Homeland Security Watch

News and analysis of critical issues in homeland security

April 14, 2006

Homeland security regulations: the challenges of cost-benefit analysis

Filed under: Risk Assessment — by Christian Beckner on April 14, 2006

The Office of Information and Regulatory Affairs (OIRA) within OMB released a draft report this week that assesses the costs and benefits of a wide range of federal regulations, on everything from environmental policy to transportation safety. But OIRA was unable to assess the benefits of two homeland security regulations, as noted in the text of the report:

Table 1-5 presents the available impact information on the two major homeland security regulations adopted in the past year by DHS and HHS. Because the benefits of homeland security regulations are a function of the likelihood and severity of a hypothetical future terrorist attack, they are very difficult to forecast, quantify, and monetize. For the purposes of Table 1-5, we have annualized and converted the cost estimates to 2001 dollars in a manner similar to Table 1-4. We have also summarized the available information on how the agencies feel each of the rules will improve security or otherwise prevent or mitigate the consequences of a terrorist attack.

OMB has also compiled the total impact of all major, economically significant homeland security rules that have been finalized since the creation of the DHS and that contain monetized costs. Since DHS was created, they have finalized 9 major homeland security regulations that impose a total cost on the economy of between $2.1 billion to $3.9 billion a year.

The report then provides annual cost estimates for regulations pertaining to “Electronic Transmission of Passenger and Crew Manifests for Vessels and Aircraft” ($127 million) and “Establishment and Maintenance of Records Pursuant to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002” ($121-$134 million) – but no estimate of the benefits of these regulations. Similarly, last year’s report offered cost estimates for seven new regulations (including advance cargo manifest rules, MTSA-derived regs for port security, and US-VISIT biometric data collection) but did not assess their potential benefits.

Is it true, as OMB suggests, that it is impossible to quantify the benefits of homeland security regulations? Or is OMB instead being overly cautious in their analysis, and unwilling to apply new methodologies. In 2003, OMB asked for public comments on how to quantify the costs and benefits of homeland security regulations, and there were a number of relevant responses among the broader list of public comments. For example, see here, here, and here. But the gap in analysis remains.

My sense is that this is an issue that can’t be solved within the typical strictures of economic analysis, but could be accomplished by taking a heterodox, unconventional approach. Real options theory in the business world allows corporate managers to notionally price the value of business decisions. Disciplines such as network theory, operations management, and decision sciences can contribute to an assessment of the value of a particular regulation in the broader system of protection and deterrence. Terror-related analysis of threat, vulnerability, and criticality can assess the potential direct and indirect costs of various types of attacks. And it should be possible to identify and quantify secondary benefits of various regulations; for example, companies’ efforts to comply with security-related import and export regulations should create a tangible and quantifiable supply chain efficiency benefit.

It’s important that OMB develop these methodologies in the years ahead; presenting a cost-benefit ledger that only shows costs creates a risk that solid homeland security regulations will lose political support. And it creates the risk that unnecessary regulations that impose high costs but little benefit will stay on the books without merit. The development of this framework should continue to be a top priority for OIRA.

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