econlife - How to Calculate the Cost of a Disaster by Elaine Schwartz

With Dorian in the news, this year we’ve moved past Andrea, Barry, and Chantal, and might soon learn about Erin, Fernand, and Gabrielle. As for the rest, these names complete the 2019 hurricane list:

• Humberto
• Imelda
• Jerry
• Karen
• Lorenzo
• Melissa
• Nestor
• Olga
• Pablo
• Rebekah
• Sebastien
• Tanya
• Van
• Wendy

When we think about a hurricane or some other disaster like a drought or a wildfire, it helps to calculate the cost. Knowing the numbers, we can better assess risk, determine insurance needs, and do some planning for the future.

So let’s take a look at how they figure out the cost.

Calculating Disaster Costs

In a recent update, NOAA looked at the weather and climate disasters whose cost exceeded $1 billion. So far there have been six:

Totaling 14, during 2018 the weather and climate events whose cost was more than $1 billion topped the average of 6.3 events from 1980 to 2018:

Ranging from wildfires and hurricanes to droughts and hail storms, these were the 14:

The cost “scorekeeper” for the U.S. government is the National Center for Environmental Information (NCEI). When they figure out the cost of a disaster, they include items like the following:

If we were to rank storm costs, then hurricanes are at the top of the list at an average of $22.3 billion per event. Valued at far less, drought is #2 at an average cost of $9.6 billion. Then, dropping to an average of $5.0 billion per event, we have wildfires.

This was the NCEI summary:

However, the NCEI points out that they do not include the value of lives lost or the cost of healthcare. If they included what U.S. regulatory agencies call the Value of a Statistical Life (VSL) each fatality could add many millions of dollars to disaster costs. You can see below that no one quite agrees how much:

Our Bottom Line: GDP Impact

The Broken Window Fallacy is one way to explain the economic impact of a disaster. In “What is Seen, and What is Not Seen,” economist Frédéric Bastiat (1801-1850) reminds us of what we are not doing as we recover from a calamity. When a window is broken, the glazier gets employment and the GDP rises. However, we just wind up with the window we had once had. Or, as he said, “To break, to spoil, to waste, is not to encourage natural labour; or, more briefly, ‘destruction is not profit.'”

My sources and more: Good for weather information, NOAA had the up-to-date disaster facts and also cost calculation information. Next, The Farmers Almanac was a handy place to get 2019 hurricane names. And finally, this paper takes a brief contrarian look at how NOAA calculates losses. However, my most interesting read was Bloomberg’s VSL discussion.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Celebrating the Economic Independence That Alexander Hamilton Created by Elaine Schwartz

The United States declared independence from Great Britain on July 4, 1776 and won the American Revolutionary War. But still, we were not truly independent. Our agrarian economy depended on Great Britain. They had the banking system, they had the factories, they had the knowhow.

But we had Alexander Hamilton.

Alexander Hamilton’s Development Plan

As Secretary of the Treasury, Alexander Hamilton’s goal was to expand the U.S. banking system, our transportation infrastructure, and technological innovation. He wanted factories that would process what our farms and plantations grew. So, in Hamilton’s development plan, he explained to the Congress what they had to do.

1. Establish Public Credit

• Hamilton said a national debt is a blessing if it’s not too large. Borrowed money had helped the U.S. finance the Revolutionary War. Also, though, those lenders had to know we would pay them back. With European creditors, the U.S. had to pay back the money that was due them while domestic creditors needed to know we had a viable plan. Only then could Hamilton establish the good credit that was necessary for a government to borrow the money it needed.
• Since then, the U.S. has been borrowing money and paying it back. However, some of us are worried that the debt is becoming too large. Just like your own income determines the wise amount for you to borrow, so too does the GDP for our nation. Below you can see that recently the debt is an increasingly bigger proportion of the GDP. Almost equal to World War II highs, the debt is projected to balloon from 78% of GDP for this year to 92% in 2029:

2. Create a Banking System

• By establishing the First Bank of the United States, Alexander Hamilton generated the beginning of a banking system that pumped money around the U.S. economy. His goal was a network of financial intermediaries that connects savers to borrowers. He knew that banks loan money to business start-ups and help firms finance inventory. They expand and contract the money supply and purchase the bonds that nations sell to raise money.
• Now, while there are close to 4,600 banks in the U.S., the large ones predominate. Below, you can see how the system has consolidated:

Among the 10 largest U.S. banks, the four with the most assets are JP Morgan Chase, BOA, Citi, and Wells Fargo:

3. Encourage Economic Diversity

• Economic growth through diversity was the third leg of Alexander Hamilton’s plan for independence. Recognizing that the U.S. in 1790 was a farming economy, he sought tariffs and subsidies to protect a young manufacturing sector. He supported a system of tariffs to encourage innovation. Correct again, Hamilton knew that the combination of agriculture, manufacturing, and invention could form an economic foundation from which we could build.
• Looking back, we can say that Hamilton created our springboard. About a different kind of independence, Hamilton’s foundation facilitated the leap beyond our borders to globalization. It let us evolve from an agricultural economy to a productive behemoth that needs world markets and global supply chains to feed our growth.

The huge volume of goods and services that each U.S. state produces can be compared to these countries:

Shown above, the four largest state GDPs would equal the value of the goods and services produced by UK, Canada, Korea, and Mexico:

Our Bottom Line: Déjà Vu

Hamilton’s goals are timeless. We still need to manage sovereign debt wisely, support a vibrant banking system, and encourage economic growth.

My sources and more: This Fortune article sums up the Hamiltonian legacy ideally.


Please note that this post is an updated version of what we have published on past Independence Days.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - What the Grocery Store Says About Us by Elaine Schwartz

Boris Yeltsin’s visit to a U.S. supermarket could have changed Russian history. Some say it was really the Jell-O Pudding Pops.

The year was 1989. Soon to be the Soviet President, Yeltsin was here to see the Johnson Space Center. After the tour, with 20 minutes to spare, his group stopped at a Randall’s supermarket in Houston. The man was reputedly flummoxed.

He marveled at the variety of goods that were available:

Yeltsin later said in his autobiography that seeing, “those shelves crammed with hundreds, thousands of cans, cartons and goods of every possible sort, for the first time I felt quite frankly sick with despair for the Soviet people.” In the Soviet Union, consumers coped with dour clerks, long lines, and shortages.

Where are we going? To what our grocery stores say about our economy.

The Grocery Store

Store Variety

When you think of the 21st century U.S. grocery store, the big ones could first come to mind. Led by Walmart and Kroger, the top 11 include Amazon’s Whole Foods and Trader Joe’s. Looked at together, we see thousands of stores and huge spending. Alone, each store is a bit different. While Walmart represents bargains, Whole Foods has a pricier organic selection, and Kroger has been called middle market.

In the grocery store list that follows, huge grocery sellers like CVS (drug stores) and Costco (warehouse) were excluded. Out of a list of 50, I copied the top 11 grocers:

Product Variety

As consumers, we support an immense amount of product differentiation. Just choose an aisle. You could see chips that are plain, sea salt, cheese or onion. Who knew there could be so many kinds of yogurt? Even milk now could be almond, 2%, whole, non-fat, supermarket brand.

Our Bottom Line: More than the GDP

In a grocery store, the GDP and subjective well-being reinforce each other. Our GDP reflects the dollar value of the groceries we produce. But our groceries deliver more. Through variety, innovation, and convenience, they boost our subjective well-being.

When we have more to spend, our demand for quality and variety increases. Meanwhile, technological innovation has enabled the retailers to know us better. Keeping track of what we buy, they identify what we want. And here is where time enters the picture, Having access to all we need in one store minimizes the time/food shopping tradeoff. So yes, we  make an average of 1.6 grocery shopping trips a week. But, a working mom and dad can do them quickly in one place, and buy some prepared food as well.

Our visits seem to been diminishing. I wonder if online shopping could be one reason:

Returning to where we began with Boris Yeltsin and ending with 1.6 visits to the 21st century U.S., we can use a grocery store to learn about more than food.

My sources and more: Thanks to Duke professor Mike Munger’s blog for the link to the econlib grocery article. From there, the Washington Post takes an interesting look at Wegman’s while you can get the top fifty list from the Progressive Grocer. After that, for some history, the Houston Chronicle had the story of Yeltsin’s visit. And finally, if you still want more, do read Michael Ruhlman’s Grocery: The Buying and Selling of Food in America.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - The Impact of the Starbucks Effect by Elaine Schwartz

Strolling around 110th street in New York’s Harlem, you see new restaurants and small cafes that sell gourmet coffee.

It could be called the Starbucks effect.

The Starbucks Effect

Zillow

A 2015 study from Zillow tells us that home prices increase after Starbucks arrives in a neighborhood. Yes, they say that “properties near Starbucks tend to start out more expensive.” However, they claim that the Starbucks connection stands out.

While homes near a Starbucks sell, on average, for $137,000, those that are distant from it average $102,000. They also found that over 17 years, the Starbucks correlation was reflected by a 96% appreciation. Homes not near went up by 65%.

The clincher though is the Dunkin’ Donuts comparison. You can see that your wealth went up by less when a Dunkin’ Donuts was nearby:

Here’s the data:

Asked which came first, the Zillow people concluded that Starbucks fueled the housing price increases. At Starbucks, they just said, sure…we understand real estate. It’s art and science and we get both.

Some Harvard professors do not entirely agree.

Harvard

In a recent paper, three economists from Harvard used Yelp to compare real time local business activity and gentrification. The Starbucks part of their study focused on the number of cafes. They wanted to see if housing prices rose when there were more Starbucks. Sidestepping causality, they were looking for a leading indicator.

And they found one.

With each new Starbucks, the home prices in a zip code rose by .5%. However, they suggest that Starbuck selects zip codes with an “upswing.” Also, Starbucks is one of many new establishments in the neighborhood. As the authors point out, we simply have communities where more people like expensive coffee. They also want more restaurants, bars, cafes, and grocery stores.

Our Bottom Line: Consumption Expenditures

Whether looking at Starbucks or the other businesses that accompany higher housing prices, we can hypothesize that GDP spending rises. As a dollar measure of what we produce, the totals are mostly what we, businesses, and governments spend. So, a new Starbucks can mean more consumer spending. Meanwhile, the new Starbucks and new housing are in the businesses category because they are defined as investments.

I guess we could conclude that the Starbucks effect is a GDP effect.

My sources and more: In two slightly different ways, Starbucks is linked to rising home prices. Quartz had an excerpt of a Zillow study in 2015. Much more auspiciously sourced, this NBER paper from Harvard Business School is dated August 2018.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - The Best Reasons For Later School Start Times by Elaine Schwartz

Last September, a bill flopped in the California state legislature. Advocating an 8:30 (or later) start time at schools, it fell far short of the votes it needed. Currently they are reconsidering.

I wonder if those lawmakers know they are really talking about the GDP.

The Wake up Call

In California. the average school start time is 8:07. By moving it 23 minutes later, we could diminish tardiness and car accidents. Researchers hypothesize also that graduation rates would rise.

Studies show that teens would go to bed at the same time but sleep later if school began after 8:30. They would also get better quality sleep during the morning hours. In dollars, a Rand study reports that after the initial cost, the benefit to California alone would be $10 billion ($83 billion for the entire U.S.) if you just project fewer auto accidents (20% of teen accidents from sleepiness) and higher graduation rates. From there, they say, students then move onward to better jobs and more of an economic contribution.

The predicted gains in state domestic product could be considerable:



As did I, you might suspect that some of this reflects a statistical leap. But even when we consider the high cost of compressed bus schedules and lighting for later activities, the basics make sense.

Our Bottom Line: Human Capital

Really, we are just talking about human capital. As a resource that fuels economic growth, human capital includes our education, entrepreneurial spirit, and health. With U.S. economic growth at a 2.2% rate for Q1 (2018) and 4.1% for Q2 (2018), maybe we could sustain the increase by giving adolescents a bit more sleep?

And finally, I could not resist this xkcd cartoon. After all, the impact of sleep deprivation extends far beyond teens.



My sources and more: This LA Times article tells about the California schools sleep bill rejection while this site has the update. But for a report chock full of detail, do look at the original paper from Rand or this summary.

Please note that I repeated several phrases from a past econlife post on the same topic.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Where Life Is Better by Elaine Schwartz

When approximately 43,000 people in 38 countries look back to 1967, some say life is better but others do not.

The Pew Research Center gathered their answers last spring. The most positive response came from Vietnam and India. The most negative was expressed by Venezuelans:

Pew concluded that people’s view of their economy seems to have been the key variable. You can see below the correlation between “life is better” and “the economic situation in our country is good:”

Where are we going? To the GDP.

Our Bottom Line: Well-Being Yardsticks

Knowing that one’s economic situation influences life satisfaction, we can ask what we mean by economic situation. Some people would say we are referring to the GDP.

GDP

The GDP is mostly composed of the value of a country’s consumer, business, and government spending. And yes, if you look at the U.S. a climbing GDP meant better food on the table, more bedrooms in our homes, and the innovative appliances (like a washing machine) that make our lives easier. Correspondingly, at work, fewer hours bought and brought us additional goods and services.

Better Life Index

As a well-being yardstick, though, the GDP can be rather controversial. In the OECD’s Better Life Index, the environment, community and health are included among the criteria that measure national well-being.

This is their full list which they then break down into more specific standards:

Stiglitz Commission

Nine years ago, France’s former President Sarkozy felt so strongly about GDP inadequacies that he created a commission. Led by Nobel Laureate Joseph Stiglitz, the commission’s report explained “the limits of the GDP.”

In a 12-page overview, they included the following recommendations:

1. When evaluating material well-being, look at income and consumption rather than production
2. Emphasise the household perspective
3. Consider income and consumption jointly with wealth
4. Give more prominence to the distribution of income, consumption and wealth
5. Broaden income measures to non-market activities

So, returning to the Pew life satisfaction survey, where does all of this leave us? There probably is no right or wrong yardstick. We just need to remember that, “What we measure affects what we do.”

My sources and more: H/T to Mark Perry at Carpe Diem for alerting me to the Pew Research. Only the beginning, the next logical step was to see the detail at Pew, And then for contrast, the Better Life Index and Stiglitz Report were ideal.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.