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Briefing to the U.S. House Committee on Homeland Security


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U.S. Economic Resiliency …

U.S. Economic Resiliency
October 10, 2007

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  • 1. U.S. Economic Resiliency Briefing to the U.S. House Committee on Homeland Security October 10, 2007 Mark A. Ehlen, Ph.D. Economist, NISAC • Team Lead, Computational Economics Group National Infrastructure Simulation & Analysis Center (NISAC) Department of Homeland Security Office of Infrastructure Protection
  • 2. NISAC’s Mission is Defined in the US Patriot Act Modeling, simulation, and analysis of the systems comprising critical infrastructures, including cyber infrastructure, telecommunications infrastructure, and physical infrastructure, in order to enhance understanding of the large-scale complexity of such systems and to facilitate modification of such systems to mitigate the threats to such systems … USA PATRIOT ACT (H. R. 3162) ESTABLISHMENT OF NATIONAL COMPETENCE FOR CRITICAL INFRASTRUCTURE PROTECTION (1) SUPPORT OF CRITICAL INFRASTRUCTURE PROTECTION AND CONTINUITY BY NATIONAL INFRASTRUCTURE SIMULATION AND ANALYSIS CENTER- There shall be established the National Infrastructure Simulation and Analysis Center (NISAC) to serve as a source of national competence to address critical infrastructure protection and continuity through support for activities related to counterterrorism, threat assessment, and risk mitigation. (2) PARTICULAR SUPPORT- The support provided under Paragraph (1) shall include the following: (A) Modeling, simulation, and analysis of the systems comprising critical infrastructures, including cyber infrastructure, telecommunications infrastructure, and physical infrastructure, in order to enhance understanding of the large-scale complexity of such systems and to facilitate modification of such systems to mitigate the threats to such systems and to critical infrastructures generally. (B) Acquisition from State and local governments and the private sector of data necessary to create and maintain models of such systems and of critical infrastructures generally. (C) Utilization of modeling, simulation, and analysis under Subparagraph (A) to provide education and training to policymakers on matters relating to-- (i) the analysis conducted under that subparagraph; (ii) the implications of unintended or unintentional disturbances to critical infrastructures; and (iii) responses to incidents or crises involving critical infrastructures, including the continuity of government and private sector activities through and after such incidents or crises. (D) Utilization of modeling, simulation, and analysis under Subparagraph (A) to provide recommendations to policymakers, and to departments and agencies of the Federal Government and private sector persons and entities upon request, regarding means of enhancing the stability of, and preserving, critical infrastructures. (3) RECIPIENT OF CERTAIN SUPPORT- Modeling, simulation, and analysis provided under this subsection shall be provided, in particular, to relevant Federal, State, and local entities responsible for critical infrastructure protection and policy.
  • 3. NISAC is Recognized as a Valuable National Resource Hurricane Katrina Lessons Learned Recommendations: 78. DHS should revise the National Response Plan…optional actions will be based on reports from…the National Infrastructure Simulation and Analysis Center (NISAC)… 82. DHS should expand the National Infrastructure Simulation and Analysis Center’s (NISAC) Modeling and Analysis capability to allow more robust and accurate systems modeling. 83. The National Economic Council should form an Impact Assessment Working Group to provide an overall economic impact assessment of major disasters, including the Departments of Homeland Security, Treasury, Commerce, Energy (Energy Information Administration) and Labor as well as the President’s Council of Economic Advisers…The various economic modeling expertise of the members of the Impact Assessment Working Group should be incorporated into the NISAC models. From National Infrastructure Protection Plan: The NISAC is chartered to develop advanced modeling, simulation, and analysis capabilities for the Nation’s CI/KR. These tools address physical and cyber dependencies and interdependencies in an all- hazards context. These sophisticated models enhance the Nation’s understanding of CI/KR dependencies and interdependencies, and better inform decisionmakers in the areas of policy analysis, investment, prevention and mitigation planning, education, training, and crisis response… Modeling and simulations through the NISAC will help quantify national and international dependency and interdependency, as well as their resulting consequences.
  • 4. History and Path of NISAC Economic Analysis Analyses Have conducted over 100 detailed economic impact studies, e.g., natural disasters: hurricanes, earthquakes, pandemic influenza; man-made: terrorist attacks (e.g., chem/bio), port closures, rail transport shutdowns, air traffic shutdowns, commodity futures markets Models Use a suite of microeconomic, mesoeconomic, and macroeconomic tools for both fast reach-back, longer term studies, and development of new NISAC models (e.g., the U.S. petrochemicals supply chain). Current Capability Development Tools and analytical approaches that can help define, measure, and design homeland security policy for economic resiliency
  • 5. How Economic Analysis fits within the Broader NISAC Storm data, infrastructure data, economic data Population Physical Electric Telecomm- Transportation/ Petroleum/ Chemical/ effects damage power unications commodities natural gas HAZMAT Economic disruption is superset of all population, physical damage, and infrastructure disruptions Local direct and Regional and national Regional and Small Relocation Financial indirect impacts value chain analysis national macro business impact markets (REAcct) (N-ABLE™) impacts (REMI) analysis analysis analysis Collected and rationalized economic results
  • 6. NISAC Economic Toolkit Approach Description Benefits / Best Use Example Studies Data Analysis Application of multiple Short analysis period; high- Chlorine Phase 1 socio-economic data fidelity answers for impacts sources to specific problem where economic consequence paths are basic. REAcct Input-Output model Short analysis period; Pre-landfall hurricane analyses modified to man-made or consequence paths are natural disaster-based widespread; methodology that infrastructure disruptions, can be applied across NISAC in which economy returns projects to baseline REMI / IMPLAN Large-scale, state-level / Long-term impacts due to Katrina, Pandemic Influenza, county-level structural changes in the MANPAD Senior Officials Exercise macroeconomic models of economy. Highly validated the U.S. models. System Systems-of-equations Large-scale problems where Pandemic influenza Dynamics approach to modeling infrastructure disruptions deterministic dynamics in a influence the economy in short complex system time durations N-ABLE™ High-fidelity stochastic, National economic impacts, Chlorine Phase 2 dynamic agent-based where impacts need to be National milk supply chain; economic modeling of the known with great fidelity. international tire supply chain, U.S. U.S. economy border security; petrochemicals industry, manufactured foods
  • 7. Economic Resiliency Some Key Concepts A definition: “the nurtured ability of an economy to recover from or adjust to the effects of adverse shocks to which it may be inherently exposed.” A metaphor: to be resilient is to remain in the elastic part of a disruption, where the economy can return to normalcy quickly and with low cost. Some metrics: • Reduced failure probability - preventing a disruption from propagating at all • Reduced consequences from failure - reducing the extent of propagation • Reduced time to recovery - reducing the time of propagation Parts of the private sector that contribute to resiliency: • Households - their willingness to forego or substitute consumption of resources impacted critically by a disruption • Infrastructures - their redundancies (e.g., rail and truck) and substitutions (e.g., of truck for rail) provide alternate paths that allow for continued production and distribution of economic resources. • Private sector - they also have redundancies and substitutions
  • 8. Economic Resiliency Three economic levels: Microeconomic – firms, households, organizations Capital equipment Accountant CEO Labor Mesoeconomic – economic sectors, markets, Inventory Input 1 Output 1 cooperative groups; largely market resilience, Buyer Inventory Output 2 which includes the effects of changes in prices Input 2 Inventory Production Sellers and changes in regional purchasing on regional and national response, adaptation, Buyer recovery Electric Power Macroeconomic – aggregate sectors and Communications Transportation interactions between sectors
  • 9. A Classical (Macroeconomic) View of (Long-Run) Economic Resiliency
  • 10. What a Mesoeconomy Looks Like
  • 11. What a Mesoeconomy Looks Like
  • 12. How the Mesoeconomy is Resilient to Disruptions Bulk chlorine markets Bottled chlorine markets * * * * * NISAC Post-Katrina Analysis
  • 13. How the Mesoeconomy is Resilient to Disruptions Chlorine transportationa Bulk chlorine demand and shipmentsb aBlue = rail shipments; red = truck shipments bDemand = diameter of column; shipments = height of column
  • 14. Measuring Macroeconomic Resiliency Chlorine dynamic impactsa aBlue = bulk chlorine; red = bottled chlorine (except GDP graph)
  • 15. Example: Chlorine Value Chain Chlorine transportationa Structure of value chain – Small number of producers that ship long distances to many intermediate producers, who then deliver short distances to customers (primarily in metro areas). – Bulk chlorine market is relatively tight (low supply/demand ratio) Impacts of hurricane – Bulk chlorine market loses 25% of production capacity; loss of key rail lines; 30% loss of GDP during the disruption. – Shortages of bulk chlorine are much larger than lost 25% of capacity, due to longer shipping distances. – Gulf coast market shrinks, shifting demand and transportation toward the Northeast. – Six bottled chlorine markets effectively shutdown due to longer transportation distances and therefore amplified demand. – During recovery, there is pent-up demand for bulk chlorine for 7 weeks as firms try to restock on-site inventories and shipment levels. aBlue = rail shipments; red = truck shipments
  • 16. Example: Milk & Milk Products Milk & milk products transportationa Structure of value chain – Large number of regionally dispersed bulk producers (milk) who ship to concentrated intermediate producers (cheese, butter, dry milk, frozen milk products), who then ship to regionally dispersed customers (primarily in metro areas). Impacts of hurricane – During disruption, bulk and intermediate markets are largely unaffected; during recovery, however, there are multiple albeit mild aftershocks to demand and shipments. – Insignificant loss of GDP. – Shortages occur in the south metro areas (FL, TX, CA), due to concentration of intermediate producers in the north (Great Lakes region). – Recovery takes 9 weeks, due to relative tightness in the bulk milk market that a Red = truck shipments propagates to the intermediate markets.
  • 17. Example: Goodyear Tire & Rubber Company GYT&R transportationa Structure of value chain – As compared with chlorine and milk, relatively small number of bulk and intermediate producers. Impacts of hurricane – Loss of 90% of carbon black supply and 20% of rubber supply to domestic tire operations. – Output across value chain only reduces by 60%, due to reallocation of on-site inventories and shipments that help GYT&R “ride out” most of the disruption. – In transit inventories triple, as these shipments must travel a lot farther (a “small numbers” problem). – Recovery period is only one week. aBlue = rail shipments; red = truck shipments
  • 18. Path Forward New Analyses Chemical Value Chain • Petrochemicals: used in Hurricane Dean FAST analysis; entire chemical sector Food Value Chain • Manufactured Food value chain developed for Phase 2 Pandemic Study; expand to include other types of food Infrastructure Interdependencies • Expand to better represent impacts of and adaptation to electric power, telecommunications, and borders impacts Research – Improve mapping from static to dynamic measures – Cognitive modeling of behavioral/economic response of consumer sector to a pandemic influenza Public Policy – Developing and applying measures of private sector resilience – Consequence analysis of potential private industry policies