Is it really news that disaster is good for business?

Marketplace's Steve Chiotakis took this photo of tornado
damage in Tuscaloosa two weeks ago.

by Ken

On American Public Radio's Marketplace Morning Report this morning host Steve Chiotakis interviewed Lary Cowart, a professor of accounting and finance at the University of Alabama at Birmingham who's described as "a real estate expert," for a segment that in the Web version is headlined, "How the storms could help the housing market in the South." This part of the conversation caught my attention.

STEVE CHIOTAKIS: We're obviously not trying to find any kind of bright side to the devastation in Alabama; I saw it certainly first-hand in Tuscaloosa [the link is to an April 28 report that notes that Chiotakis "was in Alabama visiting family when the storms hit," and reported live from there]. But people are going to need housing, right?

LARY COWART: There's over 5,000 houses destroyed in two counties, plus there's another 1,000 distributed over a much wider area. Here in Birmingham, there's sufficient supply to take care of all the people who were displaced.

CHIOTAKIS: What does this mean for the housing situation in Alabama?

COWART: Well in Birmingham, there's about 10,000 to 12,000 houses on the market for sale right now. And at the current rate of sale -- based on last month's sales -- it would take 12 months for every one of those houses to be sold. Of course now, we're going to get to the bottom of the market a lot quicker than in other places, so for us, this will kind of start the absorption to get us back to a normal market.

CHIOTAKIS: Thousands of people, as you said, lost everything in those storms. Where is the money going to come from, Lary, to buy up these properties all over the state?

COWART: In the short run, there's going to be an inflow of cash to cover the insurance costs for those people who had insurance -- the federal government, the state government; there's a lot of donations that are bringing things into the Birmingham area to try to help everybody out. The cost of this is going to be significant; the estimates right now are $2 billion to $5 billion. And going up everyday. The long-term damage is going to be pretty significant.

What caught my attention was not the news that the tornado damage is going to be good for business, but Steve Chiotakis's apparent astonishment at it. Is it really still news that disaster is good for business? At least for businessfolk who by good fortune or good planning are situated appropriately to reap the windfall.

I mean, what in the end were those eight grueling years of the Bush regime about, if not to create enough mayhem worldwide to provide the owner-investors of the regime with serial bonanzas? This included both manmade as well as natural disasters, not to mention hybrids, but the genius of the Bush regime was that by handling the natural disasters with the sniveling, contemptuous, thieving ineptitude that is the Right's secret weapon, they could be made even more profitable than the manmade ones.

Naturally no one ever wants to claim to find "any kind of bright side to the devastation." Nevertheless, it turns out that amid all those dramatic calculations of the financial "losses" incurred through disasters, the money doesn't necessarily just disappear. Heaps of it find their way into the coffers of the savvy and well-connected. This is so well-established that the only surprise, again, is why Steve C seemed so surprised.

It's not hard to grasp the basic logic. When there's large-scale destruction, provided there's money for rebuilding, there's going to be rebuilding, and that means money is going to be pumped into the local or regional economy. It may not seem "fair," and certainly not pretty, but it's just business -- up to a point.

In the March 28 New Yorker, the always-interesting James Surowiecki had an even more interesting than usual "Financial Page" titled "Creative Destruction?," which began:

Even if Japan’s nuclear crisis is contained, its earthquake and tsunami now seem certain to be, economically speaking, among the worst natural disasters in history, with total losses potentially as high as two hundred billion dollars. In response, fearful investors sent the Nikkei down almost twenty per cent on the first day of trading after the tsunami, and it’s still down more than ten per cent. Yet, while the fear is understandable, this may turn out to have been an overreaction: history suggests that, despite the terrifying destruction and the horrific human toll, the long-term impact of the quake on the Japanese economy could be surprisingly small.

That may seem hard to reconcile with the scale and the scope of the devastation. But, as the economists Eduardo Cavallo and Ilan Noy have recently suggested, in developed countries even major disasters “are unlikely to affect economic growth in the long run.” Modern economies, it turns out, are adept at rebuilding and are often startlingly resilient.

He offered as "the quintessential example" Japan's own experience of the 1995 earthquake that --

levelled the port city of Kobe, which at the time was a manufacturing hub and the world’s sixth-largest trading port. The quake killed sixty-four hundred people, left more than three hundred thousand homeless, and did more than a hundred billion dollars in damage (almost all of it uninsured). There were predictions that it would take years, if not decades, for Japan to recover. Yet twelve months after the disaster trade at the port had already returned almost to normal, and within fifteen months manufacturing was at ninety-eight per cent of where it would have been had the quake never happened. On the national level, Japan’s industrial production rose in the months after the quake, and its G.D.P. growth in the following two years was above expectations.

"Similarly," he added,

after the Northridge earthquake, in 1994, the Southern California economy grew faster than it had before the disaster. A recent FEMA study found that after Hurricane Hugo devastated Charleston, in 1989, the city outpaced growth predictions in seven of the following ten quarters. And the 2008 Sichuan earthquake, despite its enormous human toll, may have actually boosted the economy’s growth rate.

These were all monumental catastrophes, and yet, a couple of years after the fact, domestic growth rates showed little sign that they had happened. The biggest reason for this, as the economist George Horwich argued, is that even though natural disasters destroy physical capital they don’t diminish the true engines of economic growth: human ingenuity and productivity. With enough resources, a damaged region can reconstruct itself with surprising speed. Although the Northridge quake demolished the Santa Monica Freeway, it reopened after just sixty-six days. Healthy economies are by definition adaptive: in the case of Kobe, other Japanese ports picked up the slack until it was back on line. And, because governments generally flood disaster areas with money, there’s no dearth of cash for new investments.

The crucial caveat here is that we're talking about societies and economies in the developed world, "with enough resources" to harness those "true engines of economic growth: human ingenuity and production." While there has undoubtedly been money to be made from, say, the successive natural disasters in Haiti, in the underdeveloped world disaster tends to remain, well, disastrous.

And even in the developed world the rebound from disaster may be highly unevenly distributed. This is what I had in mind when I suggested that this process is understandable "up to a point." Because unfortunately the nature of human greed is such that it tends to produce a class of disaster profiteers, and an economic culture of disaster cultivation. Whether the disasters of the Bush regime, and continuing on into the present administration in such forms as the Gulf oil-rig catastrophe, are sought or merely taken advantage of, an alarmingly significant and growing chunk of the economy is increasingly devoted to harvesting the riches of catastrophe -- for the harvesters.

Do I believe, for example, that the financial finaglers deliberately provoked the economic meltdown? Not really. But I do know that (a) they positioned themselves to weather the storm a whole lot better than the people whose livelihoods and lives were tanked by it, (b) they had the political muscle to make sure that they were taken care of without concern for economic recovery, (c) such recovery as there has been has wildly disproportionately benefited them, and (d) in the aftermath they have continued to use that political muscle to permanently restructure the politics of the economy to institutionalize their chokehold.

So to the extent that construction and real-estate people in Alabama get a boost from the storms via the sweat of their honest brows -- and ditto all along the trail of destruction of the disastrous flooding heading down the Mississippi toward New Orleans (about which Doug Kahn filled us in so well last week) -- well, good for them. I'm just saying that if disaster recovery becomes our major growth industry, and that growth is reserved for people who get to make the rules for it (including the rules by which the manmade disasters are created), then we've got big trouble.

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