Economic Consequences of and Resilience to Terrorism

Principal Investigator: Adam Rose


Progress continues on an integrated body of research on the economic consequences of and resilience to terrorism and natural hazards.  Its goals are to advance the state of the art of basic understanding and modeling of key features of the topics, to build operational models, to apply them to key issues and case studies (including those at the request of DHS), and to help transition the models and findings for use by DHS and others.   A.  Advance the breadth and depth of economic consequence analysis.  Progress in Year 9 emphasized the further incorporation into the CREATE economic consequence analysis framework of behavioral responses to terrorism (arising from such factors as risk amplification and stigma) and of resilience (inherent and adaptive ways to build resilience capacity and to mute losses following a disaster).  These have been further integrated into various economic models, most notably computable general equilibrium (CGE), this past year, applied to analyzing the tradeoffs between urban security and commerce (UCASS), to the economic impacts of a major tsunami hitting Southern California, and to the competiveness and macroeconomic impacts of additional staffing of Customs and Border Patrol (CBP) agents at U.S. land border crossings. Some of this research was done in collaboration with CREATE affiliates at Monash University   The UCASS project broadened our framework for estimating the consequences of interdiction of terrorism by including spillovers, such as delays and invasion of privacy and improvements in the business environment, of such mitigation measures as bag and parcel checks, traffic check-points and closed circuit TV cameras.  CREATE continues to develop and refine a suite of state-of-the-art economic consequence analysis models to evaluate all of the above important considerations.  This year we also published our significant practical tool for rapid estimation of economic consequences of earthquakes. This is the beginning of accelerated efforts to be undertaken in Year 10 to expand the reduced form capability to the consequences of radiological and nuclear attacks for the DHS Nuclear Detection Office (DNDO)   B. Modeling Behavioral Responses to Terrorism and Their Economic Impacts.  This research continued the collaboration with CREATE researchers in psychology and decision sciences.  Together with economic affiliates at Monash University, we continued to translate experimental and survey findings on the social amplification of risk and stigma effects into changes in economic behavior.  For example, after a terrorist attack using an insidious agent such as chlorine gas, workers and investors are likely to require a premium to return to the affected area, while shoppers and tourists are likely to require a discount to return as well.  These are incorporated into a CGE model to estimate the direct and indirect economic impacts.  In Year 9, CREATE affiliate James Geisecke and I worked closely with Bill Burns and his research team on translating his survey estimates of alterations in risk perceptions into parameters of a CGE model.  We also examined the nature and length of stigma effects.  The study found that the ensuing behavioral effects in terms of business interruption were estimated to be 35 times the size of ordinary property and casualty losses.  In conjunction with Bill Burns, Heather Rosoff and Richard John,  on a TSA project we estimated behavioral effects stemming from simulated terrorist attacks on an airport or airliner were one to two orders of magnitude times larger than ordinary resource loss effects   C.  Modeling Supply-Chain Impacts and Resilience, with special application to cyber threats.  The CREATE economic consequence methodology is especially relevant to modeling supply-chain aspects of terrorism. Computable general equilibrium (CGE) analysis essentially portrays the economy as a set of interconnected supply chains.  Each sector is modeled both in terms of its own set of direct inputs, as well as its role as an input into other sectors, but the successive rounds of forward and backward supply chain connections can be computed as part of the general equilibrium solution (economy-wide quantity and price interactions).   In Year 9, we examined the supply-chain impacts of a major tsunami to hit Southern California, with the impacts primarily channeling through damage to shipping and the Ports of Los Angeles and Long Beach.   We also developed a conceptual framework for the development of economic resilience indicators.  Unlike attempts by others, who have simply used vulnerability indicators (e.g., literacy rates, disabled populations per capita income), our index places an emphasis on actionable variables (e.g, stockpiling critical inputs, building flexibility into production processes, ability to relocate business activities).