Economic impact analysis of terrorism events: Recent methodological advances and findings

National security is a basic responsibility of national governments, but it is also intangible. What can economic analysis contribute? Benefit-cost analysis has rarely been applied because of the ambiguous and commons nature of the benefits. Our group at the University of Southern California's Center for Risk and Economic Analysis of Terrorism (CREATE) has worked to elaborate and apply economic impact analysis to describe the expected losses from various hypothetical terrorist attacks. Our innovation has been to add a spatial dimension to operational inter-industry models. Plausible terrorist attack scenarios must include geographic detail. First, there is no generic national seaport, airport or similar targets. Second, most political decision makers represent geographic areas and have a keen interest in their local constituencies. Third, aggregation over spatial units may net out conditions where areas and sectors lose but others gain, especially if locations outside the impact area take over the functions that have been lost elsewhere. Fourth, by considering the spatial economy, interactions between places that rely on available infrastructure can be analyzed. This paper describes our modeling approaches (a metropolitan region model and two national models) as well as several of the results that we have developed. Our models are not formal cost-benefit analyses, but they demonstrate large business interruption costs from these events, implying that the results provide a rationale for expenditures on the benefits of protection and mitigation. We will also discuss important directions in which models such as ours could become the basis of some type of cost-benefit analysis.