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Estimating Economic Impacts of Homeland Security Measures, Working Paper 022 Open Access

The terrorist attacks of Sept. 11, 2001 have prompted the federal government to adopt a number of different measures that are intended to reduce the probability of future successful terrorist attacks and/or reduce the impact of any future attacks should they occur. These measures are grouped together under the broad rubric of preserving and increasing homeland security. Public policies that increase the level of homeland security require that government, individuals, and businesses devote more time and money to protective measures, which exacts an economic cost. Using a broad definition of “homeland security” to consist of “all expenditures possibly aimed at either preventing damage due to terrorist attacks or at preparedness for the response to potential attacks,” the Federal Reserve Bank of New York (FRBNY) has estimated that in 2003 total public and private sector outlays on increased security equaled just over $70 billion or just under 0.7% of the nation’s gross domestic product. In addition, the FRBNY report estimates that “indirect costs” such as travel delays related to heightened airport security added an additional $12 billion, for a total estimated cost of more than $80 billion. Whether costs of this magnitude are viewed as “large” or “small” depends on one’s perspective. On the one hand, as noted in the FRBNY article, when viewed against the landscape of a $11 trillion national economy, the estimated costs of attaining homeland security are relatively small; and clearly, measures of macroeconomic performance such as economic growth and employment indicate that the national economy has been able to take these additional costs in stride. Yet this does not mean that such costs should be ignored in the design, implementation and evaluation of homeland security policies. •The magnitude of the aggregate costs associated with homeland security are quite comparable in size to estimates that have been made by OMB and others of the economic cost of environmental and social regulations, and there is general agreement that there is a public interest to be served in ensuring that such regulations achieve the maximum social benefit at minimum social cost. Presumably the same logic should apply to homeland security measures. •There has been criticism that outlays made with the ostensible purpose of fostering greater homeland security have been wasteful. Focusing more attention on the economic cost and economic impact of proposed homeland security measures can help reduce such wasteful expenditures, just as more careful analysis of these factors has led to more cost-effective governmental regulatory policies in other areas (as documented by the Office of Management and Budget). •Although the impact of a single, or multiple homeland security measures may seem “small” in the context of the national economy, these costs are typically concentrated on certain stakeholders, such as local governments, specific business sectors, or consumers of particular goods and services. To these stakeholders, the cost of achieving greater homeland security can be quite palpable and substantial, and should receive their proper due in the design and evaluation of homeland security measures. •At a practical policy level, unlike national defense, policies intended to promote homeland security, are not exempt from OMB requirements that government regulatory programs with cost of impacts of $100 million or greater be subject to regulatory analysis which requires a careful analysis of the costs of such such measures in relation to the benefits to be derived.

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