The cost of living: the economics of preventing nuclear terrorism.

NUCLEAR terrorism presents an unparalleled threat to the United States. The economic impact alone of a nuclear terrorist attack would undoubtedly be staggering. Estimates of the direct economic cost of one potential scenario--a crude nuclear device detonated in lower Manhattan--range well over $1 trillion. Even this estimate cannot capture the full tragedy of such a scenario, which could include half a million deaths, a zone of total destruction one mile wide, and radiation extending for miles around the blast's center. For the protectors of America's national interest, no single issue is more urgent and frightening.

Such a scenario is a real possibility. As Graham Allison and Andrei Kokoshin wrote in these pages, "we must first be prepared to imagine the unimaginable--there is a substantial probability that within the next decade, an act of nuclear terrorism will occur." (1) These authors, and most who study the issue, reach this dire conclusion because a terrorist group needs to acquire only several kilograms of nuclear material to construct a functioning bomb out of the more than 2,000 metric tons of nuclear material that exist around the world.

Thankfully, nuclear terrorism is a finite problem. Simply put, nuclear terrorism is impossible without nuclear material, and the amount of nuclear material is finite. The quantifies that exist can be counted and, in principle, comprehensively secured. Additionally, the production of new nuclear material is beyond the technological reach of terrorist organizations, barring state sponsorship.

If sufficient financial and diplomatic resources are invested, the threat of nuclear terrorism can be substantially reduced or even eliminated. It is useful to think of preventing nuclear terrorism as an economic problem to be solved. Success, therefore, can be thought of as a "return" on the up-front investment. The question facing policymakers thus becomes: From the perspective of a country or group of countries investing in its future, is a comprehensive effort to prevent nuclear terrorism worth the cost?

For at least the first stage of such a comprehensive effort, the United States and its allies seem to have answered "Yes." The vast majority of nuclear material beyond America's borders is in the former Soviet Union, including 95 percent of the warheads, over 90 percent of the highly-enriched uranium and nearly half of the weapons-grade plutonium. Primarily to help Russia secure this material and address other threats, the United States has pledged to spend $10 billion over the next decade as part of a $20 billion overall threat reduction commitment by the G-8 launched at the Kananaskis summit in 2002 and recently reaffirmed at last summer's Evian summit.

It is true that assigning specific responsibility for the remaining $10 billion among G-8 member-states has not been simple: as of June 2003, only $7.4 billion had been pledged by the seven other nations, much of which is not dedicated to nuclear material specifically. (2) Neither has the overall implementation of the U.S. pledge been without obstacles. For instance, disagreement remains over liability for accidents. Nonetheless, the U.S. budgets for 2003 and 2004 both allocated approximately $1 billion to threat reduction efforts, as promised.

Projections of the likely investment required to complete the Russian program have varied substantially, generating concern over whether the G-8's pledges will be sufficient to finish the job--even if they are fully met. Research by Allison and others, including a study by Matthew Bunn, Anthony Wier and John Holdren, has estimated that the likely cost of fully securing the former Soviet Union's material ranges from as little as $5 billion to as much as $30 billion. This wide range reflects uncertainty over the cost of specific initiatives within the overall effort. According to these studies, securing excess plutonium could cost between $2 billion and $9 billion, and securing highly enriched uranium between $1 billion and $11 billion. Improving security at Russian facilities could cost between $1.8 billion and $5 billion, and helping Russia downsize its program could require $0.5 billion to $3 billion. Various extra costs are thought to range as high as $2 billion. (3)

This article, however, offers a new estimate of the total investment required to secure nuclear material in the former Soviet Union. This estimate provides some reassurance that currently-pledged funds are likely to be sufficient if progress continues at the pace achieved so far. The calculation begins with the estimates from the Bunn-Wier-Holdren study of progress made through early 2003 by the joint U.S.-Russia effort along 14 specific initiatives. (4) Then, it aggregates line-item U.S. budget data over the 1992-2002 fiscal years from the Nuclear Threat Initiative's budget database along these 14 initiatives. Assuming that progress can continue to be made as it has been over the last decade, these data allow us to project the investment that will be required to complete the task.

This procedure estimates that a total of about $21 billion could be required to complete the program to secure the nuclear material in the former Soviet Union. Therefore, the $4.1 billion spent by the U.S. government from 1992-2002 may have to be supplemented with an additional $17.2 billion to finish the job. This calculation is, by necessity, imprecise and subject to great uncertainty. It could overestimate the total investment that will be required if much of the spending thus far has been preparatory--simply laying the foundation for future work--or if economies of scale are reached as these efforts expand. On the other hand, this calculation could underestimate the total investment required if the least difficult tasks were undertaken first, leaving the most costly and trenchant problems for the future. Nevertheless, the $21 billion estimate lies just above the midpoint of previous estimates and near the $20 billion pledged by the G-8, providing some degree of confidence that at least the financial resources are in place to tackle the former Soviet Union's stock of nuclear material.

SECURING the material in the former Soviet Union is a first step on the road to safety, but as many as forty countries have nuclear weapons or materials that could potentially be sold to, or stolen by, terrorists. As such, these must also be secured if the United States is committed to the prevention of attacks. Too much of the world's nuclear material remains within countries with weak security precautions, unclear attitudes toward terrorist groups or potentially unstable governments. North Korea is only the most visible case. A comprehensive solution to nuclear terrorism will thus demand the cooperation of many other countries and may require substantially more investment than the effort's first, vital step to engage the countries of the former Soviet Union.

The next step must be to consider whether investment of the required magnitude can be justified. Estimating the cost of securing nuclear material in these other states is fraught with uncertainty. Most optimistically, this process could mimic the largely cooperative agreement the United States maintains with the countries of the former Soviet Union. If that scenario bears out, the investment required for each country, per unit of material, may be comparable to that required in previous work with the former Soviet Union: approximately $190,000 per warhead, $5.85 million per metric ton of highly enriched uranium and $42.3 million per metric ton of plutonium. Under this assumption, the additional funding required to secure the rest of the world's stockpiles would be relatively small--around $600 million--since most other stocks are minute. Unfortunately, that optimistic scenario is unlikely, given the presence of nuclear material in states such as Pakistan and India, not to mention China and, most pressingly, North Korea.

Strategically, these states understand that they hold a bargaining chip uniquely valuable to the United States, the chief target of the world's most strategically significant terrorist groups. Moreover, genuine concerns about highly sensitive security issues or secrecy may discourage many nations-North Korea, Israel and Iran, for example--from complying with an international monitoring regime. It is likely that these nations will ask for, if not demand, substantial economic incentives in exchange for cooperation. If Washington refuses to offer such carrots, or if they are rejected as insufficient, the United States may resort to the stick of economic sanctions. If this fails, as it very well may, the United States would have few options remaining but to force compliance with military action--a costly solution indeed. If military action were required to secure nuclear material in recalcitrant countries, this program would entail a major financial investment on behalf of the United States.

If the demand side cannot be known, at least the supply side can be understood: How much should the United States be willing to invest in an effort to secure global stocks of nuclear material? Though this question is mathematically simple--much like asking how much one would pay for a share of stock in a corporation--pinning down an answer is an exercise in judgment calls. For instance, we must know how costly a nuclear attack is likely to be, which includes knowing what the economy's response would be to the decimation of lower Manhattan or the center of Washington, DC.

We also need answers to questions on the fringe of economic analysis, such as what a life is "worth." More difficult still, we must know the probability of a nuclear terrorist attack if we make no efforts to increase security further and the (hopefully lower) probability if we invest, say, $40 billion in additional threat reduction measures. These questions are ones that have caused insurers, usually the most hardheaded probabilists, such consternation that many have simply excluded acts of terrorism from coverage after September 11, 2001. (5)

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 2-3 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.

(1) "The New Containment: An Alliance Against Nuclear Terrorism", The National Interest (Fall 2002).

(2) These pledges include: $2 billion from Russia, $1.7 from Germany, $1.2 from Italy, $890 million from France, $750 million from the UK, $650 million from Canada and $200 million from Japan.

(3) See Matthew Bunn, Anthony Wier, and John Holdren, Controlling Nuclear Weapons and Materials: A Report Card and Action Plan (Washington, DC: Nuclear Threat Initiative and the Project on Managing the Atom, Harvard University, March 2003). Allison's estimate can be found in Appendix A of H. Baker and L. Curler, co-chairs, A Report Card on the Department of Energy's Nonproliferation Programs with Russia (Washington, DC: U.S. Dept of Energy, Secretary of Energy Advisory Board, January 10, 2001). The Bunn-Wier-Holdren study's estimated costs are lower than Allison's because the latter envisions a ten-year program (twice the length of the one the trio outlined). Allision's program is more comprehensive, and he is more optimistic as to the effectiveness of individual initiatives.

(4) The fourteen initiatives are: 1) upgrade former Soviet material; 2) upgrade Russian warheads; 3) remove material from vulnerable non-Russian sites; 4) fund part-time, short-term grants for senior scientists; 5) provide sustainable civilian jobs for other workers; 6) encourage reductions in Russia's nuclear weapons complex; 7) officially declare warheads; 8) monitor warheads with U.S./International agency; 9) officially declare materials; 10) monitor materials with U.S./International agency; 11) reduce warhead stockpile; 12) reduce highly-enriched uranium stockpile; 13) reduce plutonium stockpile; 14) implement detection at former Soviet borders and ports shipping to United States.

(5) A few sophisticated international providers, such as AIG, Lloyd's and Berkshire Hathaway, offered stand-alone terrorism insurance to provide limited supplemental coverage. But, in a sign that terrorism presents general, non-diversifiable risk, the U.S. government stepped in with the Terrorism Risk Insurance Act of November 2002, providing public support for private insurance coverage. The Act makes clear the reason for government intervention: "the absence of information from which financial institutions can make statistically valid estimates of the probability and cost of future terrorist events, and therefore the size, funding, and allocation of the risk of loss caused by such acts of terrorism."

(6) Note that this scale of investment (the House bill allocated $78 million), if maintained for ten years, would be roughly in line with the $600 million "best-case" estimate of the total cost of securing material around the world.

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.