“It looks like a war zone.”
That’s how emails from friends describe the aftermath of Hurricane Sandy in the Northeast. Anybody who has looked at the distressing pictures tends to agree. The recovery will be prolonged and costly. Estimates vacillate between $25 billion and $50 billion depending on which forecast one reads.
Clearly, regional businesses and consumers, as well as insurers nationally and re-insurers worldwide are impacted.
Whether the storm will actually show up in national-level economic data is another matter. The significant dip in economic activity in one of the most populated regions of the country may be largely offset — on a quarterly scale — by the reinvestments undertaken by various levels of governments.
To this should be added household spending on repairs and the replacement of big-ticket items such as cars and washing machines once the insurance money is being distributed.
While these costs are tabulated, the discussion about potential economic effects of climate change is heating up again. Given the best scientific evidence, there is a significant likelihood that extreme weather events and coastal emergencies may become more common in the future.
One response is to utilize economic tools — regulations — to impact economic activity that may influence our future climate in detrimental ways. Of course, that often elicits a storm of differing opinions regarding the costs and benefits of various approaches.
One recent paper with the title “On modeling and interpreting the economics of catastrophic climate change” by Harvard economist Martin Weitzman (available at: http://bit.ly/Tq6PUu) fanned the flames by cautioning that even a small likelihood of what he calls a “mega-catastrophe” and the “deep structural uncertainties that are involved” makes traditional economic analysis of these scenarios much less dependable.
However difficult it may be to predict the long-term costs, another question that keeps economists busy is what people may be willing to forego to eliminate or significantly reduce future climate risks.
Three University of Chicago economists pursued that question in a paper published last year with the title “On the economics of climate policy” (an earlier version is available at: http://bit.ly/VHKEet).
The authors try to get a handle on what current generations may be willing to pay in order to reduce the chance of man-made disasters in the future. As they point out: “… current generations — who are the ones that get to decide — must be convinced that the future costs of climate change are worthy of current concern” and they “must agree to forego use of abundant carbon-based energy sources in order to mitigate uncertain harm to generations of the distant future.
“No such sacrifice has ever been made.”
Using fairly standard assumptions, they show that a 1 percent chance of death — in a “catastrophe that could occur every thousand years, on average” — would entice the representative economic actor to be willing to forego 4.5 percent of her annual income.
Reducing the time-period to 100 years, while keeping the 1 percent chance of death, that number increases to an incredible 36 percent of annual income.
The difficulty, of course, is to make real people (as opposed to an average person in a theoretical model) consider the actual economic trade-offs involved.
The tragedy may well be that only those confronting a “war zone” in their own backyard, created by a weather event, may be willing to acknowledge the facts.
Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. He may be reached by email at mreksula@georgiasouthern.edu.