Sunday, October 08, 2017

Economic Impact Of Regional Disasters: A Job For Input-Output Analysis?

This post, unfortunately, is inspired by current events.

Economists can provide guidance on disaster recovery - for example, from earthquakes and hurricanes.

Economists, for a long time, have been developing input-output models of local economies and interactions between them. I think of Walter Isard as a pioneer here. Such models are of practical importance to my post topic.

Regional input-output models can describe disasters with either a supply-side or demand-side approach. In a supply-side approach, the output of an industry is reduced because the inputs into that industry are not available at the pre-disaster level. Some of the outputs of that industry are inputs into other industries. Other outputs satisfy final demands, for example, for household consumption. Input-output modeling can help trace these consequences.

In a demand-side approach, an industry's output is constrained because those who purchase its outputs cannot do so at the pre-disaster level. If those industries who purchase your products are suddenly reduced in size, you must need cut back your output, too.

Some issues arise here. Can supply-side and demand-side approaches be combined without double counting? How should one model the effects of external infusions of aid? Multiplier effects seem to sit comfortably with the demand side approach. The assumption of fixed coefficients in the Leontief input-output approach seems to be an important restriction here. When it comes to modeling resiliency, I think of the work of Adam Rose. Apparently, some use Computational General Equilibrium (CGE) models for this reason.

I do not know enough to have a firm opinion of CGE models. I have the impression that "Computational" is a misnomer; it does not relate to computational theory and Turing machines, as studied in computer science. I am also not sure that the GE in CGE is what I understand as GE. Anyways, practical considerations interact here with the ideological demands impacting economic theory. I like to think that economists are useful in the hard problem of what to do when disaster strikes.

  • Walter Isard. 1951. Interregional and Regional Input-Output Analysis: A Model of a Space-Economy. Review of Economics and Statistics. Vol. 33, No. 4: pp. 318-328.

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