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Economics of Disasters

Economics of Disasters. Are Disasters Good for the Economy?. Directions: Distribute the clues so that each person is holding at least one clue. Clues #1-4: Black Death, #5-8: Spanish Flu, #9-10: Hurricane Katrina

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Economics of Disasters

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  1. Economics of Disasters

  2. Are Disasters Good for the Economy? • Directions: • Distribute the clues so that each person is holding at least one clue. • Clues #1-4: Black Death, #5-8: Spanish Flu, #9-10: Hurricane Katrina • Share the clues in a round-robin fashion, putting each clue into one of the following piles: • Relevant to solving the problem • Not helpful in solving the problem • Not sure • Answer the question: ARE disasters good for the economy? • Determine the least # of clues necessary to answer the question. • Be prepared to defend your answer & clue selection.

  3. Are Disasters Good for the Economy? NO ! labor-intensive products labor-intensive products labor-intensive products NO! NO! NO! NO! NO! NO! NO!

  4. Scarcity IS Resources are limited Resources are necessary for production (outputƒ resources) Disasters increase resource scarcity (disasters destroy land, labor &/or capital) Output must be lower than it would have been had the disaster not occurred GDP

  5. Activity Clue #9: J.P. Morgan senior economist Anthony Chan: "Preliminary estimates indicate 60 percent damage to downtown New Orleans. Plenty of cleanup work and rebuilding will follow in all the areas. That means over the next 12 months, there will be lots of job creation, which is good for the economy." HUH?

  6. Terminology & Measurement: • What do we mean by “the economy”? 2 options • output = real GDP • well-being” or standard of living = real GDP/capita • or • economic growth: • increase in real GDP &/or real GDP/capita • ???? Confusion ???? : Did he mean level or rate?

  7. Level vs. Rate Real GDP/capital Real GDP/capital time time

  8. Economic Growth pre & post DisasterRate?Level? trend QD Output D B Time disaster bottom

  9. Economic Growth:Rate?Level? trend QD Output D R Time disaster recovery

  10. Economic Growth:Rate?Level?When ? trend Output Q Time

  11. Economic Growth:Rate?Level?When ? trend Q Output Time

  12. Economic Growth StimulusNO Evidence for this Scenario new trend old trend Output Q Time

  13. Activity Clue #9: J.P. Morgan senior economist Anthony Chan: "Preliminary estimates indicate 60 percent damage to downtown New Orleans. Plenty of cleanup work and rebuilding will follow in all the areas. That means over the next 12 months, there will be lots of job creation, which is good for the economy." How do we get here ?

  14. Models: Tools of Economic Reasoning Production Possibilities Frontier (PPF) x Assumptions of the Model: All resources are used to produce the 2 categories of products on the X and Y axes At all points on the curve, all resources are fully employed, given the available technology. (we choose from the possibilities) services goods

  15. Models: Tools of Economic Reasoning Production Possibilities Frontier (PPF) Assumptions of the Model: Technological improvements or the discovery of new resources makes more production possible. The curve moves “out,” to the right. Destruction of resources or technology makes less production possible; the curve moves “in” and “down,” to the left. services goods

  16. Productivity:output per unit of input ƒ { human capital, physical capital } • skills & talents • education • training • buildings • machines & tools • technology

  17. services services goods goods Labor Productivity:output per person-hour ƒ {availability of capital} pop. growth pandemic Effect of population change in economy with little capital

  18. Capital to Labor Ratio ratio falls ratio rises capital-intensive products capital-intensive products labor-intensive products labor-intensiveproducts

  19. ratio falls ratio rises capital-intensiveproducts capital-intensive products labor-intensiveproducts labor-intensiveproducts

  20. ratio falls ratio rises capital-intensive products capital-intensiveproducts labor-intensive products labor-intensiveproducts

  21. ratio falls ratio rises capital-intensive products capital-intensiveproducts labor-intensive products labor-intensive products

  22. ratio falls ratio rises capital-intensive products capital-intensive products labor-intensive products labor-intensive products

  23. ratio falls ratio rises capital-intensive products capital-intensive products labor-intensive products labor-intensive products

  24. ratio falls ratio rises capital-intensive products capital-intensive products labor-intensive products labor-intensive products

  25. Are Disasters Good for the Economy? • NO! NO! NO! NO! NO! • Resources are destroyed • Total output ( real GDP) falls The PPF always shrinks:

  26. Why Might Disasters SEEM To BeGood for the Economy? economic “well-being” - standard of living (real GDP/capita) When capital to labor ratios rise, real GDP/capita may rise – even as total real GDP falls capital-intensive products labor-intensive products

  27. Activity Clue #9: • J.P. Morgan senior economist Anthony Chan: "Preliminary estimates indicate 60 percent damage to downtown New Orleans. Plenty of cleanup work and rebuilding will follow in all the areas. That means over the next 12 months, there will be lots of job creation, which is good for the economy." • Questions to Ask: • Is this a credible source? • If so, are the standards for comparison specified? • (What are you measuring?)

  28. Frédéric Bastiat “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

  29. “What Is Seen and What Is Not Seen”Economic Sophisms, 1845 “The Broken Window Fallacy” Suppose James Goodfellow’s son breaks a window?

  30. The Broken Window Fallacy "It's an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?"

  31. . . . Suppose that it will cost six francs to repair the damage. . . . The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen. But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.”

  32. It is not seenthat if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. Let us next consider industry in general. The window having been broken, the glass industry gets six francs' worth of encouragement; that is what is seen. If the window had not been broken, the shoe industry (or some other) would have received six francs' worth of encouragement; that is what is not seen.

  33. Frédéric Bastiat . . . Destruction is not profitable.”

  34. He Should Know Better: "Ghastly as it may seem to say this, the terror attack . . . could do some economic good." [. . . destruction will stimulate the economy through business investment in rebuilding] . Paul Krugman, Princeton University New York Times, Sept. 14, 2001 Bastiat Hasn’t Been Forgotten: We know this has to be fishy just by asking: Would there have been even greater "economic good" had the terrorists succeeded in destroying buildings in Los Angeles, San Francisco, Chicago, Philadelphia, Boston and all other major cities? Of course, you and I know that is utter nonsense. Property destruction always lowers the wealth of a nation. I hope one of Krugman's students asks him, "If property destruction is good for the economy, why aren't Beirut and Belfast boom towns? Walter Williams, George Mason Universityhttp://www.jewishworldreview.com/cols/williams100401.asp

  35. "If property destruction is good for the economy, why aren't Beirut and Belfast boom towns?”

  36. Are Disasters Good for the Economy? 1. How do we measure non-tangible human loss?

  37. Are Disasters Good for the Economy? 2. How do we measure what might-have-been? Disaster casualties – immediate AND future losses Unrealized potential

  38. Over ???? population

  39. Paul Ehrlich Julian Simon

  40. “The Ultimate Resource – Is Human Intelligence in a Free Society”Julian Simon “[The] . . . more people there are, the more minds that are working to discover new sources and increase productivity. . . .”

  41. Knowledge & Productivity “The source of . . . improvements in productivity is the human mind, and a human mind is seldom found apart from a human body. And because improvements – their invention and their adoption – come from people, the amount of improvement plainly depends on the number of people available to use their minds.” (Simon, The Ultimate Resource 2, 372)

  42. Productivity & Population “[The] data show clearly that the bigger the population of a country, the greater the number of scientists and the larger the amount of scientific knowledge produced; more specifically . . . scientific output is proportional to population size, in countries at the same level of income.” (Simon, The Ultimate Resource 2, 380, 385)

  43. Not Just Rocket Science . . . “. . . The main contribution that additional persons make to society is the new knowledge of all kinds – scientific, organizational, and everyday knowledge . . . – that they create and leave behind them. And to repeat an earlier statement, these gains are the result not only of geniuses but of a real number of work-a-day ingenious people.” (Simon, Ultimate Resource 2, 380 & 385)

  44. Not Everyone Is Hurt By Disasters Fallacy of Composition: To erroneously assume that what is true of the whole is true of an individual Economic change creates winners and losers.

  45. And the Winners Are . . .

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