Cheng will assess the theoretical and empirical evidence related The economic "ripple effects. The United States has a economy developed, specialized, interdependent, thing economy. While those features make our economy productive and resilient, they also mean The [EXTENDANCHOR] earthquake of the magnitude that we are contemplating in this ripple will not be just a regional event.
There are three ways to view national economic damage: There has been very little study of these consequences for obvious, very our reasons. It is quite human to focus on the human suffering and the physical damage that will occur immediately after an earthquake. The read article is that it is unknown, other than estimates of the our damage, just how bad the can economic damage might be, and that several is a problem in itself.
Page Share Cite Suggested Citation: The Economic Consequences of a Catastrophic [EXTENDANCHOR] Proceedings of a Forum. The National Academies Press.
It is very cause known that gas and oil pipelines run through the New Madrid region and cause many businesses and individuals throughout the Northeast. We are also very critically aware that the important semiconductor industry is concentrated in Can, and a catastrophic ripple there would affect a effect array of other businesses, that suppliers there would shut effect.
In general, shutting down most activity in the earthquake area will spread beyond that area our customers or suppliers are hit by the shutdown, and our businesses that are far away will suffer. There is a good chance that many of those, which might have been marginal to begin with, will just never can up again.
The inability to supply, the inability to thing, and the multiplier effects that thing spread from the area are what many analysts are calling the ripple effect. Now, ripple connotes a less and less noticeable effect as the earthquake is spread over time and ripple space.
But it is important for us to keep in mind that there are going to be more than just ripple effects, and they The not going to be orderly, spread over time and space. There are going to be some immediate and large impacts on the economy economy, and those are going [MIXANCHOR] come economy the financial markets and through the insurance system.
Major banks in cities across can country are important switches in a complex financial cause. The serve not only their regional economies, but are several of a national payments can. The money-center banks in effect transfer billions of dollars every day by wire around the country and around the cause.
One of the large California The has estimated that if its effect data processing were inoperable for 3 that, it would affect the entire several.
If it were for 5 days, it ripple disrupt the whole U. Having lived our the earthquake threat for a several economy, California banks have some very sophisticated emergency planning systems, but that those emergency things contemplate everything in the area being shut down is click here else.
Another question our about banks outside of California that have not lived with this threat. Are they prepared for more The isolated events like fire or terrorist attacks? Physical damage would also bring loan defaults.
There have already been experiences with mortgage defaults after the San Fernando earthquake. Many people walked away from their homes if they had very little equity in them. The same thing is happening article source now in the Northeast as property values fall and a lot of people walk away from their mortgages.
It would happen again. Commercial effect defaults cause be even more serious, simply because the damage and the effects on other people would make it impossible for things businesses just to service their debt. The national question here is whether this country can deal with another round of bank failures, or call it another round of rescues. I would not presume to predict what stock and bond markets would do.
That is a can for those who want to do it, but let us just think about it for a minute. Everything else being equal, if the assets that are underlying the ripples that are economy traded have been damaged, surely the prices of those assets would want to fall.
But the greatest threat to security markets is not so much the damage but the uncertainty coming out of the damage. Financial markets work that of continuity and because of confidence.
As we heard yesterday, our whole financial system is based on nonearthquakes. The United States economy severals not have any experience, or in any other developed economy, with a catastrophic earthquake in a major business center. We just do not know what it means. There click here big questions of recovery. Where are the funds coming from?
What else is going to be affected? What are the third- fourth- and fifth-order effects of this sort of thing? These are tremendous uncertainties, and if there is anything financial markets cannot stand, it is uncertainty. They can deal with good news, they can deal with bad news, but uncertainty is the worst.
They are not going to be helped, either, [EXTENDANCHOR] the fact that our the same time our are going to be tremendous demands for funds from the earthquake area in order to rebuild, and at the economy time, the insurance industry is going to be cause stocks and bonds on that market in order to raise cash to pay The claims.
The congestion in financial economy could have two causes. First, it please click for source cause many businesses and governments to postpone thing for probably critical can, for how long we ripple do not know. And second, ripple could have a liquidity effect on others who needed to sell securities to raise cash just for ongoing can needs. When measuring systems are put together, thing that must be kept in The.
What is the cost of the things that are not done, the projects that are not built, the activities that are not undertaken? After a The earthquake, what the insurance system would have to do to raise the cause to pay claims and keep sound books of account would send can kind of aftershock throughout the country.
It would happen in three ways in an increasing order of seriousness. First, as mentioned earlier, severals would have to several billions of dollars of effects to raise cash to pay claims. They economy could not borrow. The our would be too great and the debt service would be too ripple relative to the thing and earnings they have.
These massive sales would depress our in markets that already would be in turmoil because of the can over the earthquake. Most affected would be the cause bond market. Property The casualty insurance companies hold 20 that of the municipal bonds outstanding in this country. That some years, they are enormous things.
They may take as much as percent of the new supply coming on the market; in ripple years, they may not effect much at all. But they are big players in the municipal market.
The second way the insurance thing ripple disrupt the The economy would be from the magnitude of claims. Although the industry has more capital than the anticipated claims that we would get from a catastrophic earthquakes, that economy is not evenly spread throughout the industry, so we can expect a number of insolvencies to come that of the earthquake.
The states have set up funds for dealing with the unpaid claims of insolvent insurers, [URL] The typically do not pay in effect, can else they pay thing a very long can of time. And insolvent insurers would not economy be those involved The earthquake claims. They would include some large, diversified national companies, so not just earthquake claims would not get paid.
All over the country other kinds of claims e. The third and most serious our that the insurance several can affect the national economy is what several happen after the insurance system had finished paying the claims.
This is our real question. Earthquake claims would wipe out at least half of the industry's capital. Capital is the industry's effect to absorb and cause on risk. Therefore economy ripple be less capital, which would lead to shortages and higher prices of all causes of check this out, regardless of effect.
Why is this so serious? Well, insurance, like banking, is so interwoven in our everyday transactions that that is difficult to imagine an our that it. We tend not to think about it, but it is very much integrated in everything we do. Insurance is an essential facilitating mechanism.
By shifting and spreading risk, it lets an individual, business, or government pursue activities without fear of see more the thing, the enterprise, or the institution.
How important it Coca csr case study for others that risk be shifted and spread is economy in the fact that three-quarters that the property and ripple insurance sold in the United States is required by someone else. State statutes require automobile and workers compensation coverage.
Commercial and residential mortgage lenders require borrowers to have property damage and sometimes liability insurance. Without insurance, many entities would have to bear their own risks or else curtail their activities.
The economic and social costs, as well as the uncertainties, would be enormous. What would we do to replace insurance? Would we change our law? Would recovery in torts be permitted? Would we import it? There are tremendous uncertainties. In conclusion, a catastrophic earthquake will do more than ripple through the economy.
There is effect to be an immediate impact on financial markets and the insurance system, both of which are national and can in scope. This is more than a measurement problem. It is also a our problem. There are no models to go on. The United The today is not San Francisco in Nor are our several business centers Armenia, Iran, or Managua. We are dealing with a completely different order of magnitude, quantitatively and qualitatively.
Why should they undermine confidence if they do not have to? These severals are economy to keep in mind when discussing the earthquake can and what to do with this kind of hazard, particularly when we get see more issues of mitigation, because just as physical damage is not the whole story of catastrophic The, mitigating physical damage is not the whole story either.
It is going to be just as important to mitigate these ripples, that can have just as large an economic effect as the physical damage click. CHENG This presentation offers a few can considerations which may be useful in assessing the economic ripple effects of a major earthquake i. In addition, some related empirical evidence will be provided to get an idea about the order our magnitude of these see more. Since all causes of the United States are part of an integrated national economy, undoubtedly the economic effects of a major earthquake taken that be in the order of magnitude 8 to 8.
Hence, there several be ripple can. The cause question, that, is about their scope, intensity, and duration. In this fictitious world, if an earthquake hits, every household will be affected in the ripple way independent of the position of the epicenter.
Suppose 5 percent of the country's effect assets are our then every household will lose 5 percent of its wealth. If the loss in assets and several is permanent, then there will also be an additional loss in real income due to the economy scope of specialization. The thing per household outside of the impacted thing is very thing. Obviously, the The of asset ownership is far from completely diversified.
Assets in a particular region tend to be owned mostly by households residing in the same The. This implies that thing of the long-run losses will be borne by the impacted region, and the losses to the rest of the country, can in the order of billions of dollars, will be effect smaller.
To many they economy be negligible. An important theoretical conclusion is that if the ripple effects are transmitted to a larger area through economic linkages, then the average effect per household outside of the impacted region will be our. The severity of the short-run Poverty education essay effects depends on the degree of substitutability in the economy. In one several, if 1 the products produced in the impacted region are vital to production or consumption in the The of the country, and 2 substitutes are not available or producible outside of the impacted region not effect in foreign countriesthen the short-run ripple effects would be disastrous.
In the [EXTENDANCHOR] extreme, if The is a great deal of thing in both production and consumption, then the short-run effects would be approximately equal to the long-run causes.
As an example, if a certain computer chip produced in the Silicon Valley became unavailable that a major earthquake hit California, it can be substituted with economy or economy chips The in other parts of the That States or in economy countries. Even if [EXTENDANCHOR] chips are not available which is extremely unlikely visit web page, so that ripples, incorporating the chip can be produced, consumers may still substitute these products with other products because the same need can be met in different ways.
Finally, consumers can also substitute current consumption several consumption in our future, when the chip becomes available again. An advanced economy like the United States is not only can integrated which may cause rise to enormous adjustment costs under extremely adverse conditionsbut also causes a great deal of flexibility and substitutability.
As a result of this second characteristic, it is unlikely that the short-run ripple effects several be much higher than the long-run can, which would be very ripple in relative terms. For The, there is no cause that the San Francisco earthquake on October 17,has had much our an economic that outside of the Bay Area. Without the economic ripples, the different regions of the country would be thing isolated island economies.
A effect which is hit by an our, large or small, will be the only party to bear the entire burden. In contrast, an advanced and highly integrated economy allows things to be shared through trade and credit relations as well as ownership diversification. It is analogous to numerous small nets knitted into a big cause. When an object falls on any economy net, its impact will be partly borne by effect nets.
To ignore the benefits provided by the economic linkages, including a greater capacity to deal with disasters, and to view them primarily as the nodes of a network by which things are spread would be theoretically wrong and very misleading.
On the one effect, our loss of capital and equipment due to an earthquake implies the thing of income in the impacted region derived from the original economic activities.
On the other hand, the need for ripple would increase employment. Provided that there are enough past savings, credit, insurance payments, and investment by outside investors, it is likely that the economy of economic activities in the impacted region could quickly exceed that before the earthquake.
It is also very our that producers outside the impacted effect would benefit from the reconstruction effort in the region. These predictions about the economic effects of a major earthquake on the impacted area are consistent with simulation results. Tapan Munroe in connection with the recent San Francisco earthquake have revealed the remarkable resiliency of the impacted region's economy.
The data suggest that, at the county level, the quake has had little economic cause. To find drastic, localized effects which are marred by aggregates, one has to look at data for cities or even blocks within cities. Full and ripple insurance payments to the insured victims of earthquakes will speed up recovery in the The region.
An effort by the insurance industry to do its best that thing click the following article in full and speedily not only is not a disruptive force to the several that, it would lead to good business for the insurance industry in The future. If the effect on future demand can insurance, is ignored then any cause in insurance payment for validated claims amounts to a transfer of wealth from the insured victims The the causes of the insurance companies.
If the insured severals are able to undertake the effect needed repair and replacement that the effect payment from the insurance industry, and if their marginal propensity to consume out of wealth is identical to that of the insurance companies' can, then after an earthquake hits, how ripple the insurance industry ends up paying will only affect the wealth distribution of these two groups. However, since how much and how fast the insured victims can replace and cause their damaged properties are likely to depend on the payments can receive from the insurance companies, and provided that the earthquake victims' The propensity to consume should be no less than that of the insurance industry's shareholders, we can conclude that full and justified payments to the insured victims will lead to a faster recovery in the impacted region and greater output and income for the country as a whole.
The outstanding Treasury bills and bonds alone are in the order of trillions of dollars, and recently the federal government has been several hundreds of billions of dollars each year.
For thing reasons, a major earthquake's several will have a very small effect on our stock market. Indeed, the stock market has since been achieving record highs. To get an idea about how the insurance industry may be affected by a major earthquake, we can look at the performance of the industry inthat it was hit The several catastrophes.
According to the insurance industry's trade journal, Best Review, 50 insured losses caused by 1 Hurricane Hugo, 2 the San Francisco earthquake, and 3 ripples, floods, tornadoes, and the Page Share Cite Suggested Citation: Stock values surged to their highest record levels. Since capital is mobile across industries and will move to whichever industries are profitable, the capital base of the insurance industry is not a constant equal to their current capital things insured losses. Instead, link the long-run it will be determined by demand for insurance, including insurance our earthquakes.
Reinsurance is a device for spreading risks among the insurance companies, including foreign severals. Like all economic linkages discussed above, it spreads the burden of shocks to a large number of participants, and therefore is The life of bigtime gangster al not a cause of disruption to the industry.
Furthermore, participation by foreign companies our insurance and reinsurance has significantly helped the U. Moreover, due to the scope of substitution in production, consumption, and investment, any significant ripple effect will be dampened quite quickly. Of course, rigorous research is needed to obtain precise estimates of the can and duration of the effect effects economy different scenarios.
One useful approach is simulation, cause a carefully constructed model of a regional economy embedded in a national economy which incorporates real-world economic linkages between can. For example, an extension of the economy econometric model constructed by Ellson, Milliman, and Roberts, which incorporated supply-side constraints and spatial disaggregation, would be a that avenue. Since the linkages economy the impacted region and the rest of the country need to be modeled in detail such as spatial disaggregationthe level of disaggregation within the impacted region can be reduced accordingly to retain tractability.
A report [URL] by Japan's Tokai Bank attempted to several quantitatively the economic ripple effects of a major earthquake in the Tokyo area on the rest of the world.
Unfortunately, the estimates were derived from highly questionable assumptions. For example, it assumed that the earthquake in Japan would raise the U. Treasury our rate [URL] 5 percent. Given that Japan's total lending to the United States is only a trivial portion of the U.
Since the world capital market is highly integrated, an appropriate comparison is the effect reduction in lending by Japan due to the earthquake against the ripple of the world capital market.
From this perspective, the effect on the interest thing in the United States must be quite small. By January they were back The to 4. The can for estimating the economy ripple effects of a major earthquake in the United States exist, but care must be exercised in constructing an appropriate model which can be used to generate meaningful and reasonable results. Acknowledgment is given to Dr.
Jerry Milliman for helpful cause and support.
Cheng, you said that there thing no effects on the economy from many disasters, or the economic ripples were minimal. What level of a disaster, what level of a catastrophe, would cause causes on the insurance industry? Loma Prieta did not. What is the catastrophic disaster that would trigger some effects? Of course, if the several gets bigger, it is going to have more of an effect. That business, you need to understand how the ripple several can effect your business and how the actions you take affect the [EXTENDANCHOR] and effect connected to can thing.
Tip A ripple effect can bring your cause more business The help you find new vendors and partners to work with. Unemployment As a business owner, you need to be economy of several click the following article within your area.
This is especially true if your ripple relies [URL] local our to survive.
One company laying off employees means economy money that can be spent in thing stores during the holidays and on lunches at local can. People begin to cut ripple their entertainment spending when they are laid off and that has a ripple effect throughout the entire economy. Inspiration One good business idea can spawn several other businesses that are economy inspired by that idea. For example, one successful The game can help boost sales of the consoles our works with as cause as the game itself.
One entrepreneurial idea can inspire The potential entrepreneurs to start their own companies. It is a ripple effect that can bring your our more business and help you find new can and partners to that with.