1. Economics of Disasters

2. Are Disasters Good for the Economy?
Directions:
Distribute the clues so that each person is holding at least one.
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. Kathy

4. Are Disasters Good for the Economy?
Pictures: Sandy, Banda Aceh, Katrina
NO! NO! NO! NO! NO! NO! NO!

5. Scarcity IS
Resources are limited Resources are necessary for production (output ƒ 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

6. 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?

7. 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?

8. Level vs. Rate
Real GDP/capita
Real GDP/capita
What do these curves show? (rate = rise over run) Which has faster rate?
time
time

9. Economic Growth pre & post Disaster Rate? Level?
trend QD
Output D B
Time
disaster
bottom

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

11. Economic Growth: Rate? Level? When ?
trend
Output Q
Reminder that lines are showing rate of growth so purple dotted line does not have to meet black dotted line to show approximately same rate of growth. (To have same rate of growth, slopes of lines have to be the same.)
Time

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

13. Economic Growth Stimulus NO Evidence for this Scenario
new trend
old trend
Output Q
Time

14. 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."
????
Chen is a credible economist; how can we interpret this quote so that it makes sense in terms of the charts we just looked at?

15. 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
Emphasize assumptions of model. Tie back to fact of scarcity. Ask what each of the points represents.
goods

16. 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

17. ƒ { human capital, physical capital }
Productivity: output per unit of input
ƒ { human capital, physical capital }
skills & talents
education
training
buildings
machines & tools
technology
Emphasize the effect of the amount of capital available to labor

18. Effect of population change in economy with little capital
Labor Productivity: output per person-hour
ƒ {availability of capital}
Effect of population change in economy with little capital
pop. growth
pandemic
services
goods
services
goods
Emphasize the amount of capital available to labor. Note difference in goods and services w/ regard to capital intensity of production

19. Capital to Labor Ratio capital to labor ratio rises
Effects of changes in capital to labor ratio. Picture is Sand Francisco earthquake.
capital-intensive products
capital-intensive products
capital to labor ratio rises
capital to labor ratio falls
labor-intensive products
labor intensive products

20. capital to labor ratio rises capital to labor ratio falls
Effects of changes in capital to labor ratio. Chicago Fire– extensive capital destruction with relatively little loss of live. Much lower capital to labor ratio; big impact on capital-intensive production. San Francisco, even then, service oriented (financial services) – part of reason for quick recovery (about 18 months). Similar to San Fran scenario in previous slide.
capital-intensive products
capital-intensive products
capital to labor ratio rises
capital to labor ratio falls
labor-intensive products
labor intensive products

21. capital to labor ratio rises capital to labor ratio falls
Spanish Flu – capital to labor ratio rises. GDP/capita rises
capital-intensive products
capital-intensive products
capital to labor ratio rises
capital to labor ratio falls
labor-intensive products
labor intensive products

22. capital to labor ratio rises capital to labor ratio falls
Japanese Tsunami -
capital-intensive products
capital-intensive products
capital to labor ratio rises
capital to labor ratio falls
labor-intensive products
labor intensive products

23. capital to labor ratio rises capital to labor ratio falls
Black Deth
capital-intensive products
capital-intensive products
capital to labor ratio rises
capital to labor ratio falls
labor-intensive products
labor intensive products

24. capital to labor ratio rises capital to labor ratio falls
Hurricane Sandy
capital-intensive products
capital-intensive products
capital to labor ratio rises
capital to labor ratio falls
labor-intensive products
labor intensive products

25. capital to labor ratio rises
capital to labor ratio falls
Effects of changes in capital to labor ratio
capital-intensive products
capital-intensive products
labor-intensive products
labor intensive products

26. Canadian Disasters
Tseax Cone Explosion: circa 1750

27. Halifax Explosion, Dec. 6, 1917

28. The Great Ice Storm: January, 1998

29. Hurricane Juan, September 29, 2003

30. Okanagan Mountain Park Fire – August, 2003

31. Slave Lake Wildfire 2011

32. Alberta Floods: June, 2013

33. Toronto Flood – July 2013

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

35. Why Might Disasters SEEM To Be Good 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

36. 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?)

37. Debbie
Break – can skip or shorten this depending on workshop length. Need to be sure to get to lessons 3 and 4 on government and non-profits so leave last half of this lecture out if necessary.

38. 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.”
Major difficulty in teaching about effects of disasters is remembering to think about the unseen in the process of dealing with what is so glaringly seen. Not a new understanding. Bastiat identified in mid 1800s.

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

40. "It's an ill wind that blows nobody some good
"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?"

41. Suppose that it will cost six francs to repair the damage
. . . 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.”

42. It is not seen that 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.

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

44. Bastiat Hasn’t Been Forgotten:
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 University

45. "If property destruction is good for the economy, why aren't Beirut and Belfast boom towns?”
To shorten this lecture, end with this slide instead of going into the Julian Simon section about population and the ultimate resource.

46. 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.

47. And the Winners Are . . .
Field workers – harvesters Black Death fire retardant brick manufacturer in PA – Chicago Fire Marriott – insurance appraisers contract for lodging on edge of storm path Netflix – 27 Movies and TV Shows to Stream to Distract You From Hurricane Sandy: - doubled viewers on Baltimore, Washington, NYC, Phila. The Weather Channel – more than doubled viewers Leaf Raker = Hurricane Sandy – found million $ lotto ticket

48. When Disaster Strikes, What Can Markets Do?
Lesson 2:
When Disaster Strikes, What Can Markets Do?
The Great
Chicago Fire
1871
Prices & information
Supply shocks
Consumption shocks
Japanese
Tsunami
2011
Superstorm
Sandy
2012

49. Review/Reminder: Why do we ration?
Scarcity IS
Scarcity requires rationing – the question is not whether to ration, but which method of rationing to use addresses scarcity.
Guideline for choice among alternatives:
Which provides us with the greatest excess of benefits over costs?
(or, another way to say it is, “Which best addresses scarcity?”)

50. Why do we ration through markets?
What markets do best:
Transmit information to decision-makers
Direct resources to their most highly valued uses
Encourage the least-cost use of resources, including human time and effort

51. Information & Knowledge
Frederich von Hayek: The essential task of economic systems: rapid adaptation to the changes in the particular circumstances of time and place The nature of knowledge and information: information about the particular circumstances of time and place is localized and widely dispersed,
Markets transmit information effectively – don’t need to know everything
BUT, unlike central planners,
economic decision-makers in markets only
need SOME of that information

52. Prices transmit information
“Assume that somewhere in the world a new opportunity for the use of some raw materials, say tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter which of these two causes has made tin more scarce. All that the users of tin need to know is [what the higher price tells them—]
The whole acts as one market, not because any of its members survey the whole field [but because] individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all.”

53. 1 vs. 100
FTE - Style

54. Information in Disaster: Who Knew?
Relief work clearing debris and reaching coastal communities in Banda Aceh was delayed until what could be acquired after the Asian tsunami?
Elephants were being used on set of director Oliver Stone’s movie Alexander in Thailand.

55. Information in Disaster: Who Knew?
If you had been in charge of setting up a survivor daily-supply store after Hurricane Katrina, what 3 items would you have stocked?
Wal-Mart inventory tracking from previous disasters.

56. Information in Disaster: Who Knew?
If you had been in charge of taking care of displaced pets after Hurricane Rita, what non-food item would you have taken to Houston in your supply truck?
Aluminum turkey roasting pans – clean, light, disposable

57. Information in Disaster: Who Knew?
Called the second disaster by relief agencies
What relief item is most likely to be oversupplied after a disaster?

58. Information in Disaster: Who Knew?
5. You’re in charge of emergency medical care in Haiti. What piece of equipment will you need to function in this impoverished undeveloped country?
Inflatable hospitals

59. Information in Disaster: Who Knew?
6. You’re in charge of helping people who need to communicate with friends and relatives after Hurricane Sandy. What equipment will meet immediate needs until infrastructure can be repaired?
Fire-powered cell phone chargers (gas canisters like used for backpacking stoves).

60. Kathy

61. Models: Tools of Economic Reasoning
Market Analysis: Supply Shock
Disasters destroy resources.
Less can be produced; output falls.
Price rises.
Quantity purchased falls.
Safter $ P
Sbefore
D before & after Q

62. Models: Tools of Economic Reasoning
Market Analysis: Supply Shock
Higher prices have 2 effects:
Consumers buy less. (They substitute.)
Producers offer more for sale. (They also substitute.)
Safter $ P
Sbefore
D before & after Q
Question: In a disaster, is this a good thing or a bad thing?

63. Models: Tools of Economic Reasoning
Market Analysis: Consumption Shock
Disasters destroy resources.
Demand shifts because of changes in the prices of substitutes. (ice for refrigeration, for example
Price rises.
Greater quantity (of ice) is offered for sale.
S before & after $ P
Dafter
Dbefore Q

64. Models: Tools of Economic Reasoning
Market Analysis: Consumption Shock
S before & after
Higher prices have 2 effects:
Consumers buy less.
Producers offer more for sale. $ P
Dafter
Dbefore
OK, but – (leading to next slide) Question of whether markets can anticipate & be ready. Q
Question: Is that a bad thing for disaster victims? (in general? individually?)
2nd Question: If it is, what can be done to help them?

65. Disaster-preparedness industry – because there’s profit in doing so.
Profit is the motivator: Markets don’t wait for disasters; they prepare.
State Farm Insurance
Wal-Mart
Home Depot
Fed-Ex
Black & Decker
Disaster-preparedness industry – because there’s profit in doing so.
State Farm – already had contracts with hotel chains. Moved adjusters to edge of disaster area before storm struck. Wal-Mart – Employs own weather forecasters. Keeps inventory of what sells; moves trucks toward areas as disaster strickes. Home Depot – moved inventory to nearby areas. Fed-Ex – logistics teams monitored roads and bridges. Planned new routing and shared it with other producers. Black & Decker – ran overtime shifts (Labor Day weekend – holiday pay)

66. Case Studies in Lesson 2
The housing market after the Great Chicago Fire of 1871
Wal Mart, Home Depot, & State Farm Insurance after Hurricane Katrina
Market allocation of gasoline after Hurricane Katrina

67. The Gasoline Market Responded to Sandy: “Disasterpreneurs”
“The Gas Price Story of Hurricane Sandy”: Markets emerge, even when you try to stop them. And they work.
Article:
YouTube Video interview with Peter C Earle who tracked rising AND falling prices in internet market for gas after Sandy: (16 min.) Video linked on next slide. Must have online access.

68. The Gasoline Market Responded to Sandy: “Disasterpreneurs”
Interviewer is awkward but Earle is interesting – especially about minute 6 where he begins to talk about the actual prices in the Internet black market and how they changed in response to changing conditions. Interviewer is more interested in bashing govt price controls, but interesting point of using video here is to show responsiveness of prices. (Note: Read background article if going to use video clip in presentation.)
article
video
Thru 7:30

69. LearnLiberty: Is Price Gouging Immoral? Should It Be Illegal?

70. What Can Markets Do in Disasters?
Markets can do what they do best – whether there is a disaster or not:
communicate information about relative scarcities
use price signals to allocate goods, services, and resources to their most highly valued uses
(What about “price-gouging”? Activity this afternoon.)
Caveat:
Markets can only do what they do best IF the rules of the game allow them to do so.
Lesson 3

71. Market for Thing-a-ma-jigs

72. How to Play… BUYERS Goal: PROFIT
Goal: PROFIT
Each buyer will have only one buyer card at a time. The card will allow you to buy ONE thingamajig and will tell you how much you value it. To make a “profit,” buy at a price lower than the price shown on your card. If you buy at a higher price, you suffer a loss.
DO NOT REVEAL THE PRICE.
Record the buyer card price on your student score sheet.
When the round starts, try to buy below your buyer-card price – the lower, the better. (You may buy at a price higher than that on your buyer card, but note that this will reduce your “profit” for the round.)
When you make a purchase, record the transaction price on your score sheet. Then, turn in the buyer card and get another buyer card from the buyer pile.

73. How to Play… Sellers Goal: PROFIT
Goal: PROFIT
At the beginning of each round, each seller will be given an inventory of Thingamajigs and a role card with the cost per thingamajig. To make profit, sell at a price higher than the cost. If you sell at a lower price, you suffer a loss.
DO NOT REVEAL THE PRICE.
Record the seller card price on your student score sheet.

74. How to Play… BUYERS & SELLERS All stores are open to all buyers.
All stores are open to all buyers.
When a buyer and seller agree on a price, they record the transaction on their transaction records, and the seller gives the Thingamajig to the buyer.
The BUYER must then report the transaction by turning in the Thingamajig card to the person keeping the Market Tally in the front of the room. The buyer may then exchange his buyer card for another and try to make another purchase.

75. How to Play… BUYERS & SELLERS
When the teacher says “Start,” sellers and buyers are free to move around the room and to make transactions with one another. Any seller may talk with any buyer.
Both buyers and sellers are free to make as many transactions as they want in a round. Buyers, remember to turn in your Thingamajig card to the tally keeper and get a new buyer card after each transaction.
During the game, keep track of your progress on the student score sheet. Compute your gains and losses by taking the difference between the price on your buyer or seller card and the price of the transaction. 

76. Let’s Play!
ROUND 1

77. Let’s Play! ROUND 1 ROUND 2 ROUND 3 ROUND 4
Round 1: Regular (don’t run out of inventory)
Round 2: Higher Value cards (disaster)
Round 3: Opportunity for Buyers to get more
Round 4: Price Ceiling

78. Transaction Tally