After the rubble has been cleared, the rebuilding begins. And for better or worse, natural disasters can provide a powerful boost to a lackluster economy.
Such was the case with the 1994 Northridge quake, which jolted L.A. from its early-1990s recessionary slumber, according to several economic studies.
But don't count on that happening again in the next big L.A. shaker. If a major quake were to hit Los Angeles, say in the downtown area, the economic consequences would be far from positive, according to several experts.
The Northridge quake's effect on the local economy resulted from an unusual confluence of factors that no longer exist. Chief among them were under-utilized capacity due to the recession, and President Clinton's desire to curry favor with California voters as he approached reelection.
Aside from the fact that there is virtually no excess capacity in today's robust economy, and Clinton is a lame-duck president, the damage from a downtown-area temblor could be so severe some damage estimates run more than $100 billion that the local economy would be thrown off track completely.
"The disruption of the transportation system, in the case of a massive earthquake, would be detrimental to the overall economy," said Joe Magaddino, chairman of the Department of Economics at Cal State Long Beach. "It would be analogous to a country suffering the ravages of war, from which it would take years to recover."
In addition, the outpouring of federal aid that L.A. County received after Northridge likely would be less generous than that of a few years ago, said Shirley Svorny, director of the San Fernando Valley Economic Research Center at Cal State Northridge.
"The recovery from the (1989) Loma Prieta earthquake took considerably longer (than Northridge) because federal assistance was much slower in coming," she pointed out. "The timing of the Northridge earthquake could have been to our advantage because Clinton was running for reelection and concerned about the Californian vote, and it might have been politically expedient to provide federal aid quickly."
Hal Cochrane, professor of economics at Colorado State University, used a model developed by the Federal Emergency Management Agency to determine how the Northridge quake would have affected the economy had there been less outside assistance and more transportation foul-ups. His conclusion? There would have been a loss of $13.41 billion in personal income in L.A. County instead of a $9.21 billion gain.
"There is no question that the Northridge earthquake was a boost for the local economy," said Magaddino. "If you look at the employment statistics, you see that construction employment in L.A. County recovered much faster than the rest of the region. That was not based on the underlying economic fundamentals, but it was a direct result of the earthquake."
But Magaddino argues that the long-term impact of the Northridge quake has been negligible compared to the effect of the overall business cycle upswing.
"You can say that if you're going to have an earthquake, it is better to have one during an economic downturn. But it is a one-time shock, and by itself it is not sufficient to sustain growth in the long run," he said.
The Northridge quake resulted in an estimated $44 billion in damages, according to EQE International Inc., a risk management firm that conducted studies on behalf of the Governor's Office of Emergency Services. By comparison, all other officially declared disasters in California from 1991 through 1998 including floods, fires, El Ni & #324;o and the L.A. riots caused a combined $10 billion in damages, according to OES.
As a direct response to Northridge, L.A. County received a huge influx of capital from insurance payments, and from federal and state emergency funds.
According to EQE, privately insured residential and business claims amounted to $8.4 billion, SBA loans $4 billion, and public assistance from FEMA and the state of California $4.5 billion.
However, the total compensation from insurance and federal aid was $24 billion, leaving an estimated $20 billion to be absorbed by individuals and businesses.
"The $20 billion is necessarily a rough estimate," said Paul Flores, vice president of EQE. "It includes financial damage because of loss of business and because of uninsured property. These are costs that were not compensated and had to be paid out of individuals' saving accounts and through commercial loans."
Svorny asserted that the losses in other sectors outweighed the benefits experienced in the construction sector following the Northridge quake.
"There were many jobs lost in places that were shut down because of quake damage," she said. "A lot of people left the area because they simply didn't want to live here any longer, and apartment vacancy rates went up dramatically after the earthquake."
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