For those of us who don’t study economics of pretend to know anything about it, cost-benefit analysis is a method used to make decisions between competing choices, or to determine whether a decision was beneficial.
What is cost-benefit analysis?
Let me indulge you with an example: The building of Terminal 5 at London Heathrow airport. When the government decided whether to build Terminal 5, they would have used a cost-benefit analysis.
The first step is to list all the costs: this would include the cost of the building materials and workers, upgrade to surrounding infrastructure and increased security. As well as the direct financial costs, effects such as greater noise pollution are quantified and someone must make a judgement – something like “the greater levels of noise caused to residents by Terminal 5 equate to £1bn of damage”.
After listing all the costs to society, the benefits to society are then listed. For Terminal 5, this would be time saved for travellers in airports, jobs provided to local residents and so on. After completing the cost-benefit analysis, we then look at whether the cost or the benefit is greater. If the benefits are greater than the costs, it is a good decision: if we spend £5bn and get a return of £10bn, we’re £5bn better off. But if costs are greater than the benefits, we are all made worse off by the building of Terminal 5.
Economics lesson over… The study found the US has spent $65billion on homeland security since 2001, or $200bn if this is broadened to include the “War on Terror”. By my own calculations, that is $110 per person in the USA per year.
Anyway… the study found terrorism only reduced economic activity by $17 billion. So fighting terrorism cost $200 billion and only $17 billion of benefits were gained, the benefits are about a tenth of the costs. Or in other words, the country is $180 billion worse off.
The Economist adds:
In 2007 Britain’s prime minister, Gordon Brown, said his country had disrupted 15 al-Qaeda plots since 2001. Yet so big is counter-terrorism spending and so limited is terrorism’s economic impact that, even if 30 attacks like the London bombings of July 2005 were prevented each year, the benefits would still be lower than the costs.
Now of course, there are a lot of criticisms to looking at anti-terrorism measures in such a way. Many people argue that the value of a human life is infinite or very high; it doesn’t matter if we spend millions to save a small number of lives. Additionally, there is the psychological effect: would we all be as happy as we were if the government did nothing about terrorism and just let it happen?
I think this study really highlights some great points. I feel that perhaps the government has been curbing too many civil liberties and freedoms lately under the guise of anti-terrorism measures. Take ID cards in the UK… very expensive, liable to data losses and presenting fairly small benefits.
I don’t think anybody should take this study to say that we shouldn’t try and fight terrorism, but perhaps, let’s reconsider just how we do it and make sure that we’re not harming ourselves more than the terrorists have.