Here's How Much Terrorist Attacks Cut Into Air Travel

Acts that target airports and tourists have an especially strong chilling effect
Photographer: Patrick T. Fallon/Bloomberg

Terrorist attacks have become both more frequent and more deadly. While their social cost is enormous and evident, economists are tallying up something more obscure: how much they reduce output.

An analysis of the terror-spurred drag on air travel leads our weekly economic research wrap. It's followed by a study on the possible costs and benefits of a border-tax adjustment in the U.S., a look at rising corporate saving, and a breakdown of what aging means for central bankers. Check out this column every Tuesday for the latest in interesting research from around the world. 

Fear of Flying

Terrorist attacks depress long-distance air travel between affected countries, St. Louis Fed researchers find, assessing a sample of 57 source countries and 25 destination countries for the period of 2000 to 2014. The number of terrorist attacks has increased by a factor of five between 2003 and 2014 and the "number of people killed in terrorism related incidents also has been increasing exponentially," based on the dataset. Against that backdrop, an attack on average reduces bilateral air transport by 0.76 percent, controlling for distance. The effect is "especially pronounced for pairs of the source country and destination country that are geographically located further away from each other," they find. As you might expect, attacks on airports and those that target tourists have the most acute chilling effects. 

Why focus on air travel? The authors offer up a few reasons. For one thing, airports are a popular terrorist target, since they affect nationals from many countries. And airlines both contribute a sizable share of global GDP in their own right and facilitate commerce, so anything that cuts into their use is a drag. "Only by understanding how terrorism’s effects ripple through an economy can we gauge the amount of national resources we might need to commit to guard against it," the researchers write. 

This isn't the first time St. Louis has taking a crack at quantifying the economic fallout from terrorism. If you're looking for further reading, they've also looked at trade effects and foreign direct investment impact. 

The Effects of Terror on International Air Passenger Transport: An Empirical Investigation

Published Jan. 28, 2017
Available on the St. Louis Fed website

Moving on to the light and airy, let's take a look at American taxes. President Donald Trump has promised tax reform in the world's biggest economy, but he initially dismissed a border-tax adjustment measure like the one in House Speaker Paul Ryan's tax plan as too complicated. It seems he may have changed his mind. Last week his administration suggested that they could levy a familiar-sounding 20 percent tariff on Mexican goods, and an administration official said Trump is warming to the idea. 

Luckily for us, the Peterson Institute has taken a hard look at what a border-tax adjustment might mean economically. Less fortunately, they've concluded that it's impossible to tell.

The problem with scoring the proposal, which would deny business deductions for imported goods and services and exclude exports of goods and services from the tax base, is that it's impossible to know how the dollar would react. If the greenback fully adjusted by rising an equal amount as the border tax, other countries would pay for the U.S.' policy. If it didn't, U.S. consumers would probably bear the burden: goods at big importers like big-box retailers or cars shipped in from abroad might cost more. The policy could help to shrink the trade deficit, but again, how much would depend on how currency markets play out. "The Trump administration and Congress will need to evaluate BTAs from different angles, realizing that decisions taken will carry the U.S. economy into uncertain terrain," Gary Clyde Hufbauer and Zhiyao Lu write. 

Border Tax Adjustments: Assessing Risks and Rewards
Published January 2017
Available on the Peterson Institute website

Consumers are not the piggy bank they once were. Household saving funded most world investment back in the 1980s, but new research shows that nearly two-thirds of global investment now comes from corporate saving. The change has come as companies earned high profits, faced a low cost of capital, and chose to hang on to their funds by holding cash, investing in financial assets or buying back shares rather than distributing the funds via dividends. The shift occurred broadly across industries and among firm regardless of age. "It reflects the pervasive increase in the share of corporate profits that mirrors the global decline in the labor share," the study authors write.  

The Global Rise of Corporate Saving
Published January 2017
Available on the University of Minnesota website

Aging in euro area economies and in the U.S. is depressing inflation, new European Central Bank research finds, though that effect is mitigated as central banks use low rates to bolster their economies. The authors show that price gains slow alongside growth in the working-age population, and therefore monetary policy makers need to take aging into account as they think about the task at hand: "deflationary pressures coming from the effect of demographic change on the equilibrium real interest rate may imply that central banks could find themselves more often at the effective lower bound and thus need to resort to unconventional measures." 

Demographics and inflation
Published January 2017
Available on the European Central Bank website


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