Unit 6 Social and Economic Impacts Prepared by: Kevin M. Simmons, Ph.D. Austin College

1. Unit 6Social and Economic ImpactsPrepared by:Kevin M. Simmons, Ph.D.Austin College Catastrophe Readiness and Response Course Session 6

2. Social Vulnerability • Traditional Emergency Management • Social Vulnerability Approach to Emergency Management Catastrophe Readiness and Response Course Session 6

3. Social Vulnerability • Vulnerable Populations • Elderly • Children • Infirm • Low Income Catastrophe Readiness and Response Course Session 6

4. Basic Economics • The price and quantity of goods available in a market are determined by the demand for the good and the supply of a good available at any given time. • To illustrate let’s consider a simple graph. Catastrophe Readiness and Response Course Session 6

5. Basic EconomicsPrice Determination • Demand has a downward slope to show that consumers will purchase more as price decreases. • Supply has an upward slope to show that firms will sell more as price increases. Catastrophe Readiness and Response Course Session 6

6. Basic EconomicsMarket Intervention • This graph shows what happens when an artificial price below the market price is imposed on the market. This action results in a shortage of the good. Catastrophe Readiness and Response Course Session 6

7. Basic EconomicsMarket Intervention • This graph shows what happens when an artificial price above the market price is imposed on the market. This action results in a surplus of the good. Catastrophe Readiness and Response Course Session 6

8. Basic EconomicsMarket Intervention • This graph shows what happens when an artificial quantity is imposed on the market. This action results in a shortage of the good. Catastrophe Readiness and Response Course Session 6

9. Basic EconomicsMacro Issues • Macroeconomics considers issues that extend beyond the market for a particular good. We are still concerned about price and quantity but now price is the price level of all goods and quantity is the quantity of all goods commonly referred to as Gross Domestic Product. • Long Run Aggregate Supply (LRAS) is shown as a vertical line because it represents a sustainable level of potential output. Catastrophe Readiness and Response Course Session 6

10. Basic EconomicsMacro Issues • Short Run Aggregate Supply (SRAS) has an upward slope to show how producers respond to higher prices. • Aggregate Demand has a downward slope to show how consumers respond to higher prices. Catastrophe Readiness and Response Course Session 6

11. Basic EconomicsDemand Pull Inflation • If Aggregate Demand increases beyond the economy’s ability to provide the goods on a sustainable basis, (LRAS) inflation occurs. Note the difference in the price level. Catastrophe Readiness and Response Course Session 6

12. Basic EconomicsCost Push Inflation • If SRAS decreases to a point below the LRAS, inflation can also occur. Note the difference in the price level. Catastrophe Readiness and Response Course Session 6

13. Basic EconomicsRecession • If Aggregate Demand decreases to a point below the LRAS, recession can occur. • The official definition of a recession is two consecutive quarters of a decline in Real GDP. Catastrophe Readiness and Response Course Session 6

14. Basic EconomicsEmployment • One crucial question for macroeconomists is employment. • To illustrate the issues, consider a graph intended to represent the market for labor. • Firms Demand labor so the demand curve comes from their need for workers. • Workers Supply labor so the supply curve comes from their desire to work. Catastrophe Readiness and Response Course Session 6

15. Basic EconomicsDecrease in Employment • If Demand for labor decreases, some workers will lose their jobs. Usually this decrease in labor demand is associated with a recession since firms are unable to hire workers when demand for their products declines. Catastrophe Readiness and Response Course Session 6

16. Basic EconomicsIncrease in Employment • If Demand for labor increases, firms will need to hire more workers, pushing wages up. Usually this is associated with an expansion in economic activity. Catastrophe Readiness and Response Course Session 6

17. Natural Hazard IssuesRisk/Uncertainty • Risk – weighs the chance of a good outcome against the chance of a bad outcome • Example: Should I buy stock in a particular company? • Good outcome: Price of stock increases • Bad outcome: Price of stock decreases • How do you decide? Catastrophe Readiness and Response Course Session 6

18. Natural Hazard IssuesRisk/Uncertainty • While risk weighs the chances of a good outcome versus bad, those chances (Probabilities) can be quantified. • Uncertainty is the inability to quantify those probabilities or more broadly, the degree to which those probabilities are known. Catastrophe Readiness and Response Course Session 6

19. Natural Hazard IssuesRisk/Uncertainty • Which is riskier? • Purchase 100 shares of Disney? • Purchase 100 shares of a new startup company? • Since the startup has no history, the chances of an increase in price is unknown. Catastrophe Readiness and Response Course Session 6

20. Natural Hazard IssuesRisk/Uncertainty • Natural Hazards are a special case since they occur so infrequently that most people do not understand the risk. • Howard Kunreuther suggested that these hazards are “Low Probability, High Consequence” events. • Question: How do people, who live in threatened areas treat this risk? Catastrophe Readiness and Response Course Session 6

21. Natural Hazard IssuesMitigation • Simply put, mitigation are actions taken before a disaster, that will minimize the negative consequences of the disaster. • These actions can be by individuals or by the community. Catastrophe Readiness and Response Course Session 6

22. Natural Hazard IssuesMitigation • Will individuals take actions, before a disaster occurs, to protect themselves? • One way to examine this question is to see if individuals place any “value” on homes that contain mitigations. • Answer appears to be yes, at least in areas where a known hazard is obvious to residents. Catastrophe Readiness and Response Course Session 6

23. Natural Hazard IssuesMitigation • Can government stimulate voluntary mitigation? • Tax Incentives • SB 696 State of Oklahoma passed a measure in 2002 to grant a property tax exemption of up to 10% for homes having a tornado saferoom. Catastrophe Readiness and Response Course Session 6

24. Natural Hazard IssuesMitigation • Can government stimulate voluntary mitigation? • Direct Subsidy • After the May 3, 1999 tornado in central Oklahoma, FEMA and the state of Oklahoma provided grants to homeowners who installed tornado saferooms. Catastrophe Readiness and Response Course Session 6

25. Natural Hazard IssuesPublic Mitigation • What options are available to communities to lessen the impact of predicable disasters? • Are there competing pressures placed on officials regarding these actions? Catastrophe Readiness and Response Course Session 6

26. Natural Hazard IssuesPublic Mitigation • Land Use Restrictions (Local Government) • Communities prone to floods may decide to restrict development in low lying areas • Competing Pressures? • Developers • Residents Catastrophe Readiness and Response Course Session 6

27. Natural Hazard IssuesPublic Mitigation • Building Codes (Local Government) • Communities prone to predictable hazards can adopt requirements on builders to construct buildings/homes to withstand the hazard. • Hurricanes • Tornadoes • Earthquakes • Competing Pressures? Catastrophe Readiness and Response Course Session 6

28. Natural Hazard IssuesPublic Mitigation • Warning Systems (Federal Government) • Tornadoes • NWS Doppler Radar • Hurricanes • NWS Flights • Geo-Hazards • USGS Monitoring Catastrophe Readiness and Response Course Session 6

29. Natural Hazard IssuesPublic Mitigation • Evacuation (Local Government) • Difficult due to the uncertainty regarding storm strength, direction, etc. • Challenges • False Alarms • Voluntary vs. Mandatory • Economic Effect Catastrophe Readiness and Response Course Session 6

30. Macro IssuesGross Domestic Product • This graph shows how a disaster can affect local economic activity. If people are forced to move, the Aggregate Demand will decrease causing a recession, at least locally. Catastrophe Readiness and Response Course Session 6

31. Macro IssuesGross Domestic Product • If the affected region produces a strategic product for the rest of the country, larger problems can migrate to other parts of the country. • Example: Disruption of oil refining capacity. Disruption of transportation network. Catastrophe Readiness and Response Course Session 6

32. Macro IssuesInflation • Inflation • If the disaster causes the supply of goods to decrease in the affected region, prices will increase. • On a larger scale, if goods from the affected region are disrupted for distribution elsewhere, then the larger economy will experience inflation as well. Catastrophe Readiness and Response Course Session 6

33. Macro IssuesInflation • Inflation • Inflation can also be caused by a sharp increase in the demand for goods that is not met by a similar increase in supply. Disasters can increase the demand for some goods, particularly essential items, like food and fuel. If supply of these goods cannot meet demand, prices may increase. Catastrophe Readiness and Response Course Session 6

34. Macro IssuesEmployment • The question of how a disaster will affect employment can give ambiguous answers. • Increase in local employment • Rebuilding efforts may actually increase local aggregate employment • Decrease in employment • A large disaster, like Hurricane Katrina, may cause large migration. This will have the effect of decreasing the supply of labor thus causing an overall decrease in employment. Catastrophe Readiness and Response Course Session 6

35. Macro IssuesEmployment • This graph shows how a loss of labor supply can affect the labor market in the disaster region. Remaining employers and firms trying to help rebuild the community have to pay higher wages due to the loss of workers. Catastrophe Readiness and Response Course Session 6

36. Macro IssuesMigration • Voluntary Migration • A disaster can change the opportunities available to residents. If they perceive that they would be better off in a new location, this can prompt some migration • Involuntary Migration • When disasters make living or working in an area impossible for many, mass migration can occur Catastrophe Readiness and Response Course Session 6

37. Macro IssuesMigration • Mass Migration Examples • Western Oklahoma (1930’s) • Drought conditions caused many families who depended on farming to move. Other business that depended on the farmers were also affected. • Southern Louisiana/Mississippi (2005) • Hurricane Katrina caused the largest migration in recent history. Some evidence exists that those of limited means are the least likely to attempt a return to their former homes. Catastrophe Readiness and Response Course Session 6

38. Financial MarketsInsurance • Insurance companies are financial intermediaries which help spread the risk of various hazards. • Insurers collect premiums from a large pool of customers and provide payments to those who experience some type of loss. Catastrophe Readiness and Response Course Session 6

39. Financial MarketsInsurance • If an area is struck by more disasters than is historically normal, premiums will increase. • The recent hurricanes in Florida caused several insurance companies to stop issuing insurance in that state. If this trend continues, the cost to live in that state will rise dramatically, making further growth difficult. Catastrophe Readiness and Response Course Session 6

40. Financial MarketsInsurance • Flood Insurance • Flooding is one hazard that is not covered on a standard homeowners policy as many residents of Louisiana and Mississippi discovered after Hurricane Katrina • It is available through a federal government program at subsidized rates. Catastrophe Readiness and Response Course Session 6

41. Financial MarketsInsurance • To keep the cost of insurance affordable, insurance companies are strong advocates of measures that will limit property damage. • Strict Building Codes • Restricted development in vulnerable areas Catastrophe Readiness and Response Course Session 6

42. Financial MarketsBanking • A large disaster would most likely negatively affect local or regional banks rather than a large national bank • Loans are based on the value of pledged collateral • Any uninsured damage to that collateral makes default more likely • If the disaster causes local businesses to cease operating, the local banks will suffer due to the loss of loan and deposit activity Catastrophe Readiness and Response Course Session 6

43. Financial MarketsBanking • A solid banking system is essential to any local economy to survive • The depression of the 1930’s led to the creation of the Federal Deposit Insurance Corporation (FDIC) which has made a very stable banking system. • Recent research suggests that banks are resilient even after a local disaster. Catastrophe Readiness and Response Course Session 6

44. Financial MarketsReal Estate • Real estate markets are local. As a result, they rise or fall as local economies rise or fall. A disaster that diminishes economic activity will be felt in the value of local real estate. • Disasters also reveal local vulnerabilities that may not have been known. As a result an individual subdivision, which may have been populated may cease to be after a disaster. Catastrophe Readiness and Response Course Session 6

45. Financial MarketsReal Estate • Generally speaking, real estate markets recover as the local economy recovers. • One study after the 1989 earthquake in San Francisco found that the seismic zones had over estimated damage thus causing real estate values to increase after the quake. Catastrophe Readiness and Response Course Session 6

46. Event Analysis • Picher, OK • Tornado (2008) • Superfund Site Catastrophe Readiness and Response Course Session 6

47. Event Analysis • Greensburg, KS • Tornado (2007) • Rebuilding community using “green” construction techniques Catastrophe Readiness and Response Course Session 6

48. Event AnalysisGalveston, TXHurricane (1900) • Galveston, TX • Hurricane (1900) • Issac’s Storm • Motivated community to adopt a mitigation strategy (sea wall) Catastrophe Readiness and Response Course Session 6

49. Event AnalysisMoore, OKTornado (1999/2003) • Moore, OK • Tornado (1999/2003) • Two tornados almost exactly 4 years apart followed a very similar storm path • Rebuilding was immediate and the community recovered quickly Catastrophe Readiness and Response Course Session 6

50. Event AnalysisNew Orleans, LAHurricane (2005) • New Orleans, LA • Hurricane (2005) Catastrophe Readiness and Response Course Session 6