"A war on Philip Morris would be much more effective, amd very much cheaper and safer to boot."
Nope. They tried declaring war on booze in the 1920's. Guess what? People would rather ignore the laws of their country than abandon their vice. Point is, they'd sooner declare war on their country. Some things you can't deny people.
"It's only too difficult because the will is not there to do so; were it to be considered a problem as heinous as terrorism, and the budget made available accordingly, it suddenly wouldn't be so difficult."
War on Drugs ring a bell? We've bee putting trillions into the problem, but it's just like Prohibition above. Vice is a Chaos Factor. You can't get rid of it even if you want to because trying to do do only results in more Chaos Factor until it can become self-feeding and you find yourself in a no-win situation, where neither the status quo nor any way to combat it is acceptable.
"It's arguable - and I would do so - that inflating the terrorism problem is in fact a major cause of terrorism;"
I would say it depends on the attitude of the terrorist. If he feels he MUST get attention by any means necessary, then nothing will stop him. Sooner or later, he'll commit something that MUST be answered, say something of 9/11 caliber (Because if not, what next? Nuking of the State of the Union Address?). Notice how we didn't pay that much attention to them until THEN, when we HAD to answer? I can see it from the point of view of the bully. Some bullies will give up when you ignore them, but others will seek attention even if they have to beat it out of you, at which point you either respond or die.