Disaster economics

by Judith Curry

I recently received a query from a journalist:

Do natural disasters help local economies?

I know that the answer is ‘no’ in highly vulnerable and impoverished societies, where disasters are relentlessly impoverishing.  But what about more developed economies?  I decided to look into this.

How disasters help

An article in the Boston Globe argues ‘ Natural disasters can give a boost to the countries where they occur – and sometimes the more the better.‘  Excerpts:

Rebuilding efforts serve as a short-term boost by attracting resources to a country, and the disasters themselves, by destroying old factories and old roads, airports, and bridges, allow new and more efficient public and private infrastructure to be built, forcing the transition to a sleeker, more productive economy in the long term.

The study of the economics of disasters remains a small field, with few major papers. And skeptics charge disaster economists with oversimplifying enormously complex economic systems and seeing illusory effects that stem only from the crudeness of the available economic measuring tools.

While not even the most fervent believer in the economy-catalyzing qualities of disasters would wish for one, the study of the costs and possible benefits of such events may help us better understand how to target recovery efforts – and, perhaps, how to replicate the salutary effects of disasters without the disasters themselves.

“The data are pretty clear about it,” says Gus Faucher, director of macroeconomics at Moody’s Economy.com, an economic consulting firm. Faucher has looked at disasters in regional US economies and found in some cases a dramatic impact. The year after Hurricane Andrew struck southeast Florida in 1992, causing what would today be more than $40 billion in damages, the state saw sharp increases in employment thanks to new construction jobs. And Faucher credits the rebuilding jobs and aid and investment that followed the 1994 Northridge earthquake for helping pull the Los Angeles area out of its early-1990s economic slump. Hurricane Katrina, Faucher says, has proved an exception: Because so many residents left the area and because government aid was so slow to arrive and insurance payouts so low, the area didn’t see an economic bounce.

To critics of this line of thinking, the problem is that it is, at best, a partial picture. It ignores, they argue, the fact that the money and labor that go into post-disaster rebuilding are simply being redirected from other productive uses.

“If you’re a carpenter, a trash remover, a physician, you may be made better off, but the things that those producers would have otherwise produced are not going to be produced,” says Donald Boudreaux, an economics professor at George Mason University. “Over any reasonably relevant period of time, society is not made wealthier by destroying resources,” he adds. If it were, “Beirut should be one of the wealthiest places in the world.”

The research on longer-run effects, its supporters argue, is less vulnerable to this criticism, because the key factor is not merely new stuff but better stuff. In this model, disasters perform the economic service of clearing out outdated infrastructure to make way for more efficient replacements.  The economy, as it recovers, actually becomes more productive than it was before, and some economists argue that the effect can be seen decades after the disaster.

Skidmore and Toya found that, in the case of climatic disasters – hurricanes and cyclones, as opposed to earthquakes and volcanic eruptions – the more the better: nations with more climatic disasters grew faster over the long run than the less disaster-prone. Why only climatic disasters? The authors suggest that, as we’ve gotten better at forecasting violent weather, its human costs, at least, can be mitigated much more easily than with geological disasters, which still take us by surprise.

Jesus Crespo Cuaresma, a professor of economics at the University of Innsbruck, has found some support for Skidmore and Toya’s argument. In a paper published earlier this year, Crespo Cuaresma examined post-disaster rebuilding efforts in developing countries and found that, at least in wealthier developing countries like Brazil and South Africa, there is indeed a tendency to use the rebuilding process as an opportunity to upgrade infrastructure that might otherwise have been allowed to grow obsolete.

Of course, even analysts of the “creative destruction” school don’t see disasters as good things – disasters kill people, often in great numbers, and uproot many more. Skidmore is careful to point out that, even from a coldly economic standpoint, the most productive disasters are those that don’t take lives.

Nonetheless, a recovery planned only to maximize growth might well conflict with more basic humanitarian concerns. Those most in need of help and resources in the wake of a disaster – the poor and the uninsured near-poor – are going to contribute the least to growing the economy as it recovers.

It may be, then, that disaster economics works best as a guide in those times when we don’t have disasters to contend with. Investing in human capital, replacing outdated plants and infrastructure – the things that Kunreuther and Skidmore argue disasters drive us to do – are also, it turns out, good ideas even in the absence of a crippling catastrophe. If the disaster economists are right, calamities are simply pushing societies to make the sort of sound economic decisions that inertia or fear or bureaucratic sclerosis prevents them from otherwise making. Governments and businesses might do well to adopt some of the urgency and innovation of a post-disaster mind-set even in more clement times.

Disasters are not good for the economy

The Foundation for Teaching Economics has a post on this topic.   From the conclusions:

We should take from this lesson the firm conviction that despite our desire to look on the bright side and despite the occasional appearance to the contrary, disasters are not good for the economy. While contemporary news coverage offers tangible evidence that disasters can produce economic opportunities and benefits for some, and while economic historians continue to argue about the standard-of-living impacts on the survivors of disasters like the Black Plague and the Spanish Influenza, we are still left with the hard economic reality that disasters impose losses on economies. The destruction of resources reduces GDP by reducing productive capacity: fewer inputs mean fewer outputs.

Economic historians have long noted, and our contemporary experience confirms, that economies tend to be remarkably resilient. The speed of rebuilding after localized disasters is often nothing short of amazing, but we certainly have no evidence that allows us to argue convincingly that a disaster-induced spurt of economic activity can boost an economy beyond where it would have been had the disaster not occurred. Post-disaster improvements, and even higher standards of living among survivors, should not blind us to the reality of the economic loss. To posit that disaster should be welcomed as an economic stimulus would lead us to the logical but ridiculous policy of trying to boost the economy of a declining city by deliberately burning it down around its residents! In simplest terms, disasters increase scarcity and thereby reduce our ability to provide for people’s wants and needs. And that is clearly not good for the economy!

Resilience building versus humanitarian response

The UK govt has a document Economics of Early Response: Lessons from Ethiopia and Kenya.  Excerpts from the conclusions:

“The separation of relief and development is both artificial and unhelpful. Not only are the recipients the same, but also the underlying causes that create the need are the same—the vulnerability of dryland communities. But what often takes place, are emergency interventions that undermine development (for example some food aid and water trucking interventions), and long term programming and investments that do not pay sufficient attention to the inevitability of drought.”

Early response is far more cost effective than late humanitarian response. The assumptions used in this analysis were conservative, and the findings nonetheless indicate that early response can decrease costs and losses substantially, with very high benefit to cost ratios indicating tremendous potential to improve value for money. Modelling of household level data for Wajir grasslands in Kenya suggests that early response could save between $107m and $167m for a population of 367k in a single event alone. In southern Ethiopia, with a beneficiary population of 2.8m, household level data suggest that early response could save between $662m and $1.3billion in a single event. A perceived risk in responding early is that humanitarian funds will be released incorrectly to situations that turn out not to be a disaster. However, these figures suggest that donors could mistakenly release funds two times in Kenya, and seven times in Ethiopia, before the cost is even equivalent to the cost of humanitarian aid in one event. 

There is a great deal of uncertainty around the cost of building resilience. Nonetheless, the estimates presented here suggest that, while the cost of resilience is comparatively high, the wider benefits of building resilience can significantly outweigh the costs, leading to the conclusion that investment in resilience is the best value for money. The model accounts for the time lag in resilience benefits reducing humanitarian cost, and therefore is a reasonable estimate of how the shift in balance from humanitarian aid to resilience might look over time. The cost of resilience would have to approach $200 per capita per year for 10 years (almost 50% higher than the figure assumed in this paper) before the modelled costs of resilience begin to approach the cost of humanitarian response.

Resilience meets disaster economics

Stanford Social Innovation Review has a post with subtitle Investing to stop disasters before they start can save lives and money.

Global needs for crisis response are increasing. Last year, US, British, and European government funders of foreign aid announced programs that would place greater emphasis on building resilience to shocks like hurricanes, earthquakes and droughts.

What do resilience strategies look like in practice? Efforts to get smart about resilience are what initially brought Mercy Corps together with the microfinance institution Fonkoze and the global reinsurance leaderSwiss Re in Haiti. The 2010 earthquake highlighted the country’s many long-simmering problems, including lack of economic opportunity.

Fonkoze, Mercy Corps, and Swiss Re mapped out a microinsurance product for Haiti and beyond. To support this new endeavor, we created a for-profit company calledMiCRO that combines parametric insurance—featuring a payout that is quickly triggered by measurable, weather-related thresholds such as wind speed or rainfall—with a possible second payout if the original payout is insufficient to cover actual losses.

In 2012, MiCRO enabled Fonkoze to pay out more than $6.8 million to more than 28,000 clients for damages, primarily from Tropical Storm Isaac and Hurricane Sandy. Assessments show that Fonkoze borrowers are willing to pay a small premium to have better control over their financial destinies, and Swiss Re estimates that the global microinsurance market could yield annual premiums of $40 billion. All of this adds up to communities that are better off, more resilient to shocks, and less dependent on foreign aid.

While MiCRO seeks to help individuals mitigate their financial risks at the local level, this kind of thinking is taking place even at a cross-continental level in Africa. The African Risk Capacity (ARC) Project is a unique partnership led by the African Union Commission, with support from the World Food Program, among others. The index-based weather risk insurance pool would provide African governments with contingency funding in the case of severe drought. The engine behind this endeavor is a sophisticated modeling tool called Africa RiskView, which calculates drought response costs across the continent. Implementation of ARC is still underway, but it looks to be an ambitious and promising undertaking.

Initiatives like MiCRO and ARC certainly won’t stop shocks from happening, but they can improve people’s abilities to cope with them. At a time of global belt tightening and increasingly volatile weather, leaders would be wise to look ahead and make cost-effective investments that help people not only survive, but thrive.

New Yorker

In response to Hurricane Sandy, the New Yorker has an article on Disaster Economics.  Excerpts:

Politically speaking, it’s always easier to shell out money for a disaster that has already happened, with clearly identifiable victims, than to invest money in protecting against something that may or may not happen in the future. Healy and Malhotra found that voters reward politicians for spending money on post-disaster cleanup, but not for investing in disaster prevention, and it’s only natural that politicians respond to this incentive. The federal system complicates matters, too: local governments want decision-making authority, but major disaster-prevention projects are bound to require federal money. And much crucial infrastructure in the U.S. is owned by the private sector, not the government, which makes it harder to do something like bury power lines.

The U.S., as a rule, tends to underinvest in public infrastructure. We’ve been skimping on maintenance of roads and bridges for decades. In 2009, the American Society of Civil Engineers gave our infrastructure a D grade, and estimated that we’d need $2.2 trillion to bring it up to snuff. Our power grid is, by the standards of the developed world, shockingly unreliable. A study by three Carnegie Mellon professors in 2006 found that average annual power outages in the U.S. last four times as long as those in France and seven times as long as those in the Netherlands. This isn’t because of a lack of resources—the U.S. is the world’s biggest economy. But, though we may have the coolest twenty-first-century technology in our homes, we’re stuck with mid-twentieth-century roads and wires.

Meaningful disaster-prevention measures will certainly be expensive: estimates for a New York seawall range from ten to twenty billion dollars. That may seem unreasonable at a time when Washington is obsessed with cutting the federal deficit. Yet inaction can be even more expensive—after Katrina, the government had to spend more than a hundred billion dollars on relief and reconstruction—and there are good reasons to believe that disaster-control measures could save money in the long run. The A.S.C.E. estimates that federal spending on levees pays for itself six times over, and studies of other flood-control measures in the developed world find benefit-to-cost ratios of three or four to one. The value for money is even higher in poor countries, where floods obliterate weak infrastructures. And a 2005 independent study of disaster-mitigation grants made by fema found that every dollar in grants ended up saving taxpayers $3.65 in avoided costs.

The size of our current deficit does not change this calculus. In fact, there’s never been a better time for a Delta Plan in the U.S. With interest rates so low, it’s cheap to borrow money, and there are plenty of unemployed workers and unused resources that can be put to work. In a time of austerity, there’s bound to be opposition to expensive infrastructure projects. But if the government—and, by extension, taxpayers—is already on the hook for all the damage caused when disasters strike, we owe it to ourselves to do something about how much those disasters cost. 

JC comments:  Regarding disaster economics, some categorization seems to have emerged regarding disaster typology, including the relatively predictable ones such as hurricanes and drought versus the unpredictable ones such as earthquakes.  There seems to be a further relevant distinction regarding specific disasters that are rare in a particular region versus those that can be expected to occur on a decadal basis, such as hurricanes striking the southeast U.S. and droughts in Africa.

A discriminating factor in disaster economics seems to be the wealth and overall resilience of the locale.  It seems that in some developing countries, there can be a significant disaster bounce.  In the poorest countries (e.g. Africa) disasters are relentlessly impoverishing.  I like the suggestion of coupling development funds and humanitarian response, to increase resilience especially for disasters that repeatedly strike in one region.  The micro finance strategy is also interesting.  In the U.S., there is an obvious huge difference between the disaster economics of New Orleans and New York City.  I also like the suggestion in the Boston Globe piece that  Governments and businesses might do well to adopt some of the urgency and innovation of a post-disaster mind-set even in more clement times.

112 responses to “Disaster economics

  1. Naomi Klein wrote about disaster capitalism in her book Shock Doctrine.

  2. The Broken Window Fallacy, Frédéric Bastiat (1850)

    If disasters were a net benefit, then break every window in sight.
    They are not. They weren’t in 1850. They are not in 2013.
    No doubt some people benefit. But society as a whole looses net productive assets.

    • Strangely the experts that set up the funding for Solyndra, used this as their business plan and at the end their management was not to be disappointed.


      Science & business have moved forward. After all; we can see them.

    • I was going to mention the broken window fallacy as well.

      If you had an area hit that was just completely run down already you don’t lose as much due to the disaster and if you then replace it with something bright and shiny, it certainly “seems” to be a good thing but that is only looking at one aspect of it.

      If the money to rebuild comes from an insurance company outside of the local area or from a state or central govt. then maybe the local economy benefits but it is at the expense of an entity (or taxpayers) from outside the area.

      Same argument was applied to Germany and Japan post WW2 but much of that money came from USA. If it was really better to completely rebuild demolished and burned facilities, why don’t we then just burn and bomb all of our factories once they are out of date instead of just renovating and making capital improvements to them?

      People who fall for this line of reasoning are only looking at the surface of the problem. I am not surprised to see Hubby pushing the ludicrous book by that idiot Naomi Klein. On Wikipedia (yes, I’m too lazy too look further), you have praise from The Village Voice and some left-wingers while the mixed and critical reviews are more damning criticisms from academics.

      • As for the villager Bill, I am not pushing anything, I am just reporting that this subject has been researched.

      • Web,

        Fair enough. Klein has about as much credibility with me as a book by Stossel or Limbaugh would with you. I don’t care for Limbaugh myself and Stossel is not an academic but I think he has some good insights at times. But neither are academics and both are seen to be “out there” by many. I would never tell anyone to read a book by Limbaugh and doubt I would for Stossel either. Maybe a Stossel article.

      • Contrary to all the reactionary villagers commenting on this blog, the goal of disaster capitalism is not to increase the GDP. It is to increase the flow of money to the elite. The wealthy buy up the properties at fire sale prices after a disaster and then make money off of that. Income disparities continue to grow year after year with no end in sight. Deny this all you want, this is not a science topic and so I don’t have a lot of interest in debating it much further.

        Go listen to your Limbaugh and Stossel.

      • Web,

        Your last comment is contrary to what I actually said. I did not say I listened to Limbaugh. In fact I don’t. I was citing him as someone whom you would not find to be a credible source, even if he wrote a book.

        The topic of the thread is not “disaster capitalism” but the question Judith received from someone as to whether a disaster was “good” for the local economy.

        Terms like “disaster capitalism” and especially “crony capitalism” can be misleading. If a large part of the problem is actually due to govt. policies and favoritism (which benefits the rich and politically connected), I think it is just as accurate to call it “crony socialism”. I will reserve comment on “disaster capitalism” until I become more familiar with the term.

      • Bill, I really don’t care what you or your buddies Limbaugh and Stossel think.

    • Yeah. That money could be used to eat, keep warm, keep cool, move from place to place, or maybe, God forbid, get some trinket for ourselves. Much better to spend it on whatever the government says. Right.

  3. The shift from mitigation to adaptation, sorry – resilience, is a result of the same thinking that is leading to the attempt to blur the difference between weather and climate.

    The “pause” is undermining the rationale for massive government spending on ‘alternative energy,” but we can’t expect all these people feeding at the government trough to actually go out and get productive jobs. So let’s just reframe from demanding massive expenditures on wind turbines and solar panels, and instead waste it on “resilience” spending on “infrastructure.”

    Whatever we do, we have to tax and spend trillions of dollars of other people’s money.

    Oh, and the Bastiat “broken windows” analysis, that economists are rediscovering after 150 years, applies as much to pre-repairing the windows. All that money you all want to take from the people and spend as you see fit, will be much better spent, for the benefit of all, if they are left to determine their priorities themselves.

    You are not smart enough to make these decisions for billions of other people. No matter how often you tell yourselves you are.

  4. If disasters are a net benefit, then break every building in sight in blighed cities.

  5. Disasters have three effects on an economy:

    1. People are killed, things are destroyed, and activities disrupted. This is unambiguously negative. Note that Net Domestic Product (NDP) is affected more than Gross Domestic Product (GDP). The impact is proportionally larger during a boom than during a recession.

    2. Reconstruction. This is unambiguously positive, and more so if a larger part of the damage is covered by formal or informal insurance and charity.

    The sum of 1+2 may be positive for GDP, but that is because GDP measures flows only. 1+2 is probably negative for NDP, because NDP measures both flows and changes in stocks. The exception is when foreign charity overcompensates the damage.

    3. Insurance. Risky places pay higher insurance premiums. This slows down economic growth, as savings are diverted.

    1+2+3 is negative.

    As far as I know, Toya and Skidmore is misquoted. I am not aware of a Skidmore and Toya paper. More importantly, Toya and Skidmore find a negative effect on economic growth.

    Cuaresma’s result is probably due to measurement error. Upgraded infrastructure is good, of course, but infrastructure should be upgraded when it is rational to do so — rather then when disaster strikes.

    • Richard, which asset class do you know of that has been liquidated to purchase all of the worlds recent debt? Some trillions have had to be paid within 24 hours of purchasing a T Bond (etc.)… or do you think all of this money was just sitting around somewhere in cash? You seem to understand these disasters better than most. When did we have our last fake economy?

    • Reconstruction is not “unambiguously positive,” even if “covered by formal or informal insurance and charity.”

      “Insurance” and “charity” are not new sources of money. Insurance payments come from reserves, or capital contributions when losses are too high. Charity comes from contributions from members of the community. In both cases, the money is diverted from what would otherwise be more productive uses than replacing what was lost. Even if you are dealing with foreign insurers or charities, you are beggaring your neighbor, which is no real net economic benefit.

      Look at it this way. There is a pool of 1 billion dollars. It can be used to fund the creation of new goods, or to rebuild goods that have been destroyed. Which actually provides a net benefit to an economy? Reconstruction does not create wealth, it merely replaces it.

      Moreover, the workers who are paid to replace what was destroyed make the same as if they were building something new. And if those insurance funds and charitable contributions were not used to pay them in the absence of a disaster, they would be put to some other productive use. (Insurers are not known for burying their reserves in mayonnaise jars.) Reconstruction diverts funds from those other, more productive uses.

      Circulation of money Keynes-style is not the creation of wealth. The creation of wealth is the creation of wealth.

      This was Bastiat’s point. And no one has refuted it yet.

  6. Two quick thoughts. Wars are disasters of a colossal kind, but both Japan and Germany benefited in the long run from having been destroyed. Those who came long after the disaster benefited, but no doubt those who were killed or lost families and houses at the time would have felt otherwise.
    Second, the point at issue reminds me of the role of car repairers in the economy .If we became extremely good at road safety these guys would go out of business, and GDP would decline.

  7. One of the biggest “disasters” that ever happened to Germany (a self-imposed one) was WWII.

    Almost every city was bombed to rubble, industry was destroyed, millions were killed.

    But (with the help of the Marshall Plan) a new, democratic (Western) Germany rose out of the rubble.

    The Eastern part stagnated under communist rule until it was reunified with the West and also began to flourish.

    Did this biggest disaster of all lead to an economic, political and social rebirth that would otherwise not have occurred?

    Food for thought.


    • “Did this biggest disaster of all lead to an economic, political and social rebirth that would otherwise not have occurred?”

      Perhaps, but I don’t see how one can argue given the enormity of the disaster, including 6 million dead Jews, that it was somehow “worth it.” Or that the good things that followed were in some way predictable.

    • Why was the destruction of Germany necessary for any “economic, political and social rebirth?”

      Why is it people see the only alternatives as WWII or the continuation of fascism? It seems to me that the Soviet Union underwent a (temporary) rebirth without being destroyed. The Chinese communists are trying to do something similar while skipping the glasnost part (which I personally think is doomed to failure).

      Sweden is backing away from the socialist abyss without being bombed into the stone age. The Czechs and Poles seem to be moving in positive directions without being reduced to rubble.

      Why this fascination with devastation of millions as somehow a positive thing?

    • If Hitler had not come to power, they had not fought a costly war and had most of their infrastructure destroyed, they would have been far better off.

      This view that it is somehow a positive simply ignores all of the negatives and looks at the bright shiny stuff after repairs are complete and says how much better it is than when it was destroyed.

      Germany had a modern, economically strong system which was only weakened by WW1, hyperinflation and Versailles punishment, and then WW2. As several have mentioned above – Broken window fallacy.

  8. David L. Hagen

    Bangladesh cyclone shelters/habitats after 500,000 died
    The 1970 Bhola cyclone Category 3 cyclone left about 500,000 dead.
    Belatedly, developed countries helped build 200 cyclone shelters by 2000, but ten times more are needed.

    Should we build cyclone shelters to save hundreds of thousands of deaths in Bangladesh from known cyclone hazards? (but lie unused?)

    Or build disaster-resilient habitats at about $65,000 each?

    Or spend $79 billion on “modeling” climate change with no known deaths prevented?

  9. The reasons for not bulldozing blighted buildings could be emotional/political rather then economic. In that case a natural disaster simply overrides the ‘non-economic’ decision, in which case the disaster could end up being a net economic benefit.

  10. If disaster is an economic benefit, then I wish you many good disasters!
    I wish it to those who think a disaster can be a good thing.

  11. If disasters can be a good thing, why bother to mitigate CAGW (to vainly try to) ?
    Let’s sit back and enjoy al those predicted disasters.

  12. No. As others have already noted, for 150 years a broken pane has always been and will likely remain a pain. There are issues of cost associated with the disruption/displacement of existing, functioning economic systems as well as a consumer tendency to reduce/withdraw from commerce.

    At any given t (i.e. not over time) an economy has finite state. A disaster occurs in time t and causes the normal economic flow to be redirected from the original target (i.e. commerce) to reconstruction. Commerce suffers or ceases as a result. Once recovery is sufficiently complete (i.e. infrastructure), commerce resumes only if there remains sufficient capital to re-start it. This is why when microphones are shoved in faces monts after a disaster you’ll usually hear things like, “We haven’t recovered” or “We may never recover.” Bastiat found the core of this to have to do with a “free” choice and commerce.

  13. Broken window theory again?

  14. Matthew R Marler

    fwiw, add me to the group that believes that Bastiat had the better argument on this.

  15. With all the federal billions that have gone into New Orleans post Katrina, the population still hasn’t recovered. Lots of money went somewhere, but lots of people are still living somewhere else.

    • Harold | July 24, 2013 at 7:08 pm
      “With all the federal billions … {spent pre-}Katrina,”
      X billion$ were allocated to disaster prevention, pre-Katrina.
      X-? was actually spent as intended; corruption accounts for the lost billion$?
      Deaths and wide-spread destruction resulted from criminal behavior. What has changed?

      • Ah, finally a benefit of natural disasters, they can excuse human fallibility.

  16. Rob Starkey

    Do disasters help the economy?

    The answer is driven by the multiplier effect of spending in different sectors of the economy. The multiplier impact of government spending on construction of domestic infrastructure is at the top of any form of government spending at approximately 8 to 1. When you work your way through the numbers that is why government spending on construction of usable infrastructure is the best investment that government can make since it almost pays for itself in the ultimate receipt of tax revenues. The added advantage of this type of spending (over defense spending as an example) is that the public also gets something that they can utilize for a long period afterwards.
    Multiplier impacts do not account for the negative impacts on the lives of individuals however.

    • The “multiplier effect” from Keynesian government spending is a fiction no different from CAGW. It is an assumption without evidence. If there were any multiplier effect at all, the massive U.S. “stimulus” spending of the last five years would not have kept reported unemployment near 8 per cent, with real unemployment over 11 percent.

    • I’ve seen numbers for the multiplier between 0.4 and 1.5 depending on the situation. Also, since GDP includes Govt. spending, it is misleading to use that as a measure of the multiplier. And yes with a number less than 1, the argument is that you are worse off than if the money was never taken as taxes (or built up as debt) and instead let individual spend it efficiently.

      The several bailout and Stimulus 1 and 2, etc. are great examples. Unemployment increased more than what they predicted there would be if there had been no stimulus. The money was not spent well and was not spent on “shovel ready” infrastructure projects.

      • Doug Badgero

        The multiplier effect must be determined on a case by case basis. Infrastructure built in the 50s may well have an 8:1 effect. However, raising the price of a completely fungible commodity, like electricity, by subsidizing wind and solar clearly has a multiplier less than 1.

      • I don’t believe the 8:1 is meaningful. A dollar of economic activity is a dollar of economic activity. My argument would be that if a state government built a sewer system, it would generate economic activity. (I don’t like the word stimulus in this regard). But, if a private company built the same sewer system, it should generate roughly the same economic activity. The only way the govt. one would generate more is if they paid more than they should, i.e. wasted money on the sewer system. Let’s assume that this govt. is a responsible one and uses tax money to pay for the sewer system.

        Some would look at the higher wages paid to (possibly union) employees and the higher prices paid to the contractors and think that when they spent that extra money it generates even more activity, which is true to an extent. But you are enriching a few connected businesses and workers at the expense of every single taxpayer. What is “unseen” according to Bastiat is the missing activity of those thousands of people who don’t spend the money since they no longer have it. So you have a visible thing touted by politicians running for election – a new sewer system – but no one runs around interviewing people about how they would have spent that extra $10 if it had not been taken from them.

        Suppose the CEO of the company that is now richer at the taxpayer’s expense buys a fancy car. Does it really employ more workers and materials to build a luxury item for a 50K car than it does for two 25K cars or 5 – 10K cars? No. More people would benefit from the ordinary citizens buying their smaller, less luxurious items. So, the “multiplier” would have been bigger. People have been falling for this for hundreds of years and they never learn.

        Now, if the “stimulus” came from debt, of course, that is GREAT, because then it is FREE MONEY and there will never, ever be any negative consequences of spending money you don’t really have. Just ask Krugnutz or Detroit.

        This idea of looking at all sides, the seen and the unseen, is at the heart of the differences between those who understand the free market and those who don’t and therefore think govt. spending is the way to go. Tariffs are an easy example. One can point to how much more money the sugar industry makes in US due to keeping out cheap foreign sugar and completely ignore the “unseen” fact that millions of Americans pay more for sugar and some go hungry due to this. (Yes, too much sugar is unhealthy but you need a little sugar in bread and so higher sugar prices help inflate the cost of bread, for example).

    • Robert Barro is probably the go-to economist on multipliers from government stimuli. His best estimate is for a multiplier of about 0.8 – that is, government interventions reduce wealth. This is consistent with many studies I’ve seen which indicate that the dead-weight cost of government programs is about 20-25%. That is, governments must raise $5 in taxation to provide $4 in benefits.

      An 8 to 1 multiplier must be sheer fantasy, if such returns were possible, they would vastly exceed those in any alternative investment opportunities, and the private sector would undertake them up to the point where normal returns prevailed.

      • Thought fer Today and termorrow:
        “Guvuh-mint inter -vent-shuns reduce wealth.”
        Guuh-mints haven’t done the journey and don’t
        have skin in the game.’
        Jest-an-ignorant-serf but wtf. )

      • Pissant Progressive

        That certainly sounds plausible to me, though it doesn’t really address my redistributionist tendencies.

      • PP, redistribution is one thing, government “stimulus” is another. If you believe in redistribution to help the disadvantaged (as opposed to wanting to “soak the rich”), then you need to support policies which are conducive to economic growth. The scope for raising the standards of the less well off will always be limited if policies are anti- growth. The Rudd-Gillard governments in Australia have combined pro-union, pro-regulatory, absurd stimulus and redistribution policies with anti-business, anti-growth policies, a recipe for all-round misery.

        Though misery is always relative, of course, most people in the world would swap their current situation for an average Australian one, but that doesn’t excuse bad policy.

    • Why stop at a multiplier of 8:1, when the Landsburg Multiplier is 100,000,000:1?


  17. natural disaster is profitable for some – so is sickens epidemic Syrian president is good for creating plenty jobs in the building industry…

    is it good for the ”economy?” same as stopping the non-existent GLOBAL warming… creates jobs and kills 10 times more jobs – on the end psychiatrists will be the biggest beneficiaries.

  18. Chief Hydrologist

    ‘Luckily, New York City is prepared for pretty much anything. And when we say prepared, we mean they know precisely how screwed they’re going to be.’

    Read more: http://www.cracked.com/article_20384_the-5-major-cities-most-likely-to-be-spectacularly-destroyed.html#ixzz2a0e0JcLn

    We pretty much don’t get a choice of disasters. My house is on the coast in central Queensland. As an engineer with some experience in these things – it is out of flood zones, above any risk of storm surge and probably out of tsunami range – although I do have an evacuation route planned.

    Nonetheless – we did get flooded in for weeks a couple of years ago when the roads north and south were cut and the airport flooded by the Fitzroy River. A bit scary how fast the supermarkets emptied – but no doubt food deliveries by sea could have been organized if necessary. There is quite a lot of fresh food and fish available locally as well as local water supplies and first class medical facility and emergency facilities. That’s an idea – thaw some whiting fillets for dinner.

    Surely the point of disasters is preparedness and resilience – not economics.

    • I agree. If they are really a good thing why would everyone be bitching about them and worrying we will have more??

  19. I believe that disasters may benefit a local economy but, the cost to the larger society is a net loss. A county can benefit from state and federal aid. To many disasters and insurance rates must rise.

  20. From the viewpoint of a usual distant observer on this blog, It is nice to have a topic where apparently no one has any preconceived biases.
    Most everyone is letting there critical thinking show. Refreshing!

  21. Jeez, broken window fallacy.

  22. Harold had it hours ago.

    • Stephen Rasey, too. These reading from the bottom is for the birds.

      It’s broken window, because it’s destruction and must be paid for somehow. Lord Shiva has the luxury to set his discount rate so that the reconstruction is an improvement.

  23. Doug Badgero

    The economic argument is from first principles. The fallacy of the broken window applies. Economic resources are finite. Diverting resources to replace capital assets that have been destroyed must be a net negative.

    That the replacement of some of these assets may be overdue is another matter. It is not difficult to hypothesize many existing capital assets that would be “built” differently (more efficiently) if constructed today, e.g electrical grid, highway system, etc. Hard to argue that “all we need is a disaster” though. Aren’t we smart enough to decide to replace these assets without the need for a disaster? When the NPV of the increased economic utility exceeds the cost?

  24. The FTE summary , UK paper and New Yorker article are sensible. However, the Boston Globe article touches on some points of value. The US economist Mancur Olson in his 1982 book The Rise and Decline of Nations showed how in every society over time groups concerned with sectional advantage arise, leading to rigidities, ossification and lack of innovation, slowing the flexibility of economies and societies, the pace of change and economic growth. At one time I had a variety of research papers which demonstrated this process in many countries and circumstances, and the benefits of disrupting it. Often the “distributional coalitions” which form can be broken only by extreme events.

    Olson illustrated his argument with two very extreme events – the defeat and devastation of Germany and Japan in World War II. In each country, relationships, rigidities and entrenched practices were swept away, infrastructure and productive capacity were destroyed. In the ensuing decades, the economies of those countries were transformed, far outstripping those of the victors and other countries, as new, more productive infrastructure and capital equipment were built and the old societal and economic structures were replaced.

    Of course, those examples are on a totally different scale from Hurricane Katrina et al, and localised disasters will not have the same impact in destroying old relationships, political structures and so on, but there may be some effect.
    We have in recent times many cases of limits on change and growth such as “Euro-sclerosis” and the damage to Australia from union-dominated policies. This has led to severe disruption in, for example, the dysfunctional Greek and Italian economies, although so far the degree of disruption has not led to the changes required to put them on a sustainable growth path.

    I have often argued for embracing change rather than resisting it, and for policies which encourage society’s capacity to respond positively to changing circumstances. There will be an element in many disasters which increase the chance of positive, valuable change. Whether this would outweigh the costs of the disasters is, of course, another question. But it is true that any disaster will produce opportunities as well as costs.

    • Bill @ 7.57 above: yes, of course, the Marshall Plan et al were factors in the German and Japanese resurgences, but the factors argued for by Olson were also in play. I can’t quote from a book a read a long time ago, but I found it pretty convincing at the time, and supported by other work I came across.

    • Bingo on Olson. That’s the only theory that begins to give a rationale for possible advantages of disaster. Japan didn’t benefit from having its factories blown up, but it might have benefitted from having some of its protectionist cliques blown up.

  25. Dr. Curry, a provocative post. There are many aspects, among them the broken window fallacy.
    One not yet touched on by others is the distinction between useful (economic) life and operational (working) life. The former is always less than or (rarely) equal to the latter. Examples: machine tools scraped before they wear out, because no longer productive enough; flyable commercial airplanes mothballed in the desert because uneconomic (fuel/ maintenance too high). Google pictures of thousands of same.
    Observe that viable businesses ordinarily scrap capital stock at its economic life if they themselves want to survive. Observe that private citizens and governments often do not. They ‘fix as fail’ even if that is economically more expensive, because cheaper (annual net oit of pocket cash) in the short run. How else can the large number of deficient bridges, decrepit infrastructure (water mains, sewer pipes, roads, schools) be explained?
    So when a disaster forces government to replace assets already beyond their economic life, it is a net economic plus. Otherwise, must always be a net negative.
    That there are any positive arguements at all in the developed world for net disaster benefits is a very negative comment on public fiscal policy.
    Since in the developing world such assets either do not exist, or if they do are seldom beyond their economic life, there will only be a net negative.

  26. There is something called an ‘opportunity cost’,so when all the medics are treating wounded, instead of fitting stents or replacing knees and the old folk are living in trailers instead of their residential care centers, then sum of human health and happiness falls.
    There was more than full employment in Britain in 1944, no one starved, but it was hellish grim; the UK didn’t return to 1939 levels until the mid-50’s.

  27. Does being bombed by a foreign power help the economy? It is the same question.

  28. Multipliers: Robert Barro in a 2009 interview:

    One of the things I’ve been trying to do in my research is to calculate the effect, particularly on Gross Domestic Product, of government expenditure programs. And I’ve been focusing on the US experience, because that’s where I have the information, although it would be good to go beyond that. But the thing you can clearly isolate is the effect of wartime expenditure – particularly World War Two – it is so big that in a statistical sense it gives you a lot of power to figure out what is going on.

    There’s both the build-up, starting in 1941, and then there’s expenditures coming down after the war, in 1945-6. There’s a lot of evidence there. Sometimes the spending in a year is 20 per cent of GDP, which is absolutely astounding. In comparison, the New Deal programs, particularly in 1934 and 1936, are only two to three per cent of GDP of extra spending.

    In terms of the stuff that’s not wartime spending – which we’re probably most interested in in the current climate – it’s just hard to know from the history of the data and the time series. The New Deal is part of my research, and it’s bigger than the other non-defence expenditure in terms of stimulus, but it’s not enough to really sort it out.

    So I don’t think you can reliably say what the effect is. But conceptually you’d expect the wartime spending to have a bigger effect for various reasons on the GDP than the equivalent amount of expenditure in a non-war situation. And the wartime effect you can estimate pretty precisely, and the multiplier is clearly less than one, even in World War Two – it’s in the order of 0.6, 0.7, something like that.

    • Faustino, (I know you understand most of this already)

      As far as Japan or New Orleans changing their cultural views (or at least in case of schools for New Orleans), of course this can have a huge effect but that’s totally separate from any kind of economic stimulus.

      As far as war, that is the prime example of the broken window fallacy. Your society now has lots of planes, tanks, bombs but many fewer cars, appliances, etc. So as Eli points out, the GDP looks the same or better but that does not translate into economic (or any kind) of well being for the average citizen.

      Then after the war, when everyone buys cars and appliances, it looks like a great stimulus but you are discounting all the sacrifices people made during the war.

      My house is in much better shape after Katrina but the insurance company lost money (and therefore their employees and anything they would have purchased, and anyone who owns their stock, and federal taxpayers who paid via flood insurance are all worse off).

      • Yes, I’m not arguing for either stimulus or disaster, I see no merit in the former, nor do I argue that there will be net benefits from the latter – far from it – I’m merely saying that disruption can provide opportunities as well as costs, e.g. by creating a situation in which positive changes can more easily occur. “Always look on the bright side of life,” “Every cloud has a silver lining,” and so on. Societies often ossify, a short sharp shock can shake up settled arrangements which do not benefit the community and make room for innovation and entrepreneurship which had been stifled.

        It ain’t necessarily so, of course. The post-war years in Britain were pretty bleak, wartime rationing continued until 1953. The disruption and destruction had great costs and no obvious upside.

  29. Basically a flaw in how GDP is defined. Well known too.

    Consider that on the same basis gambling is a net positive for the economy.

    • It’s not? :) (Only for the economy of Las Vegas and maybe not even then if you think of all the local gamblers that are worse off)

    • “Consider that on the same basis gambling is a net positive for the economy”

      Venture Capital investment? Almost all of drug development funding is wasted as it never leads to a viable, clinical, drug. Yet gambling on a new family of compounds happens all the time.

  30. I think that the answer is nuanced. There are benefits from some disasters, including opportunities to more efficiently utilise land which was previously frozen by planning and built heritage restrictions – a kind of forced “creative destruction.” As others have pointed out, it can also force governments and companies to renew crumbling infrastructure which needed renewing anyway. But destroying and replacing an asset before the end of its economic life is a net loss to the economy.

    It is also worth noting that the construction boom that typically follows disasters in the West means that we pay more for things than we would in more settled times, because of skills shortages and so on. While this is good news for those in the building and allied industries, it does not always represent good (or sometimes any) value for money to those who are paying the bills. I highly recommend Carl Hiaasen’s “Stormy Weather”, a very funny novel about the aftermath of a Florida hurricane, on this subject.

  31. “NEW ORLEANS—Things are looking up for this city. Partly, that’s because anything is an improvement over the post-Katrina hellscape. But from tragedy arose opportunity: New Orleans has used the hurricane recovery effort to confront some of its longtime political, economic, and social pathologies—the problems that seemed to leave it on the bottom of those worst-in-the-country lists.”

    Though there is corruption involved, it seems to me if one is only comparing disaster relief to other government stimulus ie, “shovel ready jobs” [or bailing out banks cause they are too big to fail] then disaster relief would tend to do lot better. As things actually are done, and there is a lot public attention on ensuring the money is not squandered- there is more media attention and more political costs associated with wasting disaster relief.

    So, in summary what Detroit needs a major natural disaster of some kind.

    But I doubt the people of Detroit were clever enough to build their city so it’s under sea level.

    • “New Orleans has used the hurricane recovery effort to confront some of its longtime political, economic, and social pathologies … In some cases, the city started from scratch: After laying off every single public school teacher, the city charterized 88 percent of the school system, and has won impressive (if early) results.”

      The Mancur Olson paradigm in practice.

    • New Orleans received an inflow of several billion dollars of federal reconstruction aid. That, sure has got to have some positive impact on New Orleans.
      Whay about the US as a whole? What about those who paid that money?

      • Jacob, of course, you’ve always got to look at the opportunity cost of funds and the net costs and benefits – you can’t just look at New Orleans or other recipients of disaster aid. My point, addressing the issue of whether there can be benefits following a disaster, is that in at least one area – schools – it has been an opportunity for revolutionary change in the system. The article notes “impressive early results,” charter schools in various countries seem to outperform conventional schools, so this might be an instance where a positive change which would never have been made without the disaster has been implemented.

  32. I know one way to have a profitable disaster. Combine the UNFCCC COP meeting with the Democrat Party convention in 2016 on some remote Caribbean island, and hit the site with a cat 5 hurricane.

    Talk about creative destruction.

    • Gustav (2008) and Isaac (2012) have disrupted Republican Conventions twice in a row now. They are the ones on a streak.

  33. Faustino,

    I always thought, from cursory readings on The Marshall Plan,
    that here was an exception ter the negative effects of large
    scale economic intervention projects. In the decimation of
    entire countries after WW11 it helped those in immediate
    desperate need and was a benevolent action in hard times,
    no matter how hard headed the political thinking behind it.
    And politically it undercut the opportunities fer fascist post
    war propoganda … used ter maximum effect after WW1. Did
    the social and political benefits out weigh the economic costs
    ter WW11 victors? Perhaps you have a recommended reading
    on this Faustino.


    • Sorry, Beth, no recommendations, but the MP might be a rare example of large-scale government intervention paying off. Of course, the circumstances which prompted it were extreme.

    • Actually, the importance of the Marshall Plan in raw economic (not political) terms is still up for grabs. For example, the economic “miracle” in W. Germany really didn’t take off until Ludwig Erhard ignored his American advisors and junked the system of wage and price controls that had been imposed.

  34. Detroit is in urgent need of disaster economics. No hurricane needed. Mancur Olson paradigm needed here too: Here’s Daniel Hannan’s take:

    Statism is turning America into Detroit – Ayn Rand’s Starnesville come to life
    By Daniel Hannan US politics Last updated: July 21st, 2013

    You thought Atlas Shrugged was fiction? Look at this description of Detroit from today’s Observer:

    What isn’t dumped is stolen. Factories and homes have largely been stripped of anything of value, so thieves now target cars’ catalytic converters. Illiteracy runs at around 47%; half the adults in some areas are unemployed. In many neighbourhoods, the only sign of activity is a slow trudge to the liquor store.

    Now have a look at the uncannily prophetic description of Starnesville, a Mid-Western town in Ayn Rand’s dystopian novel, Atlas Shrugged. Starnesville had been home to the great Twentieth Century Motor Company, but declined as a result of socialism:

    A few houses still stood within the skeleton of what had once been an industrial town. Everything that could move, had moved away; but some human beings had remained. The empty structures were vertical rubble; they had been eaten, not by time, but by men: boards torn out at random, missing patches of roofs, holes left in gutted cellars. It looked as if blind hands had seized whatever fitted the need of the moment, with no concept of remaining in existence the next morning. The inhabited houses were scattered at random among the ruins; the smoke of their chimneys was the only movement visible in town. A shell of concrete, which had been a schoolhouse, stood on the outskirts; it looked like a skull, with the empty sockets of glassless windows, with a few strands of hair still clinging to it, in the shape of broken wires.
    Beyond the town, on a distant hill, stood the factory of the Twentieth Century Motor Company. Its walls, roof lines and smokestacks looked trim, impregnable like a fortress. It would have seemed intact but for a silver water tank: the water tank was tipped sidewise.

    They saw no trace of a road to the factory in the tangled miles of trees and hillsides. They drove to the door of the first house in sight that showed a feeble signal of rising smoke. The door was open. An old woman came shuffling out at the sound of the motor. She was bent and swollen, barefooted, dressed in a garment of flour sacking. She looked at the car without astonishment, without curiosity; it was the blank stare of a being who had lost the capacity to feel anything but exhaustion.

    “Can you tell me the way to the factory?” asked Rearden.

    The woman did not answer at once; she looked as if she would be unable to speak English. “What factory?” she asked.

    Rearden pointed. “That one.”

    “It’s closed.”

    Now here’s the really extraordinary thing. When Ayn Rand published those words in 1957, Detroit was, on most measures, the city with the highest per capita GDP in the United States.

    The real-life Starnesville, like the fictional one, decayed slowly, then collapsed quickly. I spent a couple of weeks in Detroit in 1991. The city was still functioning more or less normally, but the early signs of decomposition were visible. The man I was staying withn, a cousin of my British travelling companion, ran a bar and restaurant. He seemed to my teenage eyes to be the embodiment of the American dream: he had never been to college, but got on briskly and uncomplainingly with building a successful enterprise. Still, he was worried. He was, he told me, one of a shrinking number of taxpayers sustaining more and more dependents. Maybe now, he felt, was the time to sell up, while business was still good.

    He wasn’t alone. The population of Motown has fallen from two million to 700,000, and once prosperous neighbourhoods have become derelict. Seventy six thousand homes have been abandoned; estate agents are unable to shift three-bedroom houses for a dollar.

    The Observer, naturally, quotes a native complaining that ‘capitalism has failed us,’ but capitalism is the one thing the place desperately needs. Detroit has been under Leftist administrations for half a century. It has spent too much and borrowed too much, driving away business and becoming a tool of the government unions.

    Of Detroit’s $11 billion debt, $9 billion is accounted for by public sector salaries and pensions. Under the mountain of accumulated obligations, the money going into, say, the emergency services is not providing services but pensions. Result? It takes the police an hour to respond to a 911 call and two thirds of ambulances can’t be driven. This is a failure, not of the private sector, but of the state. And, even now, the state is fighting to look after its clients: a court struck down the bankruptcy application on grounds that ‘will lessen the pension benefits of public employees’.

    Which brings us to the scariest thing of all. Detroit could all too easily be a forerunner for the rest of the United States. As Mark Steyn puts it in the National Review:

    Like Detroit, America has unfunded liabilities, to the tune of $220 trillion, according to the economist Laurence Kotlikoff. Like Detroit, it’s cosseting the government class and expanding the dependency class, to the point where its bipartisan “immigration reform” actively recruits 50–60 million low-skilled chain migrants. Like Detroit, America’s governing institutions are increasingly the corrupt enforcers of a one-party state — the IRS and Eric Holder’s amusingly misnamed Department of Justice being only the most obvious examples. Like Detroit, America is bifurcating into the class of “community organizers” and the unfortunate denizens of the communities so organized.

    Oh dear. No wonder the president would rather talk about Trayvon Martin. If you want to see Obamanomics taken to its conclusion, look at Starnesville. And tremble.


    • Mark Steyn’s take on Detroit is at http://www.nationalreview.com/article/353959/downfall-detroit-mark-steyn . A quote:

      So, late on Friday, some genius jurist struck down the bankruptcy filing. Judge Rosemarie Aquilina declared Detroit’s bankruptcy “unconstitutional” because, according to the Detroit Free Press, “the Michigan Constitution prohibits actions that will lessen the pension benefits of public employees.” Which means that, in Michigan, reality is unconstitutional.

      Time for Mancur Olson …

      • Perhaps the Michigan Constitution could also outlaw floods, tornadoes, automobile accidents and cancer.

    • Faustino | July 25, 2013 at 1:00 am |

      You may not have been paying terribly close attention to Detroit in 1991 when you vacationed there for a few days.

      I’ve lived and worked in Detroit and surrounding areas. Detroit was ready to declare bankruptcy, and would have been better off now if it had, decades before then.

      The city’s leaders for more than a century made bad decision after bad decision, under pressure to please the large corporate interests they believed would be the foundation of the prosperity of Detroit forever, only to be betrayed time and again by Ford and company.

      Detroit’s transit infrastructure once was the rival of any city in the world. Henry Ford complained that it looked bad for auto workers to arrive on buses or trains. Detroit city shut down its _privately run_ transit systems. Ford then moved to Dearborn and Flint, anyway.

      And Flint? You’ve heard of Flint, Michigan, right?

      That’s what happens when governments and corporations get too friendly.

      Corporations are not people. Republics are people. Corporations are not republics, either. Muddling the border between the one and the other is bad business.

      • Sorry, Bart, you’re confusing me with someone else. I hitch-hiked through Detroit in 1962, I haven’t been back since. I’m not an expert on its history, I’m just commenting on recent events which are germane to the “Disaster economics” theme. Some disasters are man-made, as your post indicates.

      • Faustino | July 25, 2013 at 7:46 pm |

        There are worst things than being confused with Daniel Hannan, I suppose. I can’t think of any at the moment, so I know I ought apologize for losing track of where your long quote ended. I suggest italics if you’re interested in keeping poor readers like myself from making such errors.

        Now I know next time I’ll have to read even harder.

      • Bart, the clue was in ” Here’s Daniel Hannan’s take,” with the URL at the end. A lot happened between posting the article and seeing your comment, I didn’t connect to Hannan’s 1991 reference.

        If I post an article, I think it’s usually clear, if I want to add a comment I’d usually separate it off so:

        Short quotes, I use “..” Long ones, not. Italics? When I cut from Word and paste, I lose them; I don’t know how to add them in the “Leave a reply” box.

        Re “reading harder,” as with models, it’s all about prior assumptions. :-)

      • Chief Hydrologist

        italics – text

      • Chief Hydrologist


        It is called HTML – Hyper Text Markup Language


      • say what?

        Thanks, Chief, I’ll see if that worked, but will probably stick to what I consider to be perfectly understandable formatting with no fiddly bits.

  35. In general, I think disasters are a net loss….But in modern economies, I am not so sure:
    – we are so efficient that material good production and useful services that people are willing to provide at standard wage can be done by a fraction of the workforce….hence the ever rising unemployment, but not only that: i am convinced that a lot (even probably most of) the work effort in a modern western state are not going to production, but more to posturing, office politics, overelaborate ponzi schemes and tax evasion tricks (the modern finance system) and government sponsored activities.
    – the power structure is freezed, meaning that the most productive elements are not necessarily climbing to the top nor salaries reflect productivity.

    In this environment, natural disasters, as a big kick in the ant houses, allows to defreeze the system and put real demands on the production systems, meaning it pays off to actually do usefull work instead of playing the system to death. It allows small-scale revolution, with the added benefit that there are no instigators so nobody ready to jump in the place of the fallen leaders. Again, more space for real re-organisation (not the infrastructure, the social and economic hierarchies)

    The alternative is a real revolution, but given the worldwide link between economies, a revolution would be infinitely more destructive than natural disasters.

    • kai wrote, “In this environment, natural disasters, as a big kick in the ant houses, allows to defreeze the system and put real demands on the production systems, meaning it pays off to actually do usefull work instead of playing the system to death.”

      If one natural disaster is good, would two be better? Is there some limit above which the goodness wears off? How do you quantify that? Is it your position that natural disasters will eliminate ” … posturing, office politics, overelaborate ponzi schemes and tax evasion tricks (the modern finance system) and government sponsored activities.”

      • The ants are kicking about this line of reasoning. Kicking on their boots. Soon, they march.

      • It looks like we should all be rolling in dough…


        sooner than they fear then.

      • No, nothing will eliminate this, the evolution from pure meritocracy to some sort of nepotism is probably built in, logical from a natural selection point of view. Capitalism used to be the best mechanism to prevent this. But the mechanism is not perfect, probably less now that there is “competing” system to keep capitalism in check and force him to conform to its theoretical justifications (people who get paid the most are also the one providing the worthiest services)
        A natural disaster have cost, but it has also a restart effect. If the system is constantly degenerating into nepotism at a certain rate, it follows that disruptive events at non-zero frequency are actually beneficial for average well being. Disruption can be a revolution or a natural disaster. The later is usually less nasty.

  36. A few years ago a hail storm damaged our roof — and the insurance company paid to have it replaced. It was old and would have needed replacement soon so we (and our neighbors who also got new roofs) felt that the storm had been a good thing.

    But the reality was that we would have been better off without the hail storm. If we had been self-insured and accruing for a replacement (add one twentieth of the cost of a new 20 year roof to an account every year) we would have easily seen the storm as a loss and a cost – it cost us the final two years of the roof’s expected useful life.

    Some will say that the money we had been paying to the insurance company over the years was invested and helped grow the economy. If we hadn’t been paying that money we would have saved it or spent it which would have also helped grow the economy.

    The roofer told me that he and every other roofer in town was making lots of money that summer but once all the roofs had been replaced it was going to be years before people would need to replace worn out roofs – which was the heart of their real business.

    Bastiat was right.

  37. Here’s “disaster economics” for you.

    Predict disaster so you can seize control of the economy. Except, with the “pause,” we’ve gone from global warming, to climate change, to climate disruption to…drum roll…Arctic warming.


    “Scientists warn on Arctic ‘economic time bomb’”

    “Time bomb” is of course a tried and true scientific term of art of long standing.

    They’re even trotting out the “c” word again.

    “‘We’re looking at a possibly catastrophic effect on the global climate that has been a consequence of this extremely fast sea ice retreat,’ he said.”

    And guess what…it’s worse than we thought.

    “Depending on how much methane was emitted, they calculated its potential cost was likely to be $60 trillion, with 80 percent of the damage occurring in developing countries least able to curb the impact of more floods, droughts and storms.”

  38. Our Miami based business, a Sun Microsystems VAR, was devastated by the upset to the local economy caused by Hurricane Andrew in 1992. And it continued well into 1993. The reason was not due to physical damage to our property, nor to that of any of our principle customers, but more to the redirection of the attention of local corporate middle-management, many of whom had lost their homes, to rebuilding their own lives.

    Few of our customers were able to think about future requirements of their employers – an activity which our business depended on. We were able to survive nine months without a significant sale, but when it looked like our market was unlikely to revive even by October of ’93, we shut down.

    At the same time, I don’t doubt that the reconstruction of South Florida following the storm might have had long term benefits. It certainly must have done wonders for the window and door manufacturers who found the improved code requirements which were adopted after the storm to limit competition to the technically competent firms and significantly increase the prices of their products. And this would have been much more than a regional effect.

    It’s hard for me to imagine that the economists who usually look at these things could really get a handle on the full scope of effects of a major storm – too diffuse.

  39. Disasters that help local economies are few and far between, on the facts, and place a distortionate burden on the wider market by increasing taxes collected or tightening the money supply both due borrowing for reparation and actual shrinkage of the labor and resource base.

    Yet in folklore, stories of con men who thrive on the burning down of their barn because of all the pies they get from well-meaning neighbors and fresh lumber they pry off to sell next town over until the next ‘accidental fire’ destroys the evidence are plentiful.

    You can construct an econometric case where a disaster might inspire a great movement or spark support for a great leader who in consequence implements a great many reforms that lead to a better economy in the long run, but just as wars do not generally actually benefit economies in the short run, regardless of reparations according to holistic study of the data in case after case, disasters are not a good thing.

    It’s kinda like arguing the steroidal effect of excess CO2 is good for plants: http://www.post-gazette.com/stories/news/health/climate-change-is-making-poison-ivy-grow-bigger-and-badder-696379/

    Sure, you double the vigor of poisonous weeds, but you deplete the nutrient value of food crops and diminish the productivity-enhancement of dwarf varieties, while disrupting soil microbes and leaving the ground increasingly less fertile every year.

  40. Willis Eschenbach

    Judith Curry

    I recently received a query from a journalist:

    Do natural disasters help local economies?

    I know that the answer is ‘no’ in highly vulnerable and impoverished societies, where disasters are relentlessly impoverishing. But what about more developed economies?

    I fear that this will not be a productive inquiry, because the question is ill-posed. They miss entirely the rest of the issue … compared to what? There’s no null hypothesis.

    For example, the claim is made that the disaster may force the replacement of antiquated and inefficient equipment. As a result, the economy may be more productive. In that claim, however, the unstated “compared to what”, the invisible null hypothesis, is “compared to nothing happening”.

    If we compare the disaster to a null hypothesis of the voluntary replacement of that equipment, however, the picture is much different. In that case, the equipment is not replaced until the replacement is economically justified. And often the older equipment is sold to some other manufacturer.

    So there are several benefits from that. First there is no immediate shock to the economy. Pieces are replaced as and when needed, not everyone at once.

    Next, there is no economic loss, because a) it’s not done until it makes economic sense, and b) the old equipment can be sold.

    Finally, there’s often actually a gain, in that we may end up with more productive machinery than we started with.

    So obviously, compared to replacing the machinery and infrastructure voluntarily, replacing it as a result of a disaster is a huge loser.

    So if folks want to discuss the question, to avoid endless talking past each other, let me recommend that the question be rephrased as:

    Do natural disasters help local economies compared to X?

    and that people spell out exactly which null hypothesis “X” they are comparing the disasters to.

    For example, if there’s a disaster and a million bucks are poured in from the outside world, and the money isn’t wasted, the place may well be better off than if nothing had happened. But is that the correct comparison?

    I’d say that the null hypothesis in that case should be “compared to nothing happened AND a million bucks being poured in from outside”. Is the place better off than if that had happened?

    And when you start forming reasonable null hypotheses for each situation, you have to notice that a disaster is almost never a boon to an economy, when compared to reasonable null hypotheses.


  41. When you see and can measure the local benefits in the disaster area, sometimes it’s not so easy to see a slight decline from the areas the money came from. If we assume the money came from the United States as a whole and limit it to just government money, we would suspect we had many very small uptakes of money let’s say through taxation, that were all dumped onto a specific area, and that shows a very strong signal. We can’t seem to see the negative impacts as they are spread so wide and thin.

  42. This does not explain completely to us how the antiquated equipment, once it has been relocated to Mexico or China… there are many other countries as well, this same equipment can become a profit center once more. Through the amazing power of a Neo Tax Scheme. They want the best regulations our money will buy them. For US.

  43. It never occurred to me to think about our very own disaster, the 2011 floods which hit about 25,000+ premises in Brisbane and caused 30+ deaths west of here. My house unexpectedly missed the flood (by 4 metres), but we lost power and telecoms for several days. I can’t think of any upside from that, I was reminded by tonight’s news that work had begun to replace one bit of destroyed infrastructure 30 months on. The flood response seemed to be very good, but we’re still working through the effects. (The extent of the flood itself seems to have owed more to bad management by government and bureaucracy than to nature, though we would probably have had significant flooding even with good management.)

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