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September 06, 2005

Making sense of economic impacts - Comparing apples with apples


Posted to Author: Pielke Jr., R. | Environment

For further reading:

Downton, M., J. Z. B. Miller and R. A. Pielke, Jr., 2005. Reanalysis of U.S. National Weather Service Flood Loss Database, Natural Hazards Review, 6:13-22. (PDF)

Pielke, Jr., R. A., 2000: Flood Impacts on Society: Damaging Floods as a Framework for Assessment. Chapter 21 in D. Parker (ed.), Floods. Routledge Press: London, 133-155. (PDF)

Pielke, Jr., R. A., and R. A. Pielke, Sr. (eds.), 2000: Storms: a volume in the nine-volume series of Natural Hazards & Disasters Major Works published by Routledge Press as a contribution to the International Decade for Natural Disaster Reduction. Routledge Press: London.

Pielke, Jr., R. A., 1997: The Social and Economic Impacts of Weather Workshop Report, ESIG/NCAR, Boulder, CO, May.

Accurate estimates of the economic impacts of a disaster's impacts are important for a number of practical reasons. In 1999, the National Research Council (NRC) issued a report titled, "The Impacts of Natural Disasters: A Framework for Loss Estimation" which stated that such data would be useful in making decisions about disasters:

" ... a baseline set of loss data, together with cost and benefit estimates of alternative mitigation measures, would allow the federal government and individuals and firms in the private sector to design and implement cost-effective strategies for mitigating the losses from natural disasters. Insurers could certainly use the data to improve their estimates of future payouts associated with disasters. And researchers and experts in disaster loss estimation could benefit from a standardized data base that would enable them to improve estimates of both the direct and indirect losses of disasters. These improvements in turn would assist policymakers in their efforts to devise policies to reduce the losses caused by future disasters. Beyond providing an indicator of total natural disaster losses to the nation, the framework for loss estimation described in this report would also provide detailed information on losses. A better understanding of issues such as who bears disaster losses, what are the main types of damages in different disasters, and how those losses differ spatially, are of critical importance in making decisions about allocating resources for mitigation, research, and response."

However, the NRC also found, "Despite the frequency and expenses of natural disasters, there exists no system in either the public or private sector for consistently compiling information about their economic impacts." The NRC's conclusions have been echoed by reports from the Heinz Center, Rand (prepared for OSTP), and from scholars such as Mileti, Hooke and Changnon. To date, no such database exists. A good deal of my own research over the past ten years has been motivated by this situation.

Tabulating economic losses is not straightforward. Damage estimates are a function of what is counted, how it is counted, over a certain time and space. In what follows, I present an excerpt from our 1997 book on hurricanes that briefly describes some of the methodological challenges of damage estimation and tabulation. Tomorrow we'll start looking at some actual data.

For those of you who would like a reference to the discussion below, a version of the below also appeared as a short essay in 1997. Here is that reference:

Pielke, Jr., R. A., 1997: Trends in Hurricane Impacts in the United States. Crop Insurance Today, 30(3), 8-10,18. ( PDF, apologies for the poor quality of the copy)

Begin extended excerpt -----------------------------

In the aftermath of any extreme event there is a demand for a bottom-line measure of damages in dollars. There are many valid ways to measure the costs of a hurricane. Any assessment of impacts resulting in a estimate of total damages associated with a disaster must pay explicit attention to assumptions guiding the analysis in order to facilitate interpretation of the estimate. The analyst needs to pay attention to five factors that can undermine damage assessment: Contingency, Quantification, Attribution, Aggregation, and Comparison.

Contingency: The Problem of Multiple-Order Impacts

When a hurricane strikes a community, it leaves an obvious path of destruction. As a result of high winds and water from a storm surge, homes, businesses, and crops may be destroyed or damaged, public infrastructure may also be compromised, and people may suffer injuries or loss of life. Such obvious impacts can be called "direct impacts" because of the close connection between event and damages. The costs associated with direct impacts are generally easiest to assess because they come in discrete quantities. Federal insurance payouts are one measure of direct impacts, as are federal aid, public infrastructure reconstruction, and debris removal. Table 1 (expressed in curren-tyear dollars) shows the direct impacts associated with Andrew's landfall in south Florida in August 1992.

Secondary impacts are those that are related to the direct impacts of a hurricane. Generally, secondary impacts result in the days and weeks following a hurricane's passage. For example, a hurricane may destroy a water treatment plant (Changnon 1996). The direct impact is the cost associated with rebuilding the plant; secondary impacts might include the costs associated with providing fresh water for local citizens. In general, such secondary impacts are more difficult to assess because they require estimation and are part of an existing social process; e.g., estimating the costs of providing fresh water in lieu of that which would have been provided by the plant requires some sense of what would have occurred without the hurricane's impact.

Further order impacts on time scales of months and years occur and can easily be imagined. For example, a hurricane may destroy a number of businesses in a community resulting in a decrease in tourist visits, which in turn leads to a shortfall in sales tax collection. As a result, community services that had been funded from sales tax revenues may suffer, leading to further social disruption and thus additional costs.

Estimation of the costs associated with such impacts is difficult to accomplish with much certainty because of numerous confounding factors. In short, a hurricane serves as a shock to a community that leaves various impacts which reverberate through the social system for short and long periods. Pulling the signal of the reverberations from the noise of ongoing social processes becomes increasingly difficult, as the impact becomes further removed in time and in causation from the event's direct impacts.

Attribution: The Problem of Causation

Related to contingency is attribution. In the aftermath of a natural disaster people are quick to place blame on nature: "The hurricane caused billions of dollars in damages." However, it is often the case that "natural" disasters are a consequence of human failures. Damage is often a result of poor decisions of the past and inadequate preparation rather than simply the overwhelming forces of nature. It is often at the intersection of extreme events and poor preparation that a disaster occurs. An important aspect of learning from a hurricane is to understand what damages and casualties might have been preventable and which were not. Gross tabulations of damages neglect the question of why damage occurred, and often implicitly place blame on nature rather that ourselves.

Quantification: The Problem of Measurement

How much is a life worth? Or put in practical terms, How much public money are people willing to pay to save one more life in the face of an environmental hazard? According to a review by Fischer et al. (1989) the public assigns between $2.0 million and $10.9 million as the value of a human life. The difficulties associated with assigning an economic value to a human life is representative of the more general problem of assessing many of the costs associated with a hurricane's impact. Similar questions might include: What is the value of a lost ecosystem, park, or unrecoverable time in school, etc.? What are the costs associated with psychological trauma? The difficulties in quantifying the cost of a life are representative of the more general problem of placing a dollar value on damages that are not directly economic in nature.

A hurricane impacts many aspects of society that are not explicitly associated with an economic measure (e.g., well-being). As a consequence, any comprehensive economic measurement of a hurricane's impact necessitates the quantification of costs associated with subjective losses. Therefore, the assumptions that one brings to assessment of value can affect the bottom line. Care must be taken to make such assumptions explicit in the analysis.

Aggregation: The Problem of Benefits and Spatial Scale

Hurricanes are not all costs; however estimates of impacts rarely consider benefits. Consider the following example: Following a hurricane that severely damages agricultural productivity in a region, commodity prices rise nationwide. Thus, while farmers in the affect region see losses, farmers outside of the region may actually see significant benefits due to the hurricane. At a national level the hurricane may thus have net economic benefits.

The example of farmers seeing gains or losses, depending upon where they farm, points to two sorts of issues: benefits and spatial scale. Arguably, following every disaster some individuals and groups realize benefits in some way from the event. Should such benefits be subtracted from a hurricane's total impact? Further, the picture of damages depends upon the scale of the analysis. For the same event a county may experience complete devastation, the state moderate impacts, and the nation positive benefits.

Transfers of wealth through disaster aid further complicate the picture. Because there are multiple valid spatial scales from which to view a hurricane's impacts careful attention must be paid to the purposes of loss estimates. Furthermore, it is important to remember that impacts go beyond those things that can be expressed in dollars -- Suffering and hardship are losses independent of scale.

Comparison: The Problem of Demographic Change

As a consequence of the challenges facing meaningful impact assessment, comparing hurricane impacts across time and space is problematic. Past intense hurricanes of the past would certainly leave a greater legacy had they occurred in more recent years. Yet, damage statistics often go into the historical record noting only the event and economic damage (usually adjusted only for inflation). Such statistics can lead to mistaken conclusions about the significance of trends in hurricane damage. Because population and property at risk to hurricanes has changed dramatically this century, such statistics may grossly underestimate our vulnerability. Therefore, care must be taken in the use of bottom line damage estimates to reach policy conclusions.

The Bottom Line: Apples with Apples, Oranges with Oranges

There are many ways in which to measure the costs associated with a hurricane. There is no one "right" way. The method chosen for measurement of the costs of damages depends upon the purposes for which the measurement is made, and therefore must be determined on a case by case basis. No matter what method is employed when assessing or using the costs associated with a hurricane's impact, the analyst need to ensure at least two things. First, the analyst needs to make explicit the assumptions which guide the assessment: What is being measured, how, and why. Second, compare apples with apples and oranges with oranges. If the purpose is to compare the impacts of a recent hurricane with a historical hurricane or a hurricane to an earthquake, the methods employed ought to result in conclusions which are meaningful in a comparative setting...

Society has become more vulnerable to hurricane impacts. The trend of increasing losses during a relatively quiet period of hurricane frequencies should be taken as an important warning. When hurricane frequencies and intensities return to levels observed earlier this century, then losses are sure to increase to record levels unless actions are taken to reduce vulnerability.

Inhabitants along the U.S. Atlantic and Gulf Coasts are fortunate in that hurricane watches and warnings are readily available as are shelters and well-conceived evacuation routes. However, this should not give reason for complacency -- the hurricane problem cannot be said to be solved (Pielke 1997). Disaster planners have developed a number of scenarios that result in a large loss of life here in the United States. For instance, imagine a situation of gridlock as evacuees seek to flee the Florida Keys on the only available road. Or imagine New Orleans, with much of the city below sea level, suffering the brunt of a powerful storm, resulting in tremendous flooding to that low lying city. Scenarios such as these require constant attention to saving lives. Because the nature of the hurricane problem is constantly changing as society changes, the hurricane problem can never be said to be solved.

Works Cited

Changnon, S.A. (ed.) 1996. The Great Flood of 1993: Causes, Impacts, and Responses (Westview Press: Boulder, CO).

Fischer, A., L. G. Chestnut, and D. M. Violette, 1989. The value of reducing risks of death: a note on new evidence, Journal of Policy Analysis and Management, 8:88-100.

Hebert, P. J., J. D. Jarrell and M. Mayfield, 1996. The Deadliest, Costliest, and Most Intense United States Hurricanes of this Century (And Other Frequently Requested Hurricane Facts) NOAA Technical Memorandum NWS NHC-31 (February). Coral Gables, FL: NHC.

Landsea, C. W., N. Nicholls, W. M. Gray, L. A. Avila, 1996. Downward trends in the frequency if intense Atlantic hurricanes during the past five decades, Geophysical Research Letters, 23:1697-1700.

Pielke Jr., R. A. 1997 (in press). "Reframing the U.S. Hurricane Problem," Society and Natural Resources Volume 10, Number 5, October.

Southern, R. L. 1992. Savage impact of recent catastrophic tropical cyclones emphasizes urgent need to enhance warning/response and mitigation systems in the Asia/ Pacific Region, mimeo

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Posted on September 6, 2005 07:49 AM

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