Terrorism Tax" I speculated about back in 2004, actually works.    

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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.  

The Terrorism Tax

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.  Here's some of the theory from my 2004 article on it:  

A terrorism tax is an accumulation of excess costs inflicted on a city's stakeholders by acts of terrorism.  These include direct costs inflicted on the city by terrorists (systems sabotage) and indirect costs due to the security/insurance/policy/etc. changes needed to protect against attacks.  A terrorism tax above a certain level will force the city to transition to a lower market equilibrium (aka shrink).  So, what is that level?  Here's what they concluded:

  • Singular terrorist events (black swans), like 9/11, do not impact city viability.  The costs of a singular event dissipate quickly.  In contrast, frequent attacks (even small ones) on a specific city can create a terrorism tax of a level necessary to shift equilibriums.
  • In the labor pooling model of city formation, a terrorism tax of 7% will cause a city to collapse to a lower equilibrium.  Labor pooling equilibrium reflects the benefits of aggregating workers in a single location.  Workers get higher wages and more choices.  Firms get stable wages (no one firm can deplete the market) and more candidates.
  • In the core-periphery model of city formation, a terrorism tax of 6.3% will push a city to a lower equilibrium.  The core-periphery model is based on transportation costs.  Firms generate transportation savings by concentrating in a single location next to suppliers and customers.  Customers and workers glean the benefit of lower transportation costs by locating near jobs and goods.

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The terrorism tax is even more effective when it is combined with systems disruption (the intentional disruption of infrastructure).  That combo puts in play hidden dynamics - both economic and societal - that can turn a functional society into a violent insurgency within months.