Command Economy: Definition, How It Works, and Characteristics

Consider the damage caused by three-second wind gusts at over 200 mph: over 8,000 buildings flattened, 161 fatalities, and more than 1,000 injured, all costing $2.8 billion; making the tornado that ripped through Joplin, Missouri, in May 2011, not only one of the deadliest on record in the United States but also the costliest.

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 just over two years, it is worth thinking about the impact tornadoes can have on the economy.

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.

Just after the disaster, USA Today estimated that the Joplin tornado had caused damage to at least a quarter of the city. 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 ongoing utility disruptions. The decreased economic activity also results in lost taxable receipts and uses 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 regional 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 very undesirable forms of economic stimuli, 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.

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.

Regarding the Joplin tornado, more than $1.8 billion was invested into construction, more than 1,600 homes were built in the five years after the tornado, and new businesses after the tornado generated 2,000 jobs.

The amount of jobs created is not necessarily more than those lost from a tornado, and the type of employment is different as well. Although not a tornado, Hurricane Katrina stands as an example: Nearly a year after the initial disaster, employment in Mississippi reached pre-hurricane levels, 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 do not outweigh the costs.

Although there are limitations to the extent to which damage can be prevented, it is worthwhile to consider strategies for mitigating the effects of violent storms.