The economics of disasters: Counting catastrophe’s costs

Posted: September 8, 2014 in economy
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THIS month marks the peak of the Atlantic hurricane season. It also marks the sixth anniversary of the collapse of Lehman Brothers. Both types of disaster can wreak havoc on an economy. But which is worse, a cyclone or a banking crisis?Recent research suggests that it is pretty much a tie: both a banking meltdown or a hefty (90th-percentile) cyclone reduces income per person by about 7.5%. The figures come from a paper that assesses the impact of violent storms on economic activity—and compares them against other calamities. The researchers list Armaggedonish events—civil wars, global warming, currency crises and so on—and rank them in terms of ensuing economic mayhem.A full-blown financial crisis is the most destructive man-made disaster; having roughly the same impact on incomes as a 90th-percentile tropical cyclone coupled with a broad-based increase in taxation (a taxnado, perhaps). Fortunately, full-blown financial crises are exceedingly rare. But even they aren’t as harmful as a 99th-percentile storm, which equates to the combined blow of a civil war, currency crisis, weaker regulation of corporate bosses, and a small storm. (The researchers use the meteorologically-accurate term “tropical cyclone” to refer to all sorts of extreme storms, be they hurricanes, typhoons, tornados and the like).The paper calculates damage by modelling the extent to …

via Economic Crisis


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