THE ECONOMICS OF HOMELAND SECURITY EXPENDITURES: FOUNDATIONAL EXPECTED COST‐EFFECTIVENESS APPROACHES

I. INTRODUCTION All levels of the government and the private sector have increased their security expenditures in the wake of the attack of September 11, 2001, and the continuing uncertainty regarding new attacks. To date, traditional economic concerns about the efficient allocation of resources appear to have played a relatively minor role, due in part to the analytical difficulties involving various scales of application, an intelligent adversary, and little experience with the frequency or impact of the many types of potential threats. Top-level strategies of the government either do not address or only partially address the issue of risk-based investment (U.S. GAO, 2004, p. 13). An example of this minor role can be found in the National Strategy for Homeland Security (Office of Homeland Security, The White House, 2002) which features security actions in six "mission critical" areas such as protecting critical infrastructure and key assets, while economic criteria such as balancing benefits and costs and equating the return on marginal investments are mentioned only as a principle in the last chapter of the strategy that addresses costs. Consider the difficulty in improving the allocation of homeland security expenditures. The geographic area of concern is large, even if restricted to domestic territory. There is no monolithic decision maker. Even within the federal government, seven agencies are identified as sector leads (Executive Office of the President of the United States, 2003), and 32 government agencies requested budget authority in the homeland security area totaling $58.3 billion for fiscal year 2007 (Office of Management and Budget, Executive Office of the President, 2006). The range of decisions and decision makers includes (1) direct management of federal facilities as by the General Services Administration, the Department of Defense, or any number of other Executive Branch agencies; (2) multilevel governmental management involving federal, state, and local jurisdictions, each with their own direct management opportunities; (3) private sector control, broadly involving production, transportation, and distribution facilities that range from mid-city locations to rural farms and facilities; and (4) individuals making their own consumption, location, and work decisions. The federal government, however, has a clear policy mission to improve the security of the homeland, a task to which all the tools of governance ranging from direct expenditure to partnerships and regulation can be used. This article searches for the guiding principles to inform risk-based expenditure decisions through any of the tools that governmental or nongovernmental managers may use. The models surveyed here are intended to provide a foundational, cost-effectiveness approach that seeks to minimize the expected social cost from terrorist attacks or related risks by choosing an "optimal" level of expenditures given an aggregate governmental expenditure constraint. Stated positively, the models seek to reduce expected costs by the largest amount given the available funding. These models represent a frequent progression from deterministic to expected value models when uncertainty or risk is a central element of concern. The results are capable of being tiered from large-scale concerns at a national or federal agency level, down to the scale of a facility manager who has some discretion to invest in prevention or mitigation expenditures. This search for basic or foundational principles is in part a reaction to the lack of structure for such planning as currently exists and calls for risk-based allocations of federal funds. However, the choice to frame the homeland security problem as minimizing expected social cost subject to a budget constraint is not without controversy. Some implications of the framing include (1) treating the objective as if there is an agreed-upon planning objective or social welfare function (expected social cost) when actually reaching such agreement is doubtful and impossible under broad conditions (Just et al. …