Sunday, June 11, 2006

Gary Becker on Homeland Security and Incentives in the War on Terror

When considering the expected damage caused by a terrorist attack, how does urban population density affect Homeland Security's calculations? For example, if an attack in New York City will kill 100 times as many people as an attack in Omaha, should this affect the spatial distribution of Homeland Security funds?

I pose this question because of the following quote in Gary Becker's blog entry below:
"One problem is that as coastal cities like Los Angeles, San
Francisco, Boston, New York, and Washington became better
prepared to fight terrorism, terrorists might shift inland,
to places like Detroit, Chicago, Cleveland, Omaha, Topeka,
and elsewhere. As the bombing in Oklahoma City showed, even
attacks in smaller cities cause considerable fear and

A similar issue has arisen in the pollution haven literature. Many economists have documented that dirty manufacturing is leaving big cities and locating in small cities that face less regulation (see the work of Vern Henderson, Matt Kahn, Michael Greenstone). Since these smaller cities have fewer victims, this deflection of dirty activity to smaller cities is a GOOD thing (relative to the initial status quo of dirty activity in big cities)! Ronald Coase would approve!

Why doesn't the same logic apply to terrorist attacks? I realize that small states have 2 senators each and they will vote to protect their voters but if our goal is to minimize total lives lost to terrorist attacks then "deflecting" terrorists to low density, less populated cities will help to achieve this goal. I realize that in a perfect world we could protect every square inch of this nation 24/7 but I'm assuimg that like all "economic men and women" that we must prioritize in a world of scarce resources.

Antiterrorism Allocations--Becker

Posner discusses many of the thorny issues involved in the
allocation of funds by The Department of Homeland Security
to American cities to combat terrorism. I will concentrate
my comment on how to align the incentives of cities to those
of the country as a whole.

Posner points out that there is a conflict between the
incentives of cities and those of the federal government.
When cities do more to prevent terrorism against their
residents and buildings, they also help the country fight
terrorism against other cities and towns without getting
compensated for that help. He also indicates that if the
federal government simply gives money to cities, the cities
may reduce the amounts they would otherwise spend fighting
terrorism. Both problems arise in many infrastructure and
entitlement programs, such as road-building, Medicare for
the poor, and the fight against contagious diseases.

These sources of the tendency for cities to underspend on
anti-terrorist activities can be at least partially overcome
if Homeland Security did not outright give various amounts
to different cities, but instead relied on the method used
to combat similar issues that arise with other grant
programs. The Department of Homeland Security should offer
to give cities a certain number of dollars for each dollar
they spend on antiterrorist activities. For example, if a
city spent $30 million, they might get an additional $60
million from the federal government. In this example, a city
would get to spend $3 dollars for each dollar they used from
their own funds to fight terrorism.

Federal matching of this type discourages cities from
cutting back on their spending to fight terrorism since they
lose say $3 dollars for each dollar they cut back. Matching
grants also induce cities to give de facto recognition to
the fact that each dollar they spend helps residents of
other cities as well by improving the overall American fight
against terrorism. The ratio of federal spending to city
spending should be a measure of the ratio of the benefits to
other cities compared to the benefits to the city spending
their own money to fight terrorism.

The matching need not be independent of how cities spent
their own monies. Cities are more likely on their own to
spend on salaries than on capital goods that are produced
elsewhere since spending on employees gives jobs to local
residents. The matching grants should then be oriented
toward capital spending rather than labor spending. In fact,
the Homeland Security program is so oriented, and that seems
to me to make some sense.

However, matching grants, particularly if the ratio of
federal to local contributions is large, can create the
opposite problem from that created by outright grants;
namely, cities may spend too much since their spending is
multiplied through the amounts available in matching funds.
This is usually controlled by placing upper limits on the
amounts that could be received in matching funds. Cities
that are especially attractive to terrorist attacks--such as
New York and Washington--would spend more fighting terrorism
even without federal grants. Still, on their own they may
not spend enough, so the upper limits they could receive in
matching grants should exceed that available to say Kansas

One problem is that as coastal cities like Los Angeles, San
Francisco, Boston, New York, and Washington became better
prepared to fight terrorism, terrorists might shift inland,
to places like Detroit, Chicago, Cleveland, Omaha, Topeka,
and elsewhere. As the bombing in Oklahoma City showed, even
attacks in smaller cities cause considerable fear and
consternation. That is why a federal program has to be
national, and target smaller places as well as larger ones.
Matching grants encourage smaller cities also to contribute
to the fight against terrorism, and they will spend more
when they become more vulnerable after the more attractive
terrorist targets became better prepared. So the system is
partly self-correcting through the incentives that cities
have to protect their own citizens.

But matching grants do not solve all the problems of how to
best allocate limited federal funds. So the federal
government will still need some guidelines that determine
which cities should be given more Homeland money, although
in a matched way.


Milan said...

The impact of terrorism doesn't seem tightly correlated with the number of people actually killed. I don't think September 11th would have created a very different outcome if half as many, or twice as many, people had died. What's important is creating a sense of vulnerability.

As such, it might be intelligent to defend mid-level cities, since an attack there would lead to a group of people who now feel relatively secure to feel more threatened. Of course, it still seems more likely that putative attacks would be directed towards major urban centres: due to both the actual and psychological impact of such an attack.

John Morris said...

Complex subject for a non economist.

It's a guessing game, but some value has to be placed on deflecting "crimes of opportunity"

Many small and mid sized cities seem to offer such a rich target base with no-body looking that they are inviting trouble.