The earthquake bump

Behind the scenes of an unspeakable human tragedy in Haiti, an economic theory is being tested.

It’s possible, some economists argue, that a natural disaster gives a bump to the economy of victimized countries. Douglas Dacy and Howard Kunreuther, two young analysts at the Institute for Defense Analyses, studied the aftermath of the Great Alaska Earthquake of 1964, and found that money pouring into Alaska meant many Alaskans ended up better off.

“We got a lot of hate mail for that finding,” Kunreuther told the Boston Globe last fall.

Gus Faucher, director of macroeconomics at Moody’s, also studies the economics of natural disasters, the Globe reported:

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.

Let’s face it: The whole topic is unseemly, especially since some disaster economists say considering the long-term growth of a disaster area is likely to penalize those least likely to contribute to it — the poor and homeless.

And Mark Thornton, an economist, points to other research that shows that natural disasters in poor countries do little good. Natural disasters, he says, are bad. Period.

Only in the richest of the developing economies studied were there any positive effects and this might provide some clue or clarity to solving the puzzle of disasters. Wealthier countries tend to rebuild after a disaster with more advanced capital goods, while poorer nations do less rebuilding. This rebuilding then shows up in GDP statistics and is thus claimed as positive benefit…

Therefore we can rest the common-sense case that natural disasters are indeed bad. A nation that experiences natural disasters will be harmed directly and will be less preferred by investors to otherwise similar nations that are disaster free. More disasters do not improve the economy, and as with Bastiat’s broken-window fallacy, we cannot achieve prosperity in any sense via destruction.

My oldest son today asked a somewhat related question. If Haiti was a human disaster before Tuesday’s earthquake, why did it take an earthquake for many of us to step forward and want to do something about it? That, of course, is not an economic equation. The answer is simple: We want to fix that which we see needs fixing. It takes an earthquake to force us to see it.

  • Alison

    Bob, you’ve raised a pretty good kid if he is asking an insightful question like that.

    Of course, many of the people in Haiti I have heard on MPR today have been aid workers who were trying to help before the quake, so some people had seen the need before.