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

U.S. Economic Resiliency

Mark A. Ehlen, Ph.D.Economist, NISAC • Team Lead, Computational Economics Group

National Infrastructure Simulation & Analysis Center (NISAC)Department of Homeland SecurityOffice of Infrastructure Protection

Briefing to the U.S. House Committee on Homeland SecurityOctober 10, 2007

NISAC’s Mission is Defined in the US Patriot Act

Modeling, simulation, and analysis of the systems comprising critical infrastructures, including cyberinfrastructure, telecommunications infrastructure, and physical infrastructure, in order to enhanceunderstanding of the large-scale complexity of such systems and to facilitate modification of suchsystems 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) toserve as a source of national competence to address critical infrastructure protection and continuity through support foractivities 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-scalecomplexity of such systems and to facilitate modification of such systems to mitigate the threats to such systems and tocritical infrastructures generally.(B) Acquisition from State and local governments and the private sector of data necessary to create and maintain models ofsuch systems and of critical infrastructures generally.(C) Utilization of modeling, simulation, and analysis under Subparagraph (A) to provide education and training topolicymakers on matters relating to-- (i) the analysis conducted under that subparagraph; (ii) the implications of unintendedor unintentional disturbances to critical infrastructures; and (iii) responses to incidents or crises involving criticalinfrastructures, including the continuity of government and private sector activities through and after such incidents orcrises.(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, regardingmeans 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, inparticular, to relevant Federal, State, and local entities responsible for critical infrastructure protection and policy.

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 accuratesystems modeling.

83. The National Economic Council should form an Impact Assessment WorkingGroup 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’sCouncil of Economic Advisers…The various economic modeling expertise ofthe members of the Impact Assessment Working Group should be incorporatedinto the NISAC models.

From National Infrastructure Protection Plan:The NISAC is chartered to develop advanced modeling, simulation, andanalysis capabilities for the Nation’s CI/KR. These tools addressphysical and cyber dependencies and interdependencies in an all-hazards context. These sophisticated models enhance the Nation’sunderstanding of CI/KR dependencies and interdependencies, andbetter inform decisionmakers in the areas of policy analysis,investment, prevention and mitigation planning, education, training, andcrisis response…

Modeling and simulations through the NISAC will help quantify nationaland international dependency and interdependency, as well as theirresulting consequences.

History and Path of NISAC Economic Analysis

AnalysesHave conducted over 100 detailed

economic impact studies, e.g., naturaldisasters: hurricanes, earthquakes,pandemic influenza; man-made:terrorist attacks (e.g., chem/bio), portclosures, rail transport shutdowns, airtraffic shutdowns, commodity futuresmarkets

ModelsUse a suite of microeconomic,

mesoeconomic, and macroeconomictools for both fast reach-back, longerterm studies, and development of newNISAC models (e.g., the U.S.petrochemicals supply chain).

Current Capability DevelopmentTools and analytical approaches that can

help define, measure, and designhomeland security policy for economicresiliency

How Economic Analysis fits within the Broader NISAC

Storm data, infrastructure data, economic data

Electricpower

Telecomm-unications

Transportation/commodities

Petroleum/natural gas

Chemical/HAZMAT

Physicaldamage

Economic disruptionis superset of all population,

physical damage, andinfrastructure disruptions

Local direct andindirect impacts

(REAcct)

Regional andnational macroimpacts (REMI)

Financialmarketsanalysis

Regional and nationalvalue chain analysis

(N-ABLE™)

Smallbusinessanalysis

Collectedand rationalizedeconomic results

Populationeffects

Relocationimpact

analysis

NISAC Economic Toolkit

Katrina, Pandemic Influenza,MANPAD Senior Officials Exercise

Long-term impacts due tostructural changes in theeconomy. Highly validatedmodels.

Large-scale, state-level /county-levelmacroeconomic models ofthe U.S.

REMI / IMPLAN

Pandemic influenzaLarge-scale problems whereinfrastructure disruptionsinfluence the economy in shorttime durations

Systems-of-equationsapproach to modelingdeterministic dynamics in acomplex system

SystemDynamics

Pre-landfall hurricane analysesShort analysis period;consequence paths arewidespread; methodology thatcan be applied across NISACprojects

Input-Output modelmodified to man-made ornatural disaster-basedinfrastructure disruptions,in which economy returnsto baseline

REAcct

Chlorine Phase 2National milk supply chain;international tire supply chain, U.S.border security; petrochemicalsindustry, manufactured foods

National economic impacts,where impacts need to beknown with great fidelity.

High-fidelity stochastic,dynamic agent-basedeconomic modeling of theU.S. economy

N-ABLE™

Chlorine Phase 1Short analysis period; high-fidelity answers for impactswhere economic consequencepaths are basic.

Application of multiplesocio-economic datasources to specific problem

Data Analysis

Example StudiesBenefits / Best UseDescriptionApproach

Economic Resiliency

Some Key ConceptsA definition: “the nurtured ability of an economy to recover from or adjust tothe 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, wherethe 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 continuedproduction and distribution of economic resources.

• Private sector - they also have redundancies and substitutions

Economic Resiliency

Three economic levels:Microeconomic – firms, households, organizations

Mesoeconomic – economic sectors, markets,cooperative groups; largely market resilience,which includes the effects of changes in pricesand changes in regional purchasing onregional and national response, adaptation,recovery

Macroeconomic – aggregate sectors andinteractions between sectors

Input 1

Input 2

Inventory

Inventory

Sellers

Output 2

Labor

Capital equipment

Communications

Electric Power

Inventory

Transportation

Output 1

Buyer

Buyer

Production

AccountantCEO

Input 1

Input 2

Inventory

Inventory

Sellers

Output 2

Labor

Capital equipment

Communications

Electric Power

Inventory

Transportation

Output 1

Buyer

Buyer

Production

AccountantCEO

A Classical (Macroeconomic) Viewof (Long-Run) Economic Resiliency

What a Mesoeconomy Looks Like

What a Mesoeconomy Looks Like

How the Mesoeconomy is Resilient to Disruptions

Bulk chlorine markets Bottled chlorine markets

* NISAC Post-Katrina Analysis

**

**

How the Mesoeconomy is Resilient to DisruptionsChlorine transportationa Bulk chlorine demand and shipmentsb

bDemand = diameter of column; shipments = height of columnaBlue = rail shipments; red = truck shipments

Measuring Macroeconomic Resiliency

Chlorine dynamic impactsa

aBlue = bulk chlorine; red = bottled chlorine (except GDP graph)

Example: Chlorine Value Chain

Structure of value chain– Small number of producers that ship long

distances to many intermediate producers,who then deliver short distances tocustomers (primarily in metro areas).

– Bulk chlorine market is relatively tight (lowsupply/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 largerthan lost 25% of capacity, due to longershipping distances.

– Gulf coast market shrinks, shifting demandand transportation toward the Northeast.

– Six bottled chlorine markets effectivelyshutdown due to longer transportationdistances and therefore amplified demand.

– During recovery, there is pent-up demandfor bulk chlorine for 7 weeks as firms try torestock on-site inventories and shipmentlevels.

Chlorine transportationa

aBlue = rail shipments; red = truck shipments

Example: Milk & Milk Products

Structure of value chain– Large number of regionally dispersed bulk

producers (milk) who ship to concentratedintermediate producers (cheese, butter, drymilk, frozen milk products), who then ship toregionally dispersed customers (primarily inmetro areas).

Impacts of hurricane– During disruption, bulk and intermediate

markets are largely unaffected; duringrecovery, however, there are multiple albeitmild aftershocks to demand and shipments.

– Insignificant loss of GDP.– Shortages occur in the south metro areas (FL,

TX, CA), due to concentration of intermediateproducers in the north (Great Lakes region).

– Recovery takes 9 weeks, due to relativetightness in the bulk milk market thatpropagates to the intermediate markets.

a Red = truck shipments

Milk & milk products transportationa

Example: Goodyear Tire & Rubber Company

Structure of value chain– As compared with chlorine and milk,

relatively small number of bulk andintermediate producers.

Impacts of hurricane– Loss of 90% of carbon black supply and

20% of rubber supply to domestic tireoperations.

– Output across value chain only reducesby 60%, due to reallocation of on-siteinventories and shipments that helpGYT&R “ride out” most of the disruption.

– In transit inventories triple, as theseshipments must travel a lot farther (a“small numbers” problem).

– Recovery period is only one week.

GYT&R transportationa

aBlue = rail shipments; red = truck shipments

Path ForwardNew Analyses

Chemical Value Chain• Petrochemicals: used in Hurricane Dean FAST

analysis; entire chemical sectorFood Value Chain

• Manufactured Food value chain developed forPhase 2 Pandemic Study; expand to includeother 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 pandemicinfluenza

Public Policy– Developing and applying measures of private

sector resilience– Consequence analysis of potential private

industry policies