The Fiscal Side of Fighting Terror

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Ted Koppel wrote what I found to be a smart and resonant op-ed article last week in The Wall Street Journal.  Though its focus is the United States reaction to terrorist actions and threats, there are, of course, economic and fiscal implications.

Riffing off the recent closure of our embassies in the Middle East, Mr. Koppel carefully forms an argument that after initially showing admirable restraint, we are now systematically overreacting to terrorist threats, in much the way they’d want us to (he’s of course not the first to make this point). He writes:

“Terrorism, after all, is designed to produce overreaction. It is the means by which the weak induce the powerful to inflict damage upon themselves â€" and Al Qaeda and groups like it are surely counting on that as the centerpiece of their strategy.

“It appears to be working.”

Mr. Koppel dates the overreaction to the 2003 invasion of Iraq, wherein “the U.S. began to inflict upon itself a degree of damage that no external power could have achieved. Even bin Laden must have been astounded.”

What happened next was, I’d argue, uniquely American: a predictable interaction between large scale antiterrorism initiatives and the sectors and institutions that stood, and still stand, to profit by them. This, of course, includes the military and its network of private contractors, but it has gone much further than that, involving a level of surveillance about which we’re still learning, though even now we see that it spends billions on contracted employees and huge data centers.

To shed at least some rough light on the implications of this buildup, I crunched some numbers that compare the last two decades, the 1990s and the 2000s.  The security sector in the government accounts not only covers defense, but also adds other antiterror spending, including that of the Department of Homeland Security and related intelligence accounts.  The table shows real spending over these two decades for both the full sector and without the defense part.  Real G.D.P. growth is in there for comparison.

Clearly, our reaction has been costly, as security expenditures swung sharply, from real contraction (over all, not for the nondefense part) in the 1990s to almost doubling (more than doubling in nondefense security) in the 2000s.  Such spending grew less than G.D.P. in the 1990s and a lot faster than G.D.P. since then; as the table note reports, security spending as a share of G.D.P. fell a couple of percentage points in the 1990s and rose a couple of points in the first decade of the 2000s.

Sources: Office of Management and Budget; Bureau of Economic Analysis

Such numbers raise questions.  Do they imply we’re overspending?  On one hand, there have been no successful terrorist attacks on our soil, so how do we know we’re not devoting the optimal amount of resources to this?  On the other hand, there is Mr. Koppel’s convincing argument about overreaction, which obviously carries a price tag, not all of which is covered in that table (e.g., the private costs of how our reaction has changed travel).  And then there’s the fact that some domestic terrorist plots were disrupted not at the hands of armies or special operations, but by brave passengers on a Detroit-bound jet and by the New York police.

I don’t have the answers, though I suspect an objective assessment would support the view that we’ve gone too far, which is not to say we could do less and all would be fine. As Mr. Koppel put it:

“Will terrorists kill innocent civilians in the years to come? Of course. They did so more than 100 years ago, when they were called anarchists â€" and a responsible nation-state must take reasonable measures to protect its citizens. But there is no way to completely eliminate terrorism.

“The challenge that confronts us is how we will live with that threat. We have created an economy of fear, an industry of fear, a national psychology of fear. Al Qaeda could never have achieved that on its own. We have inflicted it on ourselves.”

I’ve written a lot about damage of self-inflicted fiscal policy wounds in a weak economy, and with the forthcoming budget battles and debt ceiling, I’m sure I will shortly be doing so again.  But this is another self-infliction, one that bores even deeper into our national psyche â€" and national accounts â€" in ways that will continue to cause long-lasting damage if we don’t recalibrate.