A CGE Framework for Modeling the Economics of Flooding and Recovery in a Major Urban Area

Coastal cities around the world have experienced large costs from major flooding events in recent years. Climate change is predicted to bring an increased likelihood of flooding due to sea level rise and more frequent severe storms. In order to plan future development and adaptation, cities must know the magnitude of losses associated with these events, and how they can be reduced. Often losses are calculated from insurance claims or surveying flood victims. However, this largely neglects the loss due to the disruption of economic activity. We use a forward‐looking dynamic computable general equilibrium model to study how a local economy responds to a flood, focusing on the subsequent recovery/reconstruction. Initial damage is modeled as a shock to the capital stock and recovery requires rebuilding that stock. We apply the model to Vancouver, British Columbia by considering a flood scenario causing total capital damage of $14.6 billion spread across five municipalities. GDP loss relative to a no‐flood scenario is relatively long‐lasting. It is 2.0% ($2.2 billion) in the first year after the flood, 1.7% ($1.9 billion) in the second year, and 1.2% ($1.4 billion) in the fifth year.     

Using Probabilistic Terrorism Risk Modeling for Regulatory Benefit-Cost Analysis: Application to the Western Hemisphere Travel Initiative in the Land Environment

This article presents a framework for using probabilistic terrorism risk modeling in regulatory analysis. We demonstrate the framework with an example application involving a regulation under consideration, the Western Hemisphere Travel Initiative for the Land Environment, (WHTI‐L). First, we estimate annualized loss from terrorist attacks with the Risk Management Solutions (RMS) Probabilistic Terrorism Model. We then estimate the critical risk reduction, which is the risk‐reducing effectiveness of WHTI‐L needed for its benefit, in terms of reduced terrorism loss in the United States, to exceed its cost. Our analysis indicates that the critical risk reduction depends strongly not only on uncertainties in the terrorism risk level, but also on uncertainty in the cost of regulation and how casualties are monetized. For a terrorism risk level based on the RMS standard risk estimate, the baseline regulatory cost estimate for WHTI‐L, and a range of casualty cost estimates based on the willingness‐to‐pay approach, our estimate for the expected annualized loss from terrorism ranges from $2.7 billion to $5.2 billion. For this range in annualized loss, the critical risk reduction for WHTI‐L ranges from 7% to 13%. Basing results on a lower risk level that results in halving the annualized terrorism loss would double the critical risk reduction (14–26%), and basing the results on a higher risk level that results in a doubling of the annualized terrorism loss would cut the critical risk reduction in half (3.5–6.6%). Ideally, decisions about terrorism security regulations and policies would be informed by true benefit‐cost analyses in which the estimated benefits are compared to costs. Such analyses for terrorism security efforts face substantial impediments stemming from the great uncertainty in the terrorist threat and the very low recurrence interval for large attacks. Several approaches can be used to estimate how a terrorism security program or regulation reduces the distribution of risks it is intended to manage. But, continued research to develop additional tools and data is necessary to support application of these approaches. These include refinement of models and simulations, engagement of subject matter experts, implementation of program evaluation, and estimating the costs of casualties from terrorism events.     

A Bayesian Benefit-Risk Model Applied to the South Florida Building Code

A Bayesian compound Poisson benefit-risk model is described in this paper, and used to evaluate recent revisions to the South Florida Building Code (SFBC). The model accounts for natural variability in hurricane frequency and severity, and uncertainty in the effectiveness of the revised code. Ranges of residential growth rate, code effectiveness, construction cost increase, and planning period length are assumed, to show the ranges of cost-to-performance ratio within which the code will make sense economically. The expected cost of residential hurricane damage over 50 years for ten South Florida counties assuming continuation of previous building practices was $93 billion, equivalent to the residential damage of 5.2 Andrews. Assuming a reduction in the growth of damageable housing in South Florida from 5.5% to 2% as a result of code revision, estimated damages under the new code were $45 billion. At a per-house construction cost increase of 5%, the probability of at least recovering the estimated $40 billion cost of the specified wind-resistant construction was estimated to be 47%. Expected return on investment was estimated at $7 billion over 50 years. The expected return lies between a $44 billion loss and a $47 billion gain, when growth in damageable housing is allowed to range from 1% to 4% and construction cost increases are assumed to lie between 3% and 8%. Actual monetary return for a 5% cost increase and 2% growth in damageable housing ranges from a $20 billion loss to a $100 billion gain with 95% probability, as a result of weather variability alone. Results support SFBC revisions on solely economic grounds, a conclusion strengthened considerably in light of potentially avoided deaths and hurricane traumas. The model represents one approach to evaluating economic aspects of the sustainability of new technological measures on the basis of available information.     

Five-Hundred Life-Saving Interventions and Their Cost-Effectiveness

We gathered information on the cost-effectiveness of life-saving interventions in the United States from publicly available economic analyses. "Life-saving interventions" were defined as any behavioral and/or technological strategy that reduces the probability of premature death among a specified target population. We defined cost-effectiveness as the net resource costs of an intervention per year of life saved. To improve the comparability of cost-effectiveness ratios arrived at with diverse methods, we established fixed definitional goals and revised published estimates, when necessary and feasible, to meet these goals. The 587 interventions identified ranged from those that save more resources than they cost, to those costing more than 10 billion dollars per year of life saved. Overall, the median intervention costs $42,000 per life-year saved. The median medical intervention costs $19,000/life-year; injury reduction $48,000/life-year; and toxin control $2,800,000/life-year. Cost/life-year ratios and bibliographic references for more than 500 life-saving interventions are provided.     

Reinhardt on reform. Interview by Donna Vavala

Almost since the federal government took its giant step into health care delivery and financing in 1965 with Medicare and Medicaid, the emphasis in Washington has been on reducing the costs of health care. Almost all federal health law subsequent to those two programs has been aimed at cost control, even when the titles of the bills promised a more noble purpose. The most notable exception is the law establishing end-stage renal disease coverage, but it has become a prime exacerbator of rising costs. Not even the designers of the federal programs envisioned how quickly health care costs would rise and how substantial the increases would be. The federal tab in 1993 was $280.6 billion. In 1960, it was $3 billion and in 1970 it was $17.8 billion. And overall health care costs have followed a similar curve, growing from 5.3 percent of the U.S. GDP in 1960 and 7.4 percent in 1970 to 13.8 percent in 1993. The end is not in sight. Economists are predicting growth to 18 percent of GDP by the next century. Uwe E. Reinhardt, PhD, James Madison Professor of Political Economics in the Woodrow Wilson School at Princeton University, does not believe that the "bite" will become that large, but he does expect increases to continue into the near future. In the interview recorded in this article, Professor Reinhardt assesses both the current and his predicted financial scenario for the health care field.     

The rise and fall? Of mental stress claims in the USA

Occupation-related mental stress has been associated with significant loss in terms of diminished productivity, higher absenteeism, and increased workers' compensation claims. The Liberty Mutual Group workers' compensation data were analysed for the years 1984-93 for mental stress-related claims. This represented over 7 million claims, over 17000 of which were identified as mental stress-related. The proportion of all stress claims was estimated for each year. The proportion by gender, age and occupation (job classification code and occupation name) was also described. Stress claims increased during the late 1980s, peaking in 1991, accounting for 0.48% of all claims and 1.69% of all claims costs, and has declined since. Even at its peak, mental stress claims were not a major portion of workers' compensation losses. However, they are expensive. The average costs of a stress claim in 1993 was about $13000. The state of California accounts for 60% of the claims reported to Liberty Mutual over this 10-year period. In 1993 women accounted for 51% of the stress claims and about 30% of all claims. The mean age of workers with stress claims was 39.3 years, with most stress claims from 30 to 34 year-olds. High-risk occupations and industries include banks, insurance companies, general labourers, management, salespersons, and drivers. The current decline in stress claims can largely be explained by a combination of changes in unemployment, increasing litigation, and changes in law in California and other states that made more stringent the requirements whereby a mental stress claim can be considered work-related. While the data presented are helpful for comparing stress claims to all claims reported to Liberty Mutual and for identifying high-risk occupations and industries, because of the uniqueness of the stress claim selection algorithm and the uncertainties with cost estimates, the cost figures are not directly comparable to other claims reporting systems.     

The Economic Impacts of a Terrorist Attack on the U.S. Commercial Aviation System

We use data on air passenger travel expenditures per passenger as well as statistical analysis of the air traffic lost for the two-year aftermath of the September 11, 2001, attacks to estimate direct demand losses for air transportation services. These are used along with a national input-output model to assess the full costs of these losses. Depending on assumptions made, the full losses to the U.S. economy were between $214.3 and $420.5 billion. These estimates are similar to those from other studies of such an event, and suggest that the high costs of effective countermeasures may be justified.     

Assessing the Benefits and Costs of Homeland Security Research: A Risk-Informed Methodology with Applications for the U.S. Coast Guard

This article describes a methodology for risk-informed benefit–cost analyses of homeland security research products. The methodology is field-tested with 10 research products developed for the U.S. Coast Guard. Risk-informed benefit–cost analysis is a tool for risk management that integrates elements of risk analysis, decision analysis, and benefit–cost analysis. The cost analysis methodology includes a full-cost accounting of research projects, starting with initial fundamental research costs and extending to the costs of implementation of the research products and, where applicable, training, maintenance, and upgrade costs. The benefits analysis methodology is driven by changes in costs and risks leading to five alternative models: cost savings at the same level of security, increased security at the same cost, signal detection improvements, risk reduction by deterrence, and value of information. The U.S. Coast Guard staff selected 10 research projects to test and generalize the methodology. Examples include tools to improve the detection of explosives, reduce the costs of harbor patrols, and provide better predictions of hurricane wind speeds and floods. Benefits models and estimates varied by research project and many input parameters of the benefit estimates were highly uncertain, so risk analysis for sensitivity testing and simulation was important. Aggregating across the 10 research products, we found an overall median net present value of about $385 million, with a range from $54 million (5th percentile) to $877 million (95th percentile). Lessons learned are provided for future applications.     

The financial burden of psychosocial workplace aggression: A systematic review of cost-of-illness studies

Understanding the economic impact of psychological and social forms of workplace aggression to society could yield important insights into the magnitude of this occupational phenomenon. The objective of this systematic review was to collate, summarise, review and critique, and synthesise the cost of psychosocial workplace aggression at the individual- and societal-level. A peer-reviewed research protocol detailing the search strategy, study selection procedures and data extraction process was developed a priori. Both the academic and grey literatures were examined. To allow for basic comparison, all costs were converted and adjusted to reflect 2014 US dollars. Twelve studies, from 5 national contexts, met the inclusion criteria and were reviewed: Australia (n?=?2), Italy (n?=?1), Spain (n?=?1), the United Kingdom (n?=?3) and the United States (n?=?5). The annual cost of psychosocial workplace aggression varied substantially, ranging between $114.64 million and $35.9 billion. Heterogeneity across studies was found, with noted variations in stated study aims, utilised prevalence statistics and included costs. The review concludes that existing evidence attests to the substantial cost of psychosocial workplace aggression to both the individual and society, albeit such derived estimates are likely gross under-estimates. The findings highlight the importance of interpreting such figures within their conceptual and methodological contexts.     

Retrospective Cost-Effectiveness Analyses for Polio Vaccination in the United States

The history of polio vaccination in the United States spans 50 years and includes different phases of the disease, multiple vaccines, and a sustained significant commitment of resources. We estimated cost-effectiveness ratios and assessed the net benefits of polio vaccination applicable at various points in time from the societal perspective and we discounted these back to appropriate points in time. We reconstructed vaccine price data from available sources and used these to retrospectively estimate the total costs of the U.S. historical polio vaccination strategies (all costs reported in year 2002 dollars). We estimate that the United States invested approximately US dollars 35 billion (1955 net present value, discount rate of 3%) in polio vaccines between 1955 and 2005 and will invest approximately US dollars 1.4 billion (1955 net present value, or US dollars 6.3 billion in 2006 net present value) between 2006 and 2015 assuming a policy of continued use of inactivated poliovirus vaccine (IPV) for routine vaccination. The historical and future investments translate into over 1.7 billion vaccinations that prevent approximately 1.1 million cases of paralytic polio and over 160,000 deaths (1955 net present values of approximately 480,000 cases and 73,000 deaths). Due to treatment cost savings, the investment implies net benefits of approximately US dollars 180 billion (1955 net present value), even without incorporating the intangible costs of suffering and death and of averted fear. Retrospectively, the U.S. investment in polio vaccination represents a highly valuable, cost-saving public health program. Observed changes in the cost-effectiveness ratio estimates over time suggest the need for living economic models for interventions that appropriately change with time. This article also demonstrates that estimates of cost-effectiveness ratios at any single time point may fail to adequately consider the context of the investment made to date and the importance of population and other dynamics, and shows the importance of dynamic modeling.     

An Analysis of the Portfolio of Sites to Characterize for Selecting a Nuclear Repository

The U.S. Department of Energy has selected three sites, from five nominated, to characterize for a nuclear repository to permanently dispose of nuclear waste. This decision was made without the benefit of an analysis of this "portfolio" problem. This paper analyzes different portfolios of three sites for simultaneous characterization and strategies for sequential characterization. Characterization of each site, which involves significant subsurface excavation, is now estimated to cost $1 billion. Mainly because of the high characterization costs, sequential characterization strategies are identified which are the equivalent of $1.7-2.0 billion less expensive than the selected DOE simultaneous characterization of the three sites. If three sites are simultaneously characterized, one portfolio is estimated to be the equivalent of $100-400 million better than the selected DOE portfolio. Because of these potential savings and several other complicating factors that may influence the relative desirability of characterization strategies, a thorough analysis of characterization strategies that addresses the likelihood of finding disqualifying conditions during site characterization, uncertainties, and dependencies in forecast site repository costs, preclosure and postclosure health and safety impacts, potential delays of both sequential and simultaneous characterization strategies, and the environmental, socioeconomic, and health and safety impacts of characterization activities is recommended.     

Reducing the Risk of Injury from Table Saw Use: The Potential Benefits and Costs of Automatic Protection

The use of table saws in the United States is associated with approximately 28,000 emergency department (ED) visits and 2,000 cases of finger amputation per year. This article provides a quantitative estimate of the economic benefits of automatic protection systems that could be designed into new table saw products. Benefits are defined as reduced health‐care costs, enhanced production at work, and diminished pain and suffering. The present value of the benefits of automatic protection over the life of the table saw are interpreted as the switch‐point cost value, the maximum investment in automatic protection that can be justified by benefit‐cost comparison. Using two alternative methods for monetizing pain and suffering, the study finds switch‐point cost values of $753 and $561 per saw. These point estimates are sensitive to the values of inputs, especially the average cost of injury. The various switch‐point cost values are substantially higher than rough estimates of the incremental cost of automatic protection systems. Uncertainties and future research needs are discussed.     

Economics of Disaster Risk,Social Vulnerability,and Mental Health Resilience

We investigate the relationship between exposure to Hurricanes Katrina and/or Rita and mental health resilience by vulnerability status, with particular focus on the mental health outcomes of single mothers versus the general public. We advance a measurable notion of mental health resilience to disaster events. We also calculate the economic costs of poor mental health days added by natural disaster exposure. Negative binomial analyses show that hurricane exposure increases the expected count of poor mental health days for all persons by 18.7% (95% confidence interval [CI], 7.44–31.14%), and by 71.88% (95% CI, 39.48–211.82%) for single females with children. Monthly time‐series show that single mothers have lower event resilience, experiencing higher added mental stress. Results also show that the count of poor mental health days is sensitive to hurricane intensity, increasing by a factor of 1.06 (95% CI, 1.02–1.10) for every billion (U.S.$) dollars of damage added for all exposed persons, and by a factor of 1.08 (95% CI, 1.03–1.14) for single mothers. We estimate that single mothers, as a group, suffered over $130 million in productivity loss from added postdisaster stress and disability. Results illustrate the measurability of mental health resilience as a two‐dimensional concept of resistance capacity and recovery time. Overall, we show that natural disasters regressively tax disadvantaged population strata.     

The Consumer Gains from Direct Broadcast Satellites and the Competition with Cable TV

This paper examines direct broadcast satellites (DBS) as a competitor to cable. We first estimate a structural consumer level demand system for satellite, basic cable, premium cable and local antenna using micro data on almost 30000 households in 317 markets, including extensive controls for unobserved product quality and allowing the distribution of unobserved tastes to follow a fully flexible multivariate normal distribution. The estimated elasticity of expanded basic is about ‐15, with the demand for premium cable and DBS more elastic. The results identify strong correlations in the taste for different products not captured in conventional logit models. Estimates of the supply response of cable suggest that without DBS entry cable prices would be about 15 percent higher and cable quality would fall. We find a welfare gain of between $127 and $190 per year (aggregate $2.5 billion) for satellite buyers, and about $50 (aggregate $3 billion) for cable subscribers.     

Public Perceptions of Regulatory Costs,Their Uncertainty and Interindividual Distribution

Public perceptions of both risks and regulatory costs shape rational regulatory choices. Despite decades of risk perception studies, this article is the first on regulatory cost perceptions. A survey of 744 U.S. residents probed: (1) How knowledgeable are laypeople about regulatory costs incurred to reduce risks? (2) Do laypeople see official estimates of cost and benefit (lives saved) as accurate? (3) (How) do preferences for hypothetical regulations change when mean‐preserving spreads of uncertainty replace certain cost or benefit? and (4) (How) do preferences change when unequal interindividual distributions of hypothetical regulatory costs replace equal distributions? Respondents overestimated costs of regulatory compliance, while assuming agencies underestimate costs. Most assumed agency estimates of benefits are accurate; a third believed both cost and benefit estimates are accurate. Cost and benefit estimates presented without uncertainty were slightly preferred to those surrounded by “narrow uncertainty” (a range of costs or lives entirely within a personally‐calibrated zone without clear acceptance or rejection of tradeoffs). Certain estimates were more preferred than “wide uncertainty” (a range of agency estimates extending beyond these personal bounds, thus posing a gamble between favored and unacceptable tradeoffs), particularly for costs as opposed to benefits (but even for costs a quarter of respondents preferred wide uncertainty to certainty). Agency‐acknowledged uncertainty in general elicited mixed judgments of honesty and trustworthiness. People preferred egalitarian distributions of regulatory costs, despite skewed actual cost distributions, and preferred progressive cost distributions (the rich pay a greater than proportional share) to regressive ones. Efficient and socially responsive regulations require disclosure of much more information about regulatory costs and risks.     

Reassessing the human health benefits from cleaner air

Recent proposals to further reduce permitted levels of air pollution emissions are supported by high projected values of resulting public health benefits. For example, the Environmental Protection Agency recently estimated that the 1990 Clean Air Act Amendment (CAAA) will produce human health benefits in 2020, from reduced mortality rates, valued at nearly $2 trillion per year, compared to compliance costs of $65 billion ($0.065 trillion). However, while compliance costs can be measured, health benefits are unproved: they depend on a series of uncertain assumptions. Among these are that additional life expectancy gained by a beneficiary (with median age of about 80 years) should be valued at about $80,000 per month; that there is a 100% probability that a positive, linear, no-threshold, causal relation exists between PM(2.5) concentration and mortality risk; and that progress in medicine and disease prevention will not greatly diminish this relationship. We present an alternative uncertainty analysis that assigns a positive probability of error to each assumption. This discrete uncertainty analysis suggests (with probability >90% under plausible alternative assumptions) that the costs of CAAA exceed its benefits. Thus, instead of suggesting to policymakers that CAAA benefits are almost certainly far larger than its costs, we believe that accuracy requires acknowledging that the costs purchase a relatively uncertain, possibly much smaller, benefit. The difference between these contrasting conclusions is driven by different approaches to uncertainty analysis, that is, excluding or including discrete uncertainties about the main assumptions required for nonzero health benefits to exist at all.     

The Potential Impact of an Anthrax Attack on Real Estate Prices and Foreclosures in Seattle

This article provides a methodology for the economic analysis of the potential consequences of a simulated anthrax terrorism attack on real estate within the Seattle metropolitan area. We estimate spatially disaggregated impacts on median sales price of residential housing within the Seattle metro area following an attack on the central business district (CBD). Using a combination of longitudinal panel regression and GIS analysis, we find that the median sales price in the CBD could decline by as much as $280,000, and by nearly $100,000 in nearby communities. These results indicate that total residential property values could decrease by over $50 billion for Seattle, or a 33% overall decline. We combine these estimates with HUD's 2009 American Housing Survey (AHS) to further predict 70,000 foreclosures in Seattle spatial zones following the terrorism event.     

Discounting Compensation for Injuries

The reasons commonly given for discounting future costs and benefits are doubtfully applicable to future injuries: in particular, time preference justifies neither inter- nor intragenerational discounting. The cost of future injuries could be discounted on grounds that a smaller sum, invested at interest, is needed to pay a given level of ex post monetary compensation the further in the future the injury occurs. This effect is offset, however, by the diminishing marginal utility of compensation, if consumption is otherwise increasing. Depending on the elasticity of marginal utility of consumption, on whether consumption is growing at an optimal rate, and on the time period considered, the implicit discount rate may be positive, zero, or negative (even indefinitely so). There is no prospect of conventional discounting dealing appropriately with the cost of injuries to either future or present generations.     

A computerized financial planning model for a health maintenance organization

The time and resource costs needed to plan and start a prepaid medical program or health maintenance organization (HMO) are extensive. It can take up to 3 years to bring one on line and another 3 to 4 years to reach financial stability. Depending on the type of prepaid medical plan designed, the cost can reach $6 to $8 million before breakeven occurs. Because the financial stakes are so high, a systematic and sound business approach must be taken to find that one ‘best’ design that will survive in the market place. Thousands of hours are required to study all of the possible HMO design configurations. This paper describes how a corporation constructed a computerized financial planning model to simulate the financial behavior of a prepaid medical program with different organizational formats, operational policies and pricing and compensation schemes in varying market, economic and cost environments. Model development and application was a corporate affair. The computerized model provided a special design team with the capability to evaluate the economic impact of many different designs by asking ‘what if’ questions dealing with several key design and operating variables concerning different health benefit options, service utilization rates, staffing patterns, inflation rates and price and premium schedules. Thousands of hours of design time were saved and the corporation was able to find the ‘best’ possible design in a reasonable time and at a reasonable cost.     

Explosion Probability of Unexploded Ordnance: Expert Beliefs

This article reports on a study to quantify expert beliefs about the explosion probability of unexploded ordnance (UXO). Some 1,976 sites at closed military bases in the United States are contaminated with UXO and are slated for cleanup, at an estimated cost of $15–140 billion. Because no available technology can guarantee 100% removal of UXO, information about explosion probability is needed to assess the residual risks of civilian reuse of closed military bases and to make decisions about how much to invest in cleanup. This study elicited probability distributions for the chance of UXO explosion from 25 experts in explosive ordnance disposal, all of whom have had field experience in UXO identification and deactivation. The study considered six different scenarios: three different types of UXO handled in two different ways (one involving children and the other involving construction workers). We also asked the experts to rank by sensitivity to explosion 20 different kinds of UXO found at a case study site at Fort Ord, California. We found that the experts do not agree about the probability of UXO explosion, with significant differences among experts in their mean estimates of explosion probabilities and in the amount of uncertainty that they express in their estimates. In three of the six scenarios, the divergence was so great that the average of all the expert probability distributions was statistically indistinguishable from a uniform (0, 1) distribution—suggesting that the sum of expert opinion provides no information at all about the explosion risk. The experts' opinions on the relative sensitivity to explosion of the 20 UXO items also diverged. The average correlation between rankings of any pair of experts was 0.41, which, statistically, is barely significant (p= 0.049) at the 95% confidence level. Thus, one expert's rankings provide little predictive information about another's rankings. The lack of consensus among experts suggests that empirical studies are needed to better understand the explosion risks of UXO.