A Framework for Analyzing the Total Economic Impacts of Terrorist Attacks and Natural Disasters

Abstract

Policies to mitigate natural hazards and terrorism are facing increasing scrutiny, such as the benefit-cost test. The benefits are the losses that can be avoided by the mitigation actions. For sound policy-making, it is therefore necessary that the various types of losses and major factors affecting them be identified and that metrics be established for their measurement in accordance with economic principles. This paper presents a comprehensive framework for the analysis and measurement of ordinary economic impacts and two categories of impacts that have recently gained the attention of analysts and policy makers, but for which operational definitions are lacking. The first is resilience, which refers to how the economy manages to keep functioning and how quickly it recovers. The second major extension of loss estimation pertains to behavioral and systems linkages. These refer to considerations unique to disasters that cause indirect impacts to be orders of magnitude greater than ordinary indirect effects in cases where risks are amplified, systems are overwhelmed, and resilience is eroded. The framework combines a checklist of types of impacts, consistent definitions, metrics, and strategies for estimation. The framework is serving as a template for loss estimation and benefit-cost analysis by several offices of the U.S. Department of Homeland Security.

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