Realistic Questions and Answers

For at least two reasons, policymakers cannot simply set aside such questions. First, they must establish an upper limit on investment, since any dollars allocated to securing nuclear material are taken from other budgetary priorities. As with social programs, national investment in securing nuclear material must meet a certain required "rate of return." Second, at the other extreme, if policymakers do not know how much they are willing to invest, they are likely to misunderstand the situation, perhaps balking at an investment of another $10 billion, despite a compelling case for its value. For example, of the resources earmarked for nuclear material security, the U.S. Congress has so far appropriated only limited portions to promote cooperation with states other than Russia, and even that has not been without difficulties. The House and Senate versions of the Defense Authorization bill allocated less than $100 million, respectively, to efforts outside the former Soviet Union but disagreed on whether the funding should be controlled by the Department of Defense or State.6

Realistic answers to the questions facing policymakers require the United States to have some idea as to the maximum amount that it should be prepared to invest. The basic idea is to calculate how much a program that would reduce the probability of a nuclear terrorist attack by a certain percentage could cost and still meet a required rate of return. For example, if a program reduces the annual probability of an attack from 0.5 percent to 0.25 percent, if the required rate of return on the investment is 5 percent, and if an attack is estimated to cost $1 trillion, calculations show that a program costing about $80 billion is worth the investment. As for the sensitivity of this calculation, if the cost of an attack rises to $2 trillion, such a program is worth about $170 billion. A similar upper bound exists--about $180 billion--if the cost of an attack is left at $1 trillion, but suppose the program reduces the probability of attack to 0 percent. On the other hand, if the program reduces the probability of attack to 0.4 percent, the investment should only be about $30 billion. These are risk-neutral calculations.

In general, reasonable values for the key inputs--though these are wide open to debate--imply that an effort requiring several times the investment required by the program for the former Soviet Union could still comfortably "pay for itself." Perhaps the most important input for the upper-limit calculation is, not surprisingly, the probability of an attack if no program is put in place. The assumption that the annual probability of an attack is 0.5 percent is roughly equivalent to assuming that there is a one-in-five chance of an attack occurring in the next 50 years. If that probability rises to 1.0 percent, so that there is a two-in-five chance of an attack in the next 50 years, and a program continues to cut that probability in half, the program is now worth over $130 billion.

For comparison, $100 billion spread over ten years is approximately 2â€"3 percent of the U.S. defense budget. The recent discussion of these issues in Congress, coupled with the Bush Administration's stated commitment to address this threat, are welcome first steps. Nevertheless, a broader debate is needed, one that faces up to the potentially large costs, and potentially much larger returns, of a comprehensive program. Such a debate should include an estimate of the returns to potential investments in securing nuclear material, difficult as that may be. This is the only way to yield the information required by policymakers who want to decide upon a sufficient course of action.

The world currently has a unique opportunity with regard to the threat of nuclear terrorism, a finite problem that can be solved. The real question is whether the will exists to confront and meet the cost of the solution.

Matthew C. Weinzierl is a doctoral candidate in Economics at Harvard University. He is currently on leave as a Staff Economist at the Council of Economic Advisers. The views expressed above are his own and do not necessarily reflect the opinion of Harvard, the CEA or the Bush Administration. This research was supported by a grant from the National Bureau of Economic Research in Cambridge, MA as part of a seminar on national security economics led by Martin Feldstein.