Thursday, October 3, 2019

econlife - How to Calculate the Cost of a Disaster by Elaine Schwartz

With Dorian in the news, this year we’ve moved past Andrea, Barry, and Chantal, and might soon learn about Erin, Fernand, and Gabrielle. As for the rest, these names complete the 2019 hurricane list:
  • Humberto
  • Imelda
  • Jerry
  • Karen
  • Lorenzo
  • Melissa
  • Nestor
  • Olga
  • Pablo
  • Rebekah
  • Sebastien
  • Tanya
  • Van
  • Wendy

When we think about a hurricane or some other disaster like a drought or a wildfire, it helps to calculate the cost. Knowing the numbers, we can better assess risk, determine insurance needs, and do some planning for the future.

So let’s take a look at how they figure out the cost.

Calculating Disaster Costs

In a recent update, NOAA looked at the weather and climate disasters whose cost exceeded $1 billion. So far there have been six:

Totaling 14, during 2018 the weather and climate events whose cost was more than $1 billion topped the average of 6.3 events from 1980 to 2018:

Ranging from wildfires and hurricanes to droughts and hail storms, these were the 14:

The cost “scorekeeper” for the U.S. government is the National Center for Environmental Information (NCEI). When they figure out the cost of a disaster, they include items like the following:

If we were to rank storm costs, then hurricanes are at the top of the list at an average of $22.3 billion per event. Valued at far less, drought is #2 at an average cost of $9.6 billion. Then, dropping to an average of $5.0 billion per event, we have wildfires.

This was the NCEI summary:

However, the NCEI points out that they do not include the value of lives lost or the cost of healthcare. If they included what U.S. regulatory agencies call the Value of a Statistical Life (VSL) each fatality could add many millions of dollars to disaster costs. You can see below that no one quite agrees how much:

Our Bottom Line: GDP Impact

The Broken Window Fallacy is one way to explain the economic impact of a disaster. In “What is Seen, and What is Not Seen,” economist Frédéric Bastiat (1801-1850) reminds us of what we are not doing as we recover from a calamity. When a window is broken, the glazier gets employment and the GDP rises. However, we just wind up with the window we had once had. Or, as he said, “To break, to spoil, to waste, is not to encourage natural labour; or, more briefly, ‘destruction is not profit.'”

My sources and more: Good for weather information, NOAA had the up-to-date disaster facts and also cost calculation information. Next, The Farmers Almanac was a handy place to get 2019 hurricane names. And finally, this paper takes a brief contrarian look at how NOAA calculates losses. However, my most interesting read was Bloomberg’s VSL discussion.

Ideal for the classroom, reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.