U.S. Economic Resiliency October 10, 2007

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