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Thu, Feb 27, 2003 - Page 12 News List

Anti-terrorism costs set to hobble productivity

``DEAD WEIGHT LOSS'' The aftermath of Sept. 11 was initially seen as a one-time charge, but increased security spending looks poised to cut into economic growth

BLOOMBERG , HERSHEY, PENNSYLVANIA

Early last month, Pennsylvania-American Water Co told its 600,000 customers to expect their bills to go up US$10 a year.

The reason: US$8.7 million in added annual costs for security guards to patrol reservoirs and filtration systems of the Hershey, Pennsylvania-based unit of American Water Works Co.

"We consider these security measures as part of our day-to-day operations, and a necessary business expense," said Robert Ross, Pennsylvania-American's chief executive. "The events of Sept. 11 have changed the face of the water industry and the way we do business."

The costs of protecting against terrorism are becoming embedded in the world's largest economy. Initially dismissed by Federal Reserve Chairman Alan Greenspan and other analysts as one-time charges with limited long-term impact, security spending may trim US productivity and growth, some economists say.

A war with Iraq would heighten security concerns and probably trigger more spending on protection on home. That would be additional money for guards, security devices and procedures that might otherwise be invested in production-boosting technology and workers who generate salable goods and services.

"It's a dead-weight loss as far as the economy is concerned," said Vernon Smith, a George Mason University professor who won the 2002 Nobel Prize in economics.

The US government has budgeted US$38 billion for homeland security this year, amounting to 0.35 percent of GDP or a 10th of total defense spending, Federal Reserve Bank of New York economist Bart Hobijn said in a study last November.

Public and private costs combined may reach US$72 billion this year, Hobijn estimated.

Assuming that companies have doubled their security budgets and that the added workers and protective equipment won't contribute directly to the production of goods and services, Hobijn calculated that the extra costs would reduce productivity by about 1.12 percent.

"There's a long-run loss in output," Hobijn said. "This is a permanent shift in resources as long as there's a big terrorist threat."

The Congressional Budget Office has estimated the costs for security spending would trim US productivity, a measure of output per worker per hour, by 0.3 percentage points. The impact is similar to expenses companies incurred in the late 1970s and early 1980s to comply with environmental regulations, the budget office said last year in its 10-year outlook.

US non-farm productivity rose at an average annual rate of 2.2 percent from 1995 to 2000, up from the average 1.3 percent over the previous 20 years. Over the past four quarters, the rate averaged 5.6 percent as companies eliminated jobs faster than they reduced production.

Following the Sept. 11 attacks on New York's World Trade Center and the Pentagon near Washington, Greenspan tried to calm concerns about the impact on productivity.

"These adjustments in prices and in the associated allocation of resources, when complete, represent one-time level adjustments, without necessary implications for our longer-term growth prospects," Greenspan told the Joint Economic Committee of Congress in October 2001.

Eaton Corp, the second-biggest maker of hydraulic equipment, says its experience with added security costs -- for such things as emergency evacuation drills and new photo identification badges -- are in line with Greenspan's view and not a burden.

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