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COUNTER-TERRORISM

The Private Cost of More Security

September 08, 2002|PETER NAVARRO | Peter Navarro teaches macroeconomics at the Graduate School of Management at UC Irvine.

The greatest danger that terrorism poses to America may be purely economic, the threat of weapons of mass destruction notwithstanding. The danger lies in a severe "productivity shock" that could lead to a gross domestic product trillions of dollars below what it otherwise should be.

The most obvious source of this shock lies in a deficit-producing shift from butter to guns in the federal budget as we wage war against terrorism. Cuts in education and infrastructure spending will directly lower productivity even as deficit-driven higher interest rates indirectly cut productivity by crowding out investment in the private sector.

But the more subtle, potentially more serious productivity shock may come from a federally mandated substitution of "protective" for "productive" capital in the private sector. That is, money spent for more fences, guards and surveillance equipment at the expense of new machinery, technology and software. Over the next several years, this capital substitution will probably accelerate as a security-conscious White House and Congress impose a new layer of regulations the likes of which we haven't seen since the 1970s.

Since Sept. 11, some corporations have voluntarily put capital into protection. But the levels of counter-terrorism spending have been far below what one might have expected, particularly in light of the legal liabilities that corporations may face for failing to protect their employees and customers. Moreover, with the exception of a few sectors like petroleum, which have adopted plans to safeguard facilities from terrorist attacks, there has been little coordinated action by corporate leadership.

This relative inaction in the private sector poses an ideological problem for the Bush administration, one that has provoked considerable differences of opinion across federal bureaucracies. To understand why President Bush finds himself between a conservative rock and a pragmatic hard place, it's important to know why the private sector has failed to shoulder its fair share of the counter-terrorism burden.

First, corporate executives have been reluctant to invest in new plant machinery, let alone in protective devices, during these recessionary times. Corporations that have significantly boosted counter-terrorism spending, like Boeing, can either afford to or have no other option because of their risk exposure.

Second, some industry stakeholders have simply let others carry the burden. Bush's initial response to this "free rider" problem was classically conservative. Rather than jam new regulations down industry's throat, government should form "patriotic" partnerships with business to develop voluntary counter-terrorism obligations. But after months of corporate foot-dragging, Bush now understands that free riders will continue to shirk their duty absent federal mandates.

The recent skirmish between Bush and Congress over the chemical industry's failure to regulate itself illustrates the underlying policy conflict. The industry was initially asked to devise plans to prevent a terrorist attack on chemical plants from sending waves of toxic fumes into a major urban area. But free riders run rampant in this industry.

Of the nation's 15,000 chemical companies, only about 10% even participate in the industry's trade association. Moreover, the sector's profit margins are very low. Finally, the industry has been in almost constant regulatory warfare with the government. As a result of the chemical sector's go-slow approach to managing the terrorist threat, the Bush administration had to cancel a much ballyhooed June rollout of the president's voluntary partnerships.

Democratic Sens. Jon Corzine of New Jersey and Harry Reid of Nevada quickly used the opportunity to push legislation that would achieve what volunteerism hadn't. Outflanked, Bush tacked. Amazingly, he is moving forward on using the Environmental Protection Agency, a favorite target during his 2000 presidential campaign, to crack down on the chemical industry.

The skirmish raises a broader policy question: How best to proceed with the design, implementation and enforcement of a complex and costly layer of new counter-terrorism regulations? Unfortunately, the answer so far has many unsettling parallels with the mistakes of the regulation-heavy 1970s.

During that decade, the federal government churned out new, strict regulations on everything from clean air to water purity to occupational health and safety. We now know that their poor initial design and implementation were a major cause of a decade of lost productivity and painfully slow economic growth.

A basic problem was that overzealous bureaucrats and politicians adopted a broad range of "command and control" standards that left little maneuvering room for industry. For example, the EPA required new power plants to use expensive "best available control technology" whether or not the new plants could meet new emission standards by simply burning lower-sulfur coal.

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