With the second-costliest tornado in Tuscaloosa, Alabama, at $2.45 billion and the third costliest in Moore, Oklahoma, at $2.0 billion, and with all three tornadoes occurring within two years, it is worth thinking about the impact tornadoes can have on the economy.
KEY TAKEAWAYS
- Tornadoes result in significant economic losses that can be classified as direct losses or indirect losses.
- Direct losses are the result of the destruction of assets and the resulting decrease in their value and/or the lost income as a result of destroyed assets.
- Indirect losses relate to the wider impact and include the loss of production and sales, increased commute times, increased transportation costs, and decreased tourist activity.
- Despite the economic devastation, tornadoes can act as economic stimuli, through rebuilding efforts, the inflow of insurance money and disaster-relief funds, and improvements in the labor market.
Direct and Indirect Losses
The impact of a tornado results in both direct and indirect losses to the local economy. Direct losses result from the destruction of assets from the initial impact of the tornado and include the loss of human lives, roads, power, phone lines, crops, factories, homes, and natural resources. USA Today estimated that the Joplin tornado destroyed around 2,000 buildings and caused damage to at least a quarter of the city.1 To calculate the cost of direct losses, one must either sum up the total value of the decrease in the value of the lost assets or sum up the total of the lost income that the lost assets generated.
Indirect losses that occur from the destruction of physical assets can be quite significant. These losses include lost production and sales, incomes and labor time, increased commute times, increased transportation costs from goods having to be rerouted, decreased tourist activity, and utility disruptions. The decreased economic activity also results in lost taxable receipts and uses up federal disaster relief funds to help clean-up, repair, and replace lost assets.
Lost production can also result in surging prices due to consequent shortages, as when refineries were affected by the swath of tornado activity that swept through the southern United States in 2011, causing gas prices to rise. Further, although insurance companies don’t usually increase rates because of a single disaster, increased tornado activity may lead to permanently higher insurance premiums or reduced coverage.
Tornadoes as Economic Stimuli
Although most would agree that tornadoes and natural disasters are a very undesirable form of economic stimulus, many economists have found that a flurry of increased economic activity often follows. The rebuilding efforts are fueled by the inflow of insurance and disaster-relief funds, which can help replace many of the jobs lost due to the initial disaster. Improvements in the labor market are exactly what researchers discovered after studying the economic impact of the Oklahoma City tornado in 1999.
New jobs and the income generated do not always remain in the local economy as it is often outside contractors that specialize in disaster clean-up and rebuilding.
Yet, this type of recovery can have a lot to do with the state of the economy before the disaster. In the case of the Oklahoma City tornado, the economy was strong and, consequently, there was a lot of confidence helping to fuel the rebuilding efforts. In contrast, the struggling town of Picher, Oklahoma, one of America’s Superfund hazardous waste sites, is now a ghost town having ceased municipal operations not long after being hit by an EF-4 tornado in May 2008.
Further, the amount of jobs created is not necessarily more than those lost from the tornado, and the type of employment is different as well. Although not a tornado, Hurricane Katrina stands as an example: Nearly three years after the initial disaster, 99% of the jobs had been regained while the type of work had significantly changed.
The Bottom Line
Tornadoes are devastating events. While primarily they have the potential to be fatal, they also uproot people’s livelihoods by destroying their places of work, the food that they eat, and how they communicate and interact with one another.
Those who survive a tornado can find their quality of life severely diminished by the consequent economic impacts, and while the clean-up and replacement efforts can stimulate economic activity, these resultant benefits will not outweigh the costs.
Although there are limitations to the extent to which damage can be prevented, it would be worthwhile to consider strategies for mitigating the effects of violent storms.