Author: Bart Hobijn

The increased spending on security by the public and private sectors in response to September 11 could have important effects on the U.S. economy. Sizable government expenditures, for example, could trigger a rise in the cost of capital and wages and a reduction in investment and employment in the private sector, while large-scale spending by businesses could hamper firm productivity. This article attempts to quantify the likely effects of homeland security expenditures on the economy. It suggests that the total amount of public- and private-sector spending will be relatively small: the annual direct costs of the homeland security efforts are estimated to be $72 billion, or 0.66 percent of GDP in 2003. In the private sector, homeland security expenses are estimated to lower labor productivity levels by at most 1.12 percent. Therefore, the reallocation of resources associated with homeland security is unlikely to have any large and long-lasting effects on the U.S. economy.