Congress acts — to cut funds for port security
While there was a tremendous hubbub over the Dubai Ports World deal (which I think was somewhat beside the point), Congress is doing something now that arguably will have a substantial impact upon whether the ports are more secure — and that is to cut additional funding. According to the Seattle Post-Intelligencer article:
“Opponents of the $648 million for port security said it was too expensive and needed to be cut to satisfy President Bush’s request that the supplemental budget for things such as the Iraq war and Hurricane Katrina reconstruction be brought under control.”
This action occurred despite remaining concerns about port security.
Is port security much ado about nothing? The CBO has recently produced a report assessing the economic costs of disruptions to container traffice. They conclude:
“As requested by the Subcommittee [on Investigations of the Senate Committee on Homeland Security and Governmental Affairs], the analysis focuses on two specific disruption scenarios:
- An unexpected one-week halt to all container traffic through the ports of Los Angeles and Long Beach, California, the country’s two largest ports for such shipments; and
- An unexpected three-year halt to all container traffic through those two ports as well as an initial precautionary one-week stoppage of container shipments at all U.S. ports.
CBO’s analysis of those scenarios provides rough estimates of the costs to the U.S. economy of disruptions in container traffic. Although in 2004 approximately $500 million worth of containerized imports flowed into the ports of Los Angeles and Long Beach each day, the loss in production (gross domestic product, or GDP) from a oneweek
shutdown of those ports would probably be less — between $65 million and $150 million per day.
Daily costs would be at least that large in the case of a three-year closure of those ports and an initial one-week stoppage of container movement at all U.S. ports. Simulations commissioned by CBO suggest that the three-year shutdown would reduce real (inflation-adjusted) GDP by between 0.35 percent and 0.55 percent, or $45 billion to
$70 billion, per year. That reduction translates into daily costs ranging from $125 million to $200 million.” (p.1-2)
The three year disruption scenario simulation has implications along other dimensions.
In the simulation, the three-year shutdown reduces real GDP by
between 0.35 percent and 0.55 percent, or $45 billion to $70 billion, per year. That translates into daily costs ranging from $125 million to $200 million. Outlays by consumers and businesses fall by substantially more than that, however, because they include less spending on both imported and domestically produced goods, whereas the decline in real GDP reflects only reductions in domestic production.
Inflation — as measured by consumer prices — is about 2 percentage points higher in the first year of the simulation than it would be otherwise, little changed in the second year, and lower thereafter, eventually bringing the level of consumer prices back to where it would have been without the disruption. (Thus, for example, if inflation would have been a steady 2 percent without the port closure, it would rise to 4 percent in the first year of the shutdown, fall back to 2 percent in the second year, and then decline further in the following two years.)…
An additional 2 percent jump in prices would call for a decision by the Federal Reserve Board about whether to tighten monetary policy to constrain inflation. The usual rules of thumb for monetary policy suggest that interest rates would rise. However, in the simulation, interest rates actually fall slightly in nominal terms, which implies a large reduction in real interest rates and an extremely accommodative monetary policy. Because the increase in inflation would be expected to be temporary, the Federal Reserve might well decide that an accommodative policy was appropriate to minimize losses to GDP and income. If, instead, the Federal Reserve acted more
aggressively to suppress the additional inflation, the first-year increase might not be affected much (because of inflation’s slow response to monetary policy), but the decline over the next two years would be greater. However, the reduction in real GDP during the three-year shutdown would probably also be larger.
The employment level would be about 1 million jobs lower, on average, over the three-year period than it would be otherwise, according to the simulation. That reduction is large given the reduction in GDP because the jobs that would be lost on account of the closure have, on average, lower pay and productivity and fewer weekly hours than the national averages….” (p.19-20).
Did it make sense for Congress to cut the spending on port security? It depends upon the probabilities you ascribe to the various scenarios, when you think these events might occur, and your coefficient of relative risk aversion.