Calculation Captures Economic Growth's Role in 'Billion-Dollar Disasters'

By Jo Craven McGinty Features Dow Jones Newswires

More than 200 cyclones, floods, droughts and other weather calamities have run up tabs of at least $1 billion apiece since the National Oceanic and Atmospheric Administration started keeping track in 1980 -- and this year, hurricanes Harvey, Irma and Maria will join the list.

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But a billion-dollar disaster ain't what it used to be.

A dollar doesn't stretch as far as it once did. Building in coastal areas and other economic growth have increased the potential for damages. And NOAA's disaster estimates only account for one of those two factors.

"NOAA adjusts for inflation, which is wonderful, but it doesn't make an adjustment for the amount of physical assets in the country," said Jay Zagorsky, an economist at Ohio State University. "There are twice as many bridges, homes, factories and cars for a hurricane to destroy."

In a way, that observation is a no-brainer, but Dr. Zagorsky came up with a simple way to estimate the effect.

He applies an additional adjustment to NOAA's numbers using something called the chained fixed asset index from the Bureau of Economic Analysis to estimate how many fewer events would exceed the billion-dollar threshold if economic development had held steady at 1980 levels.

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It's a rough measure that doesn't account for loss of life or environmental harm. It only captures damages to fixed assets, and even then it uses a national measurement, not a regional adjustment, and it doesn't account for offsetting measures, such as updated building codes that reduce damages.

Some experts think even more adjustments should be made.

The calculation "is a start, but it doesn't fully address the problems with the time series," said Roger A. Pielke Jr., a professor of environmental studies at the University of Colorado in Boulder who has studied the economic damages of hurricanes and adjusted for additional factors such as changes in population.

Still, it's an easy way to get a sense of how development has contributed to economic losses when the weather turns ugly.

"NOAA estimates suggest the numbers are going up very quickly" Dr. Zagorsky said. "I'm just disagreeing with how fast it's going up."

His calculation is similar to applying the Consumer Price Index to adjust costs for inflation.

"If the CPI is 100 one year, and then it's 110 in a later year, you know prices went up 10%," Dr. Zagorsky said. "Without adjusting for inflation, disasters would consistently look more expensive over time and constantly shatter records for damage."

To calculate the adjustment for economic growth, each year's BEA value for fixed assets is divided by the 1980 value and multiplied by $1 billion. The results represent the annual figure that is the minimum amount of damage needed to be economically equivalent to $1 billion of destruction in 1980.

"For example, the figure for 2007 is $2.1 billion," he said. "This means any storm in 2007 that caused less than $2.1 billion in damage would not have been economically important enough to make the billion dollar list using the 1980 standard."

Here's another way to think of it:

Assume that all houses in an area have the same inflation-adjusted price of, say, $1 million in 2017 dollars. If disasters of equal size and intensity strike the area in 1980 and in 2017, destroying 10% of the housing stock each time, Total Damage = Number of Houses x 10% x Price.

In 1980, if there are 10,000 homes, the loss would equal $1 billion. In 2017, if there were twice as many homes, the loss would equal $2 billion.

"Subtract the first from the second, and this yields the extra damage caused by new construction," said Matthew Kahn, chairman of the economics department at the University of Southern California, who reviewed the approach.

That kind of change isn't an exaggeration. According to the U.S. Census Bureau, Miami went from 654,800 housing units in 1979 to 2 million in 2015. Houston went from 1.1 million to 2.2 million. And New York City from 4.2 million to 7.4 million. Understanding how economic growth contributes to disaster damages could help policy makers decide whether to strengthen building standards, provide more disaster assistance or take other steps.

"Once we agree on the true scope of the problem, it's a political question on what the optimal response should be," Dr. Zagorsky said.

NOAA says it will update the billion-dollar disaster list on Oct. 6, when hurricanes Harvey, Irma and Maria will be added. And -- for what it's worth -- those disasters will likely rank among the costliest to hit the U.S.

Write to Jo Craven McGinty at Jo.McGinty@wsj.com

(END) Dow Jones Newswires

September 29, 2017 09:14 ET (13:14 GMT)