Seeking a Silver Lining to Calamities

Everyone knows the havoc disasters wreck on finances. How about the good they have?
by | December 15, 2011
 

2011 was a disaster. Just ask the residents of Joplin, Mo., and Tuscaloosa, Ala. (tornadoes); Vermont and Tennessee (flooding); Texas (wildfires); and New England (October snowstorm). All totaled -- barring another last-minute horrific weather event -- this year's share of billion-dollar weather disasters stands at 14, breaking the previous 2008 record of nine. The national price tag is in excess of $53 billion. For the states and cities in the eye of these storms, the revenue and property losses, infrastructure repairs and replacements, and other asset losses are crippling.

Can anything financially positive come out of a disaster? With all the reconstruction and new investment that takes place, is there a lift to the local economy? Luckily, there are economists who study this kind of thing. To find out, I sat down with two of them: Alexandre Padilla, economics professor at Metropolitan State College of Denver, and Kevin M. Simmons, economics professor at Austin College and author of the book, The Economic and Societal Impact of Tornadoes. Here's an edited version of our conversation.

Does reconstruction lift the economy and add new value?

Alexandre Padilla: There is the argument that if somebody breaks a window, it creates a job for the window maker. To extend that to a natural disaster, if you destroy a bunch of houses or cars, it gives jobs to people to replace those destroyed assets. What we don't see, though, is what could have been done with the money you used to replace the houses and cars.

When you replace or rebuild something that's been destroyed, you have to decide what should be built in its place -- something that's more or less valuable? If it's more valuable, you do create some value but not as much as you think. You still have money displaced.

What are the challenges to an economic recovery from a disaster?

Kevin Simmons (KS): In Joplin, 8,000 structures were destroyed and property assessments were affected. I suspect that most of that tax base will be replaced. Joplin is in a part of the country that has been doing better than others. The real challenge for city officials comes when rebuilding starts. Normally, a city gears up for what they expect to be the number of houses built in a year -- typically 100 to 200 houses. You have a staff of inspectors for that. If every one of those homeowners who lost homes in the Joplin tornado rebuilds, 8,000 structures will be built in a short period of time. The challenge is to gear up for this burst of construction activity and to do so in a way that doesn't slow redevelopment.

Does the purchase of building supplies act as a shot in the arm for sales tax revenue?

KS: There is a burst of economic activity in the recovery phase. If the rebuilders are buying locally, the revenues go up on sales taxes. But the construction needs are not likely to be completely filled by local suppliers. One of the buildings destroyed in Joplin was the Home Depot. So construction companies look to buy plywood, but if they can't get a sufficient supply locally, they may have to truck it in. That happened with Hurricane Andrew [in 1992]. The area in southern Florida devastated by Andrew was so big that the price of plywood all over the country went up. You couldn't buy supplies in the Miami area; you had to find it elsewhere. So the answer to the question on tax revenue is that increased construction activity will affect a local economy in that you may see a residual effect from spending by construction crews brought in to do the work.

In Vermont -- and many other places that experienced disastrous floods this year -- roads, bridges and buildings were washed away. Those are expensive losses. They also threaten the state's tourism industry.

KS: What we saw in Irene was a hurricane moving up the densely populated eastern seaboard. Tons of rain from the storm created all kinds of havoc. We saw videos of bridges being swept away. It's likely that event has highlighted the vulnerabilities of towns and cities in Vermont -- vulnerabilities you didn't know existed or were ignoring. When you rebuild, what is a city going to do to keep losses at a minimum the next time? Is it going to allow people to rebuild in the same location or will the city say, "That's not a good place to build a home." In terms of economic development from here on out, how is the city going to respond to that vulnerability and what effect will that have on the community?

This is the thing about these disasters: We have a tendency to think that if one hasn't happened since I lived here -- 20 or 30 years -- then it won't happen. But in geologic terms, thirty years is a nanosecond. That's the kicker in redevelopment. If people in that community did not have flood insurance, they will have to rebuild from their own personal funds. If you were a bank, would you loan to somebody to build where they can't get insurance? A disaster is an opportunity to learn something you didn't know. Areas where they build around these rivers or brooks are incredibly picturesque and beautiful, but Mother Nature can be unpredictable and vicious.

And expensive. Are there financial lessons to be learned from a disaster?

KS: Each local community needs to be aware of what hazards it is likely to encounter. A resilience plan has to speak to that. I would guess that most local communities have a pretty good feel for what's likely and what's not. After Hurricane Andrew, Florida learned its vulnerabilities and instituted new building codes. In 2004 when Hurricane Charley hit, the damage to newer homes was much less than to those built in the go-go years when the state was ramping up construction. Florida took a tragedy and learned from it in terms of what is required in their building codes to prevent loss.

Anything else?

KS: Let's say a developer comes in who owns land that happens to be in a flood plain. He puts pressure on a city to allow him to build. It may be years before any kind of disaster happens. When it does, you realize, "Wow, maybe we shouldn't have put development there." But you've got to feel for the city: Every time you build a house, that's more tax revenue. When something bad happens that highlights it was not a good idea, maybe it strengthens the resolve of politicians to resist that temptation. We have short memories.

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