James Giesecke, Maureen Rimmer, Glyn Wittwer
October 2013 to June 2014
Economy-wide effects of disruptive events
Dynamic computable general equilibrium modelling
Econometric-CGE analysis of the effects of terrorism
This project focuses on the creation and adaption of computable general equilibrium (CGE) models to facilitate the calculation of the economic consequences of terrorism events, counter terrorism measures, natural disasters and accidents. The research has three objectives. The first is general: to advance the application of economic modeling in the analysis of terrorism and other disruptive events and counter terrorism measures. Such analysis is an important input to policy decisions concerning appropriate responses to terrorism and other disruptive events. The second objective is to develop CGE models, particularly the USAGE-R model, as quick-response analytical tools. Such tools allow us to respond quickly to requests for economic modeling of localized terrorism events or natural disasters such as the destruction of a bridge over the Mississippi, a dirty bomb in LA or a flood surge in New Orleans. The third objective is to enhance existing models by introducing new analytical features reflecting innovative theory. If existing models are to survive and continue to be useful in applications relevant to disaster policy, then they must be continuously updated and modified to take on new dimensions. In recent years we have, for example, enhanced models: to deal with illegal immigration by including specifications of labor-supply decisions by illegals and substitution decisions by employers between legal and illegal labor; to deal with a wide-spread terrorism-related closure of U.S. ports by modifying the specification of household behavior to allow for adjustments that would take place in response to sudden severe shortages of imported commodities; and to deal with a severe but short-duration H1N1 epidemic by giving a CGE model a quarterly time dimension. The main work planned for 2013-14 was to extend the regional detail of USAGE-R from the state level to the county level. This has been achieved. It was a major undertaking, consistent with the first and third objectives outlined above. Using Census data we identified the industrial structure (up to 500 industries) of economic activity in most of the 3,077 counties of the U.S. Then using gravity formulas we estimated inter-county trade flows. In theory this is sufficient to create a 3,077-region bottom-up regional model. In practice, such a model is far too unwieldy for use in a policy situation. Consequently, as we have done with the state-level version of USAGE-R, we equipped the county version with a flexible aggregation facility. Users of the model will be able to choose both the industry and regional aggregation to suit their application. This aggregation facility is an important part of achieving the second objective outlined above, the development of USAGE-R as a quick-response analytical tool. Flexible aggregation allows us to respond quickly to requests for economic modeling of localized terrorism events or natural disasters. Most terrorism shocks and other disruptive events occur at a localized level (well below the state level). Thus, for analyzing such events, extending the USAGE-R capability to the county level is an important enhancement. Another objective for 2013-14 has been to make our work better known to DHS. Towards this objective, the CoPS team visits Washington DC twice a year. In December 2013, Tony Cheesebrough of DHS attended a week long training course on economic modelling that CoPS conducted in Washington DC.