Do disasters help the economy?

One of my colleagues asked me recently what economic impact analysis has to say about this question. He provided a link to a Forbes article countering the frequent claim that disasters can be/are good for the economy; in turn, Forbes linked to this example from the New York Times. I’ve heard the claim before, of course. In fact, you often hear people say that rural areas and farmers/ranchers are not impacted by drought, fire, or other disasters because of government disaster relief payments.

Do disasters help the economy? Clearly they do help some sectors (shingle manufacturers as the article points out). Overall though, there are a few points to consider:

• Again, as the Forbes article points out, the spending people have to do because of the disaster replaces spending they wanted to do anyway. Both types of spending have economic impacts. We don’t know how people would have spent their money in the absence of a disaster. Thus we don’t know which would have been better for the economy.
• Insurance or government relief payments rarely foot the entire bill.
• That said, we can be certain that consumer’s utility decreased as a result of the storm. That’s an economist’s way of saying that people would have been happier spending the money the way they wanted to instead of the way they had to–especially considering my next point.
• Most post-disaster spending simply rebuilds existing capital. It is not really growing the economy, although new construction may be more efficient, more attractive, or have other beneficial attributes.
• Simple dollar accounting fails to note potential psychological, social, and environmental costs from a disaster. Familiar people and places may be missing from the community. Debris fills local landfills. Local ecosystems may be damaged. All of the effects are real and may be significant. They may affect the region’s economic productivity either directly or through community morale and appearance. But there are also effects that cannot be assigned anything so simple as a dollar sign.

Economic impact studies are built around the idea that a dollar spent in an economy generates additional economic activity, or multiplies, throughout the economy. This info graphic from the Forbes article is pretty dead-on, from an economic impact perspective. James Richardson and I here at Texas A&M AgriLife Research with colleagues at the Texas A&M Engineering Extension Service studied the economic impact of Hurricane Ike. Sure enough, the construction economy did well enough in the post-Ike short-run, beating not only average Predicted Sales but Max Predicted sales as well.

But the economy overall continued to struggle. There were certainly rallies, but it takes time for an economy to regain ground lost, let alone grow.

OK, so construction sales increased, but they were replacing existing capital. That wasn’t new growth, really. And insurance paid for a substantial part of the cost–but not all. Some of those expenditures were paid by individual people, who probably wanted to spend their money another way, as the Forbes article explains. Now, it is entirely possible and in fact even likely, that they spent most of their construction money in the local economy whereas they might have spent a larger percentage of their intended purchase elsewhere (e.g., going on vacation). At the same time, economic impacts are built on the idea of money circulating in the economy. While much construction labor may be local, many construction supplies are not produced locally (especially post-disaster). In essence, people diverted money they would have spent or saved into construction rather than new economic activity.

Construction is so very visible. In the language of the Forbes article, it is the “seen”. And as things come back shiny and new, it is easy (and appropriate) to take pride and relief in the growth we see around us. In short, rebuilding does help the economy. In its absence, the regional economy would remain decimated. But the growth we note may only be bringing us back up to our regular spending pattern.

Obviously, Galveston has a strong tourism economy that took a huge hit from Ike, but the county’s manufacturing economy also plummeted and faced a slow recovery path. In any sector, some businesses are never rebuilt. Their activity leaves the area economy. At the same time, a greater share of residents’ money may be spent locally and thus fewer leakages occurred. Also, outside groups and private citizens likely injected new money into the economy.

In their recent book, Rural Wealth Creation, Pender, Weber, Johnson, and Fannin tackle the topic of disasters on page 3. They point out that there is a big difference between increases in “flows” of economic activity (e.g., sales) and increases in “stocks” of wealth and well-being. They note that few of us would say residents of a city ravaged by a hurricane are better off, even if sales spike to record highs.

Another issue with disaster recovery is that poor residents and small businesses are less likely to have either insurance or the means to rebuild and recover. Thus, a disaster can drive greater disparity among the population and between neighborhoods.

Do disasters help the economy? The insurance payments and disaster relief efforts do help local economies recover, and sometimes parts of the economy may bounce back stronger than ever before. But I don’t think you’ll find many communities dreaming, “If only we could have a disaster.”