In the aftermath of Hurricane Sandy, it is probably a good time to revisit the basic economics of natural disasters.
(Like Sandy), We’ve been over this ground before.
First, are natural disasters good for the economy? Also here.
Second, is price gouging a bad thing? Many, many links at Knowledge Problem — including this one from Slate.com. And here’s an archived EconTalk where Duke’s Mike Munger takes an hour with Russ Roberts to lay it out for us.
John Whitehead from the Environmental Economics blog lives in North Carolina and has been keeping us up to speed on all sorts of hurricane-related curiosities, from the opportunity costs of evacuation preparation to a supply & demand example to potential stimulative effects (umm) to predictions of hurricane damages (short version: the predictions are wrong).
As a bonus, here’s Professor Michael Munger — also a Carolina denizen — griping about subsidizing building in hurricane zones.
(And justifiably so, I might add).
As I pointed out before, there is some disagreement on this issue. Will Wilkinson at The Economist helps us out by reviewing some of the evidence himself. And here we go:
By far the boldest claim… is that some disasters can boost GDP by forcing upgrades in technology and infrastructure, and offering the opportunity for critical reappraisal of ingrained modes of economic activity, leading to a higher level of productivity and, eventually, to net gains in growth. They find that this holds for some weather-related disasters, but not for geological disasters. They find persistent, long-run negative effects for geological catastrophe, suggesting any upside from Japan’s earthquake and tsunami is unlikely. The argument of this paper, which is as strong as the disaster-bonus case gets, is a touchstone for a good deal of later research.
Wilkinson also directs us to a review from Binyamin Applebaum in the New York Times.
And there is a rather extensive piece from Ilan Noy over at Econbrowser with this surprising conclusion:
Given the findings described above, one can conclude that the likely indirect impacts of this horrific earthquake/tsunami event on growth in the Japanese economy will be quite minimal. The Japanese government and the Japanese people have access to large amounts of human and financial resources that can be directed toward a rapid and robust reconstruction and rebuilding of the affected region. Neither do we have any evidence to suggest that the earthquake is likely to have any enduring monetary effects.
After reviewing some potential regional impacts, he gets to the elephant in the room:
We still do not know what will be the impact of the enfolding crisis in the various nuclear reactors that have been affected. The analysis above ignored this danger, though the still present devastation in Chernobyl attests to its potentially destructive powers.
Indeed.
Überwriter Michael Lewis has written extensively about the potential economic impacts of an earthquake in Japan, “How a Tokyo Earthquake Could Devastate Wall Street and the Global Economy.” Interesting thing about this is that he wrote the piece back in 1989!!!
My eyes aren’t quite good enough to make out that copy online, unfortunately, so I’ll wait for some younger eyes to give me the summary.
On the plus side, the global economic situation is far different that it was back then. Indeed, back then we had an MIT economist telling us that if we didn’t start following Japan’s lead that the US was in for a meteoric drop. Instead, it was Japan’s economy that was in for a lost decade, not the US. But, on the minus side, that our economic situation is different doesn’t mean that our financial institutions are any less vulnerable — again, see Lewis on this point.
He’s a prolific writer, that’s for sure.
In another sign that the world has changed, Gilbert Gottfried was fired as the voice of the Aflac duck for telling tasteless jokes about the disaster on his Twitter feed. Isn’t that sort of like firing Big Bird for being tall and having feathers?
I saw the Lewis tip at Kottke and the Gottfried bit at Slate.
Indeed, it is just that. If you have access to the internet or a television, you’ve probably already seen this, but here’s some absolutely astonishing footage from The Guardian.
The internet is also abuzz with discussion of its implications for Japan’s economy. “Not good” is what jumps to mind for me, but that is evidently not a consensus view. Here’s Larry Summers:
If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery. It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.
After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction.
Lynne Kiesling at Knowledge Problem isn’t buying it:
Even my intro macro students, who are studying for next week’s final exam, could tell Dr. Summers that the earthquake and tsunami are a negative productivity shock, shifting the long-run Solow growth curve to the left, and that any rebuilding consumption and investment will shift the aggregate demand curve out in the short run … but those resources have been destroyed and the lives of people have been devastated.
Neither is George Mason economist, Don Boudreaux.
By this logic, Japan should have evacuated people from the buildings and triggered the earthquake and the tsunami sooner. By this logic, they should just blow up empty buildings randomly. By this logic, their $6.3 trillion stimulus spending of the past decades should have helped their economy. By this logic, they should rebuild the buildings with shovels rather than construction equipment. Or using spoons rather than shovels.
Annie Lowery at Slate discusses how it could potentially bankrupt the country (but probably won’t).
And here’s the Chart of the Day:
I guess you can make up your own minds what you care to believe.
