Via Tim Schilling, we find this excellent piece from Rick Mattoon of the Chicago Fed.
He starts with the basics...
From a conceptual viewpoint of our economy, natural disasters impact our economic well-being in two basic ways. First, they destroy what we have produced in the past—our “capital stock”—including lives, homes, commercial buildings, public infrastructure and property. Second, they often interrupt normal commercial activity and production. Transportation and deliveries do not take place, people cannot get to work and work places become dysfunctional until normalcy is restored.
...
... Following the 1993 floods, estimates for the third quarter reduced personal income by $9 billion and forecasted uninsured losses to be $2 billion. Losses to proprietors’ incomes were estimated at another $1 billion.
Remarkably, such initial losses soon appear to translate into economic gains as business and households rebuild. The rise in construction activity and the resumption of business activity often boost gross domestic product (GDP) estimates for future quarters, as households and businesses attempt to rebuild their physical capital and, in the case of businesses, to fill order backlogs. For example, following Hurricane Andrew, annualized GDP growth hit 5.7% in the fourth quarter of 1992, spurred by rebuilding activities.
But take heed, gentle reader...
However, such rebuilding does not reflect an actual economic gain in the broad long-term perspective. In most cases the rebuilding merely replaces lost capital stock—meaning that, in the long term, the nation’s product will not exceed what would have been produced without the disaster. While the immediate burst of economic activity is quite evident, the losses from the foregone output of interrupted and diminished business activity may go largely undetected because the diminished growth takes place in small amounts spread over many years.
The last sentence is so true, yet so often forgotten.
Most of the rest of the article goes on to estimate the actual losses. Mattoon finds that the aggregate losses will likely be smaller this year than in 1993, in part because the geographical footprint of the flooded area is smaller.
He finishes with another comparison--one of which I know something from my western Minnesota roots--the Red River flood of 1997 which devastated Grand Forks, ND.
For business, the greatest disruption was for restaurants, bars, hotels and any business where discretionary spending is important. Many of these businesses had to lay off workers. Other businesses such as banks, health care and manufacturing suffered lost sales but did not suffer drastic employment declines. In fact given the gains in construction jobs, employment in Grand Forks rebounded to its pre-flood level in five months. To some observers, the newly rebuilt Grand Forks with its improved infrastructure and new capital stock is better positioned for growth than before the flood, but this is only true because of significant government subsidies and 10 years of hard work. And of course, it is not true for every household and business impacted by the flood, as many chose to leave Grand Forks.
Well said.
I'd sum it up this way. Natural disasters are not a net benefit for the economy. They result in arbitrary transfers of wealth and temporary changes (both positive and negative) in spending and income. The resulting equilibrium (new capital stock and all) is not a Pareto improvement.
Let me state it even more plainly. Anything a natural disaster can do could also be done by a government through the use of forced relocation, bulldozers, and other people's tax dollars.
Grand Forks now has a better infrastructure and capital stock. This could have been done without the floods, but would it have been done?
If the new infrastructure and capital stock makes output higher than it would be with the old infrastructure and capital stock isn't it a question of comparing this difference to the losses from the flood.
If output is now 5% higher than if would be with the old capital stock while the loss from flooding was 50% of output for a quarter of a year
--or 12.5% of one years output -- at some point wouldn't the extra expanded output be larger than the flood loss.
Or is your point that government sponsored redevelopment is like a flood, just destructive?
spencer,
My point is stated very plainly in the last two paragraphs. But let me address your questions.
Would Grand Forks have upgraded its infrastructure and capital stock without the floods? Probably not. The question is "why not?" And the answer is that if it needed to be financed by local tax dollars, the citizens probably would have opposed raising taxes for that purpose. The current infrastructure was good enough and the tax bill would have been quite onerous.
Of course, option #2 would be for a pre-flood Grand Forks to try to convince legislators in Bismarck or congressional leaders in Washington to allocate tax dollars collected elsewhere to upgrade Grand Forks' already serviceable infrastructure. Unless said lawmakers happen to hail from Grand Forks and have sufficient power, the prospects are not too likely.
But after a disaster, option #2 is viable because (1) we have an administrative structure for dealing with such things and (2) there is an emotional/political response that says we have to help. Both of these, if used properly, can produce a positive outcome. Experience, of course, has produced mixed results--with Grand Forks and New Orleans occupying opposite ends of the spectrum. (That is, of course, with the understanding that the scale and scope of Katrina was vastly larger than the flood that hit Grand Forks--but that just goes to show that our current approach perhaps does not do enough to address the specific challenges of different situations. One size does not fit all.)
So we conclude that the only reason Grand Forks got the upgrade was because of the disaster. It was random. That year's flood happened to hit them the hardest.
But spencer, you're putting words in my mouth when you wonder if my point was that government sponsored redevelopment is just destructive. Some of might be; most of it probably isn't. But it's always redistributive, and not always in a good way (i.e. sometimes it benefits the wealthy at the expense of the less wealthy).
Let's go over this again. I said,
"Anything a natural disaster can do could also be done by a government through the use of forced relocation, bulldozers, and other people's tax dollars."
So for starters, this particular statement would only be directed at development that (like a disaster) results in a forced relocation of people. As you might suspect, I was not happy with the Kelo decision by the Supreme Court. Tearing down perfectly good houses to make room for an office park offends my sensibilities.
Redevelopment that truly addresses blight and is aimed at improving the lives of people living there is somewhat less objectionable, but once again, our record is mixed. Such projects deserve careful consideration and are not to be taken lightly.
But that's my point. Disasters do not give careful consideration. They are arbitrary, and they result in arbitrary transfers of wealth and temporary variations in income.
If the resulting outcome after a disaster is so good, then why do people (including municipal governments) fight to save the levees? Why not just let it flood? The worse it floods, the more money you'll get from rebuilding, right?
That logic doesn't work.
It is possible that output will be higher in Grand Forks (though it is not clear that per person output in present value terms would be much if any higher). But it's not a free lunch. Other people's tax dollars contributed, and those dollars could not be spent elsewhere.