Cost Benefit Analysis Memorandum Essay

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Benefit Analysis Memorandum

Cost-Benefit Analysis

Cost-benefit analyses are routinely conducted for federal programs and proposed federal programs. The researchers propose a cost-benefit analysis for homeland security expenditures designed to address conventional threats to national security. An evaluation of catastrophic threats is specifically excluded from this analysis as only 14% of the federal homeland security budget is directed at the prevention of catastrophic threats to national security. The recommendation from the authors is to employ a risk-informed framework to the proposed cost-benefit analysis is. A risk-informed approach has as its basis consideration of the likelihood of occurrence, the life/safety effectiveness, and the economic cost of proposed security and protective measures, and it includes any "consequence of terrorist attacks on such infrastructure" (Stewart & Mueller, 2009, p.2). Thus, the metrics associated with the proposed cost/benefit research are: 1) Cost per life saved, and 2) Net benefit as measured by lives saved and economic costs.

A report from 9/11 Commission admonished the federal government to develop and implement a national security plan which will "reflect assessment of risks and cost-effectiveness" (p. 2 in NC 2004). The authors argue that a comprehensive assessment to inform policy making and policy implementation has not been conducted, making the cost-benefit analysis policy-relevant. A comprehensive assessment of the anti-terrorism components of the national security plan is of interest to policy makers, policy implementers, and to the general citizenry.

Unit of analysis. Best practices in program evaluation require clarity about what is being measured and investigation into the appropriateness of what is being measured. The proposed cost-benefit analysis for homeland security is poised to use the Value of a Statistical Life (VSL) as the economic measure of as its key unit of analysis -- a human life saved by terrorism. The authors examine an historical list of federally-funded projects and their associated VSLs to identify a mid-point value of $7.5 million that represents "a reasonably accurate reflection of societal considerations of risk acceptability and willingness to pay to save a life" (Stewart & Mueller, 2009, p. 5). Here, too, the authors concede that "non-quantifiable criteria may be important also in judging the overall acceptability of risks" (Stewart & Mueller, 2009, p.5), thereby acknowledging a potential weakness in the goodness of fit of latter day mainstream cost-benefit analysis, which presumes an absence of values in the equation and thereby implies the appropriateness of taking issue with the application of cost-benefit analysis to decisions of moral import.

Costs and benefits. The authors clearly identify the costs to be assessed as the VSL of the homeland security expenditures. The benefit to be measured is the effectiveness of increased expenditures for federal homeland security measures since 9/11. The increased cost for six homeland security measures identified by the authors is $31.2 billion in the period from 2001 through 2008 (Stewart & Mueller, 2009, p. 6). The authors delineate costs that are not included in this figure and emphasize that the figure is considered to be a conservative estimate of the increase in homeland expenditures since 9/11.

Cost-benefit analysis by the numbers. The authors examine the parameters of numbers of lives lost and number of potential lives lost to terrorism within several frameworks. Domestic and global numbers of lives lost, both forward and backward looking, are fit together by the authors to create a sort of mosaic of possible scenarios. Top and bottom parameters are calculated and declared by the authors, and a range of 50 to 500 lives is established.

Given the $7.5 million per life established by the authors, the number of American lives that would need to be saved on U.S. soil for the increase in homeland security expenditures from 2001-2008 to be cost effective is 4000. When actual costs for the estimated range of lives that could be saved are calculated, the expenditures could potentially span $63 million for 500 lives saved to $630 million for 50 lives saved. The estimated cost increase for homeland security since 2011 is between 8 to 80 times higher than generally accepted by society as appropriate for risk reduction" (Stewart & Mueller, 2009, p. 11). From this analysis, the authors conclude that, even given the most optimistic equation, the increased expenditures for homeland security as defined fail a cost-benefit analysis.

A second analysis that looked specifically at the economic costs of terrorism was compiled by the authors by examining secondary research and data. Three studies using independent bases were offered for comparison: A RAND study of a moderate case scenario, an Australian study commissioned to explore a scenario similar to the July 2005 London bombings, and a study by the International Monetary Fund (IMF) that focused on U.S. GDP after 9/11 and in the three years subsequent to that event.

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The RAND study indicated that two to three terrorist attacks would result in cost-effective expenditures. The Australian study on cost-effectiveness would require prevention of seven terrorist attacks similar in scope to the London bombings. And the IMF analysis would have to prevent an attack on the scale of 9/11 every several years in order to be cost effective. As a side note, the RAND corporation conducts just less than half of its research on issues of national security, and they are rated "fifth in the latest survey of think tank media citations by FAIR (Fairness & Accuracy in Reporting) which categorizes RAND as Centrist," (Source Watch, 2011) all of which lends credibility to their estimates.

A third analysis examines collateral costs and existential threats to the U.S. In an effort by the authors to include less obvious but compelling issues. In this analysis, the authors provide evidence that the reactions that people have to the threat of terrorism cause them to make choices that can have subsequent serious impact. Three primary examples of reaction costs are offered. The first is the rate of increased vehicular accidents following 9/11 as a result of more people choosing what they perceived to be safer travel options than flying. The second example alludes to the theory of existential threat, that is a result of deterioration of society as disoriented and deluded citizens strongly react in substantively damaging ways to perceived threat to the country and life as they know it. The third example of reaction cost is the lamentable loss of lives due to wars for which 9/11 served as a catalyst.

Taken together, the several analyses presented by the authors suggest that -- as finite threat and not an existential threat, which is the apparent assertion of the authors -- the expenditures of the homeland security programs have been excessive in light of the actual parameters of the terrorist threat. The further conclude that the opportunity costs compound the effects of the inexcusable economic decisions made by homeland security policy makers and policy implementers.

Critique.

Strengths of proposal. Overall, the evidence, as presented supports the authors' conclusions. However, one can argue that the authored primarily used only a single policy tool to evaluate the effectiveness of the homeland security fund expenditures, when there are other policy evaluation frames and policy tools available. The evidence, although-based strongly on estimation and scenario-building, is a good match to the policy analysis research questions asked by the authors. The analysis is comprehensive and thorough. However, the authors do not extend their analysis to address several of the issues they present as secondary concerns in the last section of their article, Other Decision-Making Considerations. This issue is discussed in more detail in the following section.

Weaknesses and limitations of proposal. Taken at face value, the evidence provided by the authors strongly supports their conclusions. Further, the analysis was comprehensive, considering several discrete frameworks for considering the data and making estimates. Regardless, the analysis was, at its core, an economic evaluation of federal policy designed to protect much more than economic interests. "An important claim by critics is that CBA [cost -- benefit analysis] is a mechanical algorithm that is used to answer questions about what people want -- the result of what Ted Porter describes as 'lust after mechanical objectivity' (Porter, 1995, p. 187)" (Zerbe, 2007, p.7 ).

That the cost-benefit analysis was suggested for an assessment of the effectiveness of the homeland security measures and programs is not surprising, given its historical basis in the evolution of federal program evaluation. It should be noted that policy analysis, a field that includes the study of the implementation of policy, extends far beyond cost-benefit analysis, and often takes a very different tack than what the authors have presented in their article. A discussion of the evolution the cost-benefit analysis tool follows.

Evolution and application of cost-benefit analysis. In order to consider the appropriateness of the application of cost-benefit analysis, it is important to understand the evolution of the construct and the application of the construct. Early application of cost-benefit analysis took place in programmatic environments in which substantive variables were measurable. In fact, it was a French engineer named Jules Dupuit who first wrote about economic accounting in 1848. But the….....

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