Saturday, September 03, 2005

Loss accounting

This morning's NY Times reports: "First Estimate Puts Storm's Economic Toll at $100 Billion". Like it or not, incomplete and point estimates are part of the landscape.

The $100 billion are estimated property losses (mainly structures) that will be revised upwards. Business interruption losses are seldom estimated but these will also be substantial. There is, of course, life and limb and related traumas that will one day also be estimated.

But no one really understands the long-term consequences. Will GDP growth be bumped down to a lower trend? Will civil society take a hit? Or will it be reborn in an aftermath of soul-searching?

After the 1994 Northridge earthquake, a $20 billion guess came down from Sacramento officialdom almost immediately. Insurers were eventually on the hook for $16 billion and the structure (and contents) replacement cost estimates have hovered around $35 billion. Our own research found another $6.5 billion of business interruption effects. Heonsoo Park's co-integration analysis (no link found) suggested no long-term economic effects.

The long-term resiliency of market economies is usually the (mostly unsung) good news. Disasters, however, have the effect of prompting politicians (and acolytes) to undermine markets. So we get more controls and more programs and bureaucracies. Talk about cures being worse than diseases.

In the same NY Times, Maureen Dowd writes: "Stuff happens. And when you combine limited government with incompetent government, lethal stuff happens." She and many other seemingly toilet trained adults believe that less limited but competent government is an option.

On the same page, John Tierney saved my morning by concluding: "Here's the bargain I'd offer New Orleans: the feds will spend the billions for your new levees but then you're on your own. You and others along the coast have to buy flood insurance the same way we all buy fire insurance -- from private companies that have more at stake than Wasington bureaucrats. Private flood insurance has come to seem quaint in America but in Britain it's the norm. If Americans paid premiums for living in risky areas, they'd think twice about building oceanfront villas. Voters and insurance companies would pressure local politicians to take care of the levees, prepare for the worst -- and stop waiting for the bumbling white knight from Washington."