Adams/North: Kath And Kim Are Responsible For The Bushfires…

It appears that scientific bush fire experts have been warning for several years that a catastrophe would be coming and yet these warnings have not been heeded by governments or their bureaucratic officials.

Why is that, and what does it tell us about Australian society? John Adams and Martin North discuss.

Is this also true of impending financial disaster?

http://royalcommission.vic.gov.au/getdoc/a155e141-1883-444e-a11a-4f2fa174a2b4/TEN.038.001.0003.pdf

https://www.parliament.vic.gov.au/images/stories/committees/SCEP/Fire_Season_Prepardeness/Submissions/Submission_27_-_David_Roy_Packham-Attachment_3.pdf?fbclid=IwAR0v6slFxwWneBImHhhhnW9APuAZVaTIkH-TxsLPri-yn5k9ykYZKC-usn8

https://www.youtube.com/watch?v=gQdt7-SOaLU&t=179s

https://www.2gb.com/podcast/scientist-david-packham-on-whats-really-causing-the-bushfires/

Australia Is Committing Climate Suicide – Richard Flanagan

We look at a New York Times opinion piece from Novelist Richard Flanagan, who draws a parallel between Australia now, and what happened to the USSR after the Chernobyl disaster.

https://www.nytimes.com/2020/01/03/opinion/australia-fires-climate-change.html

Richard Flanagan won the Man Booker Prize for “The Narrow Road to the Deep North” and is the author, most recently, of the novel “First Person.”

Bushfires $30 Billion And Counting!

Australia is one of the most fire-prone countries on earth and bushfires can cause widespread devastation. In the right conditions a small fire can quickly become a massive one if not quickly controlled. When weather, topography, vegetation and fuel combine to defeat the best efforts of firefighters, bushfires can cause millions of dollars in damage and claim lives. Climate change is making the effects worse and we are of course in the middle of a serious natural disaster now, with more than 1,500 homes lost and  around 20 deaths, plus people missing.  Yet even as events grind on, in the absence of rain, the totals are likely to rise ahead.  I have had a number of people ask me for my views of the broader economic and social impacts on communities and the country. So today we begin to make some initial estimates. It will be a big number, and may in fact risk that $5b surplus the Treasury was expecting for this year.  We cannot yet be definitive, as the firestorms are still raging.

For starters, the Insurance Council of Australia says Insurers have received claims worth A$297m since October, relating to almost 4,300 claims and they expect the number will grow significantly.  They already declared a catastrophe in 236 postcodes across four states, including areas on the east coast stretching from East Gippsland to the Gold Coast. Expect Insurance premiums to rise.

These claims include 2,306 claims, worth an estimated A$182.6m, from fires on the New South Wales Mid-North Coast and Queensland. In October, the Rappville bushfire in New South Wales resulted in 200 claims costing an estimated $25 million, while the bushfires that raged in southeast Queensland and northern New South Wales in September cost $20 million. The Bunyip bushfires in eastern Victoria in March resulted in 432 claims and $31.9 million worth of losses.

But previous fire tragedies in Australia have run into the billions. 

When bushfires ripped through the heart of Victoria on that scorching Saturday a decade ago, the impact was likened to 1500 Hiroshima-style bombs exploding across the state. That was one of the world’s worst bushfire events ever recorded till then. It claimed 173 lives, burnt 450,000 hectares of land, (one sixth of the current fire footprint) and destroyed 2,000 homes and 1,500 buildings. While the initial and obvious cost of the devastation was estimated, the more hidden and enduring economic loss is still being counted.

Researchers within the Deakin Business School’s Department of Economics and Centre of Energy, looked at the income effects of the Black Saturday bushfires on the people who lived in the disaster-hit areas.  They argued this was a key indicator of economic resilience because the ability to bounce back to pre-disaster income levels shows an aspect of the individual’s resilience to disasters. They looked in detail at different demographic groups such as gender, age, low income, middle income, high income individuals, homeowner status and how individuals in each sector were affected across 37 Statistical Area-2s (SA2), which are medium-sized general-purpose areas that represent a community that interacts together socially and economically, roughly corresponding to postcodes. The percentage of burnt areas in a given SA2 ranged between 0.1 and 72.2 per cent.  And they used the census data to analyse the results and they showed the Black Saturday bushfires caused significant adverse economic effects on the incomes of those living in the disaster areas. While incomes of males and female were affected there was a steeper decline in female income (14 per cent vs 9 per cent), individuals in the low-income group were most vulnerable with an 18 per cent drop. While the income of employed people fell significantly (8 per cent), there was no significant income effect on unemployed individuals, presumably because they continued to receive their entitlements. Looking at the incomes of different age groups, they found it was the 25-45 age group who experienced the most negative and significant income losses following the disaster. Home renters suffered an average income loss of 14 per cent but the income decline for homeowners was much less. In terms of the industry sector of employment, they found those who worked in agriculture lost 31 per cent of their income; the retail sector 13 per cent and the tourism sector 12 per cent. However, individuals working in health care gained 8 per cent probably because they worked overtime. In economics literature, this is known as the creative destruction effect of disasters.

Finally, individuals who moved out of the disaster zones are associated with a 19 per cent decline in their incomes. These results confirm the need to dig deeper beyond aggregate and community trends and investigate the effects at the individual level.  They drew four major implications from their research. First, while average income effect is informative, the story is in the detail. Individual demographic groups and sectors of employment point to sizeable economic vulnerabilities. Second, disaster recovery and relief assistance arrangements could be enhanced by considering an individual’s vulnerabilities with a view to enhancing their economic resilience. In other words, there is room to rethink how we build a sustainable disaster recovery model on limited budgets. Third, the migration effects of the Black Saturday bushfires are substantial. Bushfires are frightening and devastating. They found that the Black Saturday bushfires had permanent effects on an individual’s location decisions in terms of moving out and not returning. This finding is also supported by anecdotal evidence. Finally, the social effects were extremely negative and resulted in significant adverse mental health effects. Reduced incomes and financial capabilities were critical factors behind deteriorating mental health of the individuals who lived in the disaster zones.

Then there are medical bills from the fires and smoke haze could also run into the hundreds of millions. For example, SGS Economics and Planning suggests disruptions caused by the fire and smoke haze could cost Sydney as much as A$50m a day. We run the risk of Sydney, and Australia more broadly no longer being known for its beautiful harbours and beaches, but for its awful pollution and bush fires. Already, in regional areas, many small businesses rely on the summer holiday trade which has been decimated.

Other evidence underscores the costs which include significant, and often long-term, social impacts including death and injury and impacts on employment, education, community networks, health and wellbeing. For example,  Tasmania faced A$25m in health costs from bushfires and smoke haze at the beginning of 2019, but then the current crisis was on a much bigger scale.

As well as the psychological trauma, health impacts are likely to long term, from being forced to breath poor smoke-laden air, stress and other impacts. Around a third of the Australian population has been impacted, with prolonged, episodic exposure and sometimes extreme health impacts.

Between 1967 and 1999, bushfires in Australia resulted in 223 deaths and 4,185 injuries, at a total cost of $654 million. While total insurance and other costs from bushfires were less than from floods, severe storms, tropical cyclones or earthquakes during the period of analysis, bushfires claimed more lives than any of these other disasters. More people were injured by bushfires than all other disasters combined and bushfires created 48 per cent of the total death and injury cost from natural disasters in Australia.

Some bushfires are truly devastating. The 1939 Black Friday fires in Victoria burned almost two million hectares, claimed 71 lives and destroyed more than 1,000 homes, including entire townships. In adjusted terms, these fires cost some $3 billion. On 1983 Ash Wednesday fires in Victoria and South Australia claimed 75 lives, more than 2,000 homes and over 400,000 hectares of country. Total property losses were estimated to be over $400 million back then. Today they would be closer to $2.5 billion.

A royal commission called after the Black Saturday fires in 2009 put the cost at A$4.4bn. That included insurance claims, which the Insurance Council of Australia said totalled about A$1.2bn. In today’s terms, that would be closer to $6 billion dollars, and the land so far raised this time around is around 6 times that of those 2009, which would give a gross hit around $36 billion.  Reconstruction will likely take more than 3 years.

More broadly, Deloitte Access Economics partner Kathryn Matthews said Australia would face mounting costs from the increasing prevalence of natural disasters. In a 2017 report the total economic cost of natural disasters, and not just bushfires, was estimated to reach $39 billion per year by 2050.

Even the Australia Institute said natural disasters cost Australia $13 billion per year and that will only increase with the increase in frequency and severity of these climate disasters.

They suggest slapping a levy on Australia’s coal and gas industry companies to help pay for the skyrocketing costs of climate-change driven disasters such as bushfires. A one-dollar levy on core oil and gas produced in Australia could raise $1.5 billion annually – essential income for a national climate disaster fund. But Treasurer Josh Frydenberg isn’t convinced. The federal government will not be introducing a disaster levy,” he said in a statement to AAP.

References:

https://www.theguardian.com/australia-news/2020/jan/03/australian-bushfire-crisis-predicted-to-cost-tourism-industry-hundreds-of-millions

https://www.smh.com.au/national/nsw/the-economic-cost-of-bushfires-on-sydney-revealed-up-to-50-million-a-day-and-rising-20191212-p53jbq.html

https://aic.gov.au/publications/bfab/bfab002

https://knowledge.aidr.org.au/resources/ajem-april-2019-black-saturday-bushfires-counting-the-cost/

https://www.bbc.com/news/business-50862349

https://www.northerndailyleader.com.au/story/6565188/frydenberg-dismisses-disaster-levy-idea/

The Future Of Money – Adam and I Chat – 4

Another deeply philosophical discussion with Adam Stokes about how we see the world.

What defines “Money” and how does the likes of Bitcoin stack up?

Prepare for some mind-stretching conversations about how we look at the world (and why people often ignore new concepts and ideas).

IMF Warns On Link Between High Public Debt And Crises

The IMF just released a working paper* “Debt Is Not Free“. The evidence presented in this paper points to the risks, suggesting that public debt might not be free after all! In addition, low, or ultra low interest rates are not a get out of jail card!

The case for more public debt is being reinforced by weak economic activity across the globe, large investment needs, and increasing concerns that monetary policy may be reaching its limits particularly in advanced economies. And yet, the risk of fiscal crises still casts a long shadow. Therefore, as many countries remain riddled with mounting debt, one of the most pressing questions facing policymakers is whether current high debt levels are a bellwether of future crises with large economic costs.

The argument that “public debt may have no fiscal cost”is also gaining traction as many countries face historically low interest rates and the global stock of negative-yielding debt is hovering around $12 trillion by the end of 2019. The underlying rationale is that if interest rates are lower than the economic growth rate—that is, the interest-growth differential is negative—there is no reason to maintain a primary surplus as it would be feasible to issue debt without later increasing taxes.

This working paper contributes to the debate on the costs of public debt by revisiting its importance in predicting fiscal crises. In a world of ultra-low interest rates, it is tempting to believe that there may be no costs. For those that subscribe to that theory, the natural conclusion is that now may be the time to rely more heavily on debt to attend to worthy causes such as fixing a crumbling infrastructure all while propping up a frail economy. The skeptics point to history, noting that those that ignore high debt do it at their peril as excessive debt may force disruptive fiscal adjustments or eventually lead to costly crises.

They use machine learning models to confront these dueling views with evidence. Our results show that public debt in its various forms is the most important predictor of fiscal crises and it does matter always and everywhere. But public debt is not the only game in town as its interactions with other predictors also make a difference. Surprisingly, however, the interest-growth differential does not have much signaling value: it does not really matter whether it is highly positive or negative; moreover, beyond certain debt levels, the likelihood of a crisis surges regardless.

It is important to acknowledge that the machine learning techniques used do not allow us to establish causality. This is an area where computational science is still trying to make inroads. What they can confidently say is that there is a high correlation between public debt and crises and that this association is very robust. Therefore, at the current juncture, complacency about high debt levels would be ill-advised even if interest-growth differentials were to remain low. The underlying reason is that the dynamics of crises are highly non-linear and by the time the interest-growth differential may start flashing red, a crisis may well be underway catching policymakers off guard.

These findings do not mean that bringing debt down is always the right policy prescription. There are clearly cases where the use of debt for countercyclical purposes, to increase public investment, or to address other structural needs is desirable. However, the evidence presented in this paper points to the risks, suggesting that public debt might not be free after all!

*IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.