November 29, 2002

THE COST OF TERRORISM CAN BE MITIGATED BY PREVENTION STRATEGIES
By Dr. Saul B. Wilen

The Goals of Terrorism

Can the United States economy afford and sustain a war on terrorism? The answer to this may be found in the adage, “it’s not what you do but how you do it.” The assumptions that such a war could be won against a “guerilla movement” whose soldiers sleep on cave floors, by throwing at them a “modern military machine”, an intelligence apparatus incorporating primarily high technology, and the “inexhaustible” economic resources of the United States, has quickly proven to be a faulty strategy. America continually underestimates this enemy. The strengths of the United States economy are under attack on two major fronts. First, terrorists see America’s economy as the ultimate vulnerability to be targeted for destruction, and second, the stresses being imposed by the nation’s demands on the economy to respond to terrorists, strain its capabilities and interfere with growth.

Terrorist acts as demonstrated by the events and aftermath of September 11, 2001 resulted in fear, economic vulnerability, and the diversion of resources due to on-going threats. Fear reduces consumer confidence and negatively impacts investment. The disruption of daily activities, U.S. security, and economic stability, allow the terrorist goals to succeed.

On September 11, 2001 terrorists hijacked four airliners laden with full tanks of jet fuel and used them as bombs to destroy and create fear. The far-reaching effects directly impacted the operation and economic stability of the airline industry, the on-going cost of enhanced security and preparedness, and the effects on the American economy in general. Financial concerns about economic instability, job instability, and the issues of insurance and insurance cost have weighed heavily on the industry’s sense of security and safety.

Terrorism is aimed at undermining operating structures and economic interests. This realization emphasizes the belief that the economy is the major vulnerability target for terrorists in their efforts to destroy the United States. Although this is true, the United States economy is simultaneously the key element for America’s survival, and terrorism prevention is the most successful strategy available to support financial survival.

What Is America’s Direction?

Congress has progressively increased the federal budget for 2002 by 200 billion dollars. Congress is expected to approve an additional $150 + billion for 2003. Defense and Homeland Security expenditures generated after September 11, 2001 account for more than half of these increases. This raises a number of key questions. How prudent is this spending for homeland security? How much is being misspent by federal agencies and the recipients at the state and local government levels? Are there financial accountability systems in place to monitor effectiveness and produce the necessary data to realistically and adequately plan for future spending?

Of the major sectors of the U.S. economy, only the government sector has recently gained jobs. The private sector has undergone an economic contraction according to the Department of Commerce 2002 second quarter figures. America’s fastest growing industry is government. When government is spending more, the private sector, the true driver of the economy, has less.

State, county, and local governments have been experiencing reduced tax revenues, and with existing balanced budget requirements spending growth has also decreased. However, federal spending continues to grow. Jobs data from the U.S. Department of Labor from September 2002 showed that unemployment decreased to 5.6 percent, but even so the United States economy lost approximately 43,000 jobs from the private sector.

The Glue Holding It All Together

There are both common threads and unique considerations for each component of America’s operating structure. These components of the economy simultaneously represent both America’s exposed vulnerabilities and America’s greatest strengths. This dichotomy creates a “fine line” perspective for establishing and implementing both global and focused solutions.

The common threads include information, communication, education, and resources and their management. These threads hold the variety of operating components together and allow the unique considerations for each infrastructure segment to function to its maximum potential and productivity, thereby contributing to economic growth. For example, information technologies and telecommunications play vital networking roles allowing the components to interact positively for expansion. However, such openness contributes to attack vulnerabilities due to increased nodes of vulnerability as in multi-modal transportation systems at the points (nodes) where the various entities interact; and due to interference with the function of the technology that is being depended upon, as in a successful cyber attack. The need for redundancy, and backup and alternative systems becomes essential.

The conglomerate of the vital sectors that make up the U.S. operating structure defines its critical infrastructure. They allow for carrying out the functions of daily living, the operations of industry and government, and the variety of elements that contribute to the American and global economies. In August 2002 USA Today reported that of the 5.3 million businesses in the United States greater than half of them do not consider themselves vulnerable to terrorist acts.

The American economy functions within the context of the global economy. The business community must respond to the challenges of cyber-terrorism as well as to international terrorism with its domestic manifestations.

Homeland Security

The President of the United States declared a war on terrorism and set in motion the forces of homeland security. The efforts instituted are primarily those related to reaction, response, and recovery. The prevention strategies talked about for more than a year are nowhere to be found.

The latest Homeland Security Plan has abandoned the emphasis of “the homeland will be secure when the hometown is secure.” This abandonment is not surprising. The federal government finally realized that such a strategy was solely responsive and reactive, and therefore extremely expensive. The word prevention has surfaced even though the Homeland Security Plan including the Department of Homeland Security lacks any prevention focus. This department is presently under development and will combine 22 existing agencies and entities. The General Accounting Office (GAO) has estimated that it will take ten or more years for this department of 170,000 federal employees to get all of its diverse functions to operate. Will the components coming from the various existing entities and agencies arrive without their existing bureaucracies?

The reorganization, the largest since the creation of the Department of Defense, will require major financial expenditures estimated to be approximately $80 billion, which includes a projected operating budget of $37.45 billion in 2003. There are no guarantees that the bureaucratic turf issues, roadblocks, and communication resistance will be controlled.

Has Anything Really Changed?

On October 24, 2002, a high-powered panel of former government officials, leaders from business, and academicians from the Council of Foreign Relations released a new report relating America’s current status of preparedness for another terrorist attack. This report has again concluded that America continues to be unprepared to deal with another terrorist attack, “dangerously unprepared.” The report particularly underscores, although previously well documented, the lack of preparedness by our communities to effectively participate. Former U.S. Senators Hart and Rudman chaired the panel.

Even this newest of reports emphasizes reaction and response strategies, not prevention, which is the key to America’s economic survival and its survival as a society.

Terrorism Insurance

Terrorism insurance has been a high priority item on the administration’s legislative agenda because of need for measures to invigorate the economy. The insurance industry has paid approximately $40 billion in terrorism covered claims related to September 11, 2002 loses. Under the provisions of the terrorism insurance legislation the insurance industry would cover only up to $15 billion in annual claims and there are no present limits on punitive damages. According to Scott McClellan, White House spokesman, “This legislation will put hard hats back to work, create construction jobs, improve the legal process, and protect taxpayers.” Terrorism insurance will put the U.S. government into the liability insurance business for at least the next three years. The government would cover up to $90 billion yearly in insurances claims for any future terrorist attacks. President Bush has said, “this measure will aid the economy by allowing the resumption of thousands of building projects stalled by lack of such insurance.”

The Private Sector

The federal government has created an artificial and arbitrary distinction between the federal homeland security establishment and the private sector. The homeland security agencies take on the responsibility to establish the criteria, policies, and deadlines for the creation of security; in some cases actually supplying part of the funding. The private sector is responsible for establishing and implementing the planning and systems for safeguarding the infrastructure components under its control. This implies the obligation to fund such efforts since securing the infrastructure is in the best interests of the private sector. In actuality, these two functional responsibilities are one and the same and should not be separated.

Required is the development of an established joint working partnership, not yet developed, and a national blueprint to guide the process, not yet considered. The critical element is a structure that connects the 100 plus federal agencies with responsibilities for homeland security, state and local authorities, and the private sector.

What It Costs

To estimate and evaluate the financial investment already made to date and that planned for the next fiscal year it was necessary to perform an extensive search of public records at all levels including federal, state, regional, and local governments, agencies, and quasi-governmental entities. This was also done for state, regional, and local jurisdictions in terms of budgets and proposals, and allocations and proposals relating to homeland security. Private sector information was obtained from corporate security professionals, trade and security organizations relating to security allocations and proposals, and the annual financial documents required of public companies for disclosure to their stockholders.

The following table presents the best estimate available to date of the costs so far of the war on terrorism, $137.6 billion, and the projection costs for 2003, $252.5 billion. Not included in the billions spent in the first year is the cost required for updating the INS and FBI computer systems. There are still no major financial commitments for educational efforts on any level, and strikingly absent is funding to educate the people. The diversion of funds essential to support the services and programs of states and communities for education and healthcare further weaken the U.S. economy.

State and Local Impact

The states and local communities in the United States have felt the impact of the weakened economy. Diversion of funds essential to support their services and programs to the war on terrorism worsens their stability. The National Governors’ Association reported that state revenues last year dropped by 6 percent. Legislatures have instituted the largest tax increases in a decade. Factors contributing to this include sky-rocketing healthcare costs and the faltering economy. Medicaid assistance of $9 Billion has been stalled in Congress since Senate passage in July of 2002.

Overall it is estimated that a state shortfall of at least $40 Billion presently exists. The Texas shortfall is estimated to be $5 Billion. Just months into the new fiscal year the National Conference of State Legislatures even noting major scaling back of state spending indicates an already existing budget shortfall of $17.5 Billion.

Perspective

To understand U.S. economic survival during the process of an extended war on terrorism, two aspects require analysis. The first is the cost to respond to and recover from terrorist attacks and threats. The second is the cost to prevent them. The billions already spent and the additional billions slated to support homeland security are necessary. The primary thrusts of present efforts are to react, and to develop preparedness to respond to and recover from an attack. These reactive approaches to date have not created the environment of awareness, education, and diligence on the part of all levels of government, the people, and the private sector. This reactive strategy is necessary but not sufficient for success. Sufficiency requires a coherent and cooperative prevention strategy to defeat terrorist threats.

The resolve to commit resources and efforts is an essential element. The outcomes of terrorist acts will be determined by America’s resolve and commitment to prevention actions taken by its government and people. Within such a framework the American economy can continue to survive, grow, and prosper.