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. Alright, here’s the answer: $2.8 billion, making the tornado that ripped through Joplin, Missouri, in May 2011 not only the deadliest on record in the United States since 1950 but also the costliest. With the second-costliest tornado occurring in Tuscaloosa, Alabama, at $2.45 billion and the third costliest in Moore, Oklahoma, at $2.0 billion having both occurred within the past five 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, and phone lines, crops, factories, homes, and natural resources. USA Today's estimates indicate that the Joplin tornado destroyed around 2,000 buildings and 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 assets or sum up the total of the lost income that lost assets generated.

While costs are harder to estimate than direct losses, 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, and transportation costs from goods having to be rerouted, decreased tourist activity, and utility disruptions. The decreased economic activity also results in lost taxable receipts and uses up federal disaster relief funds in order 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 gas prices to rise. Further, although insurance companies don’t usually increase rates because of a single disaster, the increasing tornado activity in recent years may lead to permanently higher insurance premiums or reduced coverage.

Tornadoes as Economic Stimuli

Although most would agree that tornadoes and natural disasters are a very undesirable form of economic stimulus, many economists have found that a flurry of increased economic activity often follows. The rebuilding efforts are fuelled 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 prior to 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.

Further, the amount of jobs created is not necessarily more than those lost from the tornado, and the type of employment is different as well. Although not a tornado, Hurricane Katrina stands as an example: Nearly three years after the initial disaster, 99% of the jobs had been regained while the type of work had significantly changed.

Additionally, the new jobs and incomes created do not always remain in the local economy as it is often contractors from outside that specialize in disaster clean-up and rebuilding, which are called in to perform the work.

The Bottom Line

Tornadoes are devastating events. While, most significantly, 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 the means by which 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 will not outweigh the costs. Although there are limitations to the extent to which damage can be prevented, with increased tornado activity in recent years, it would be worthwhile to consider strategies for mitigating the effects of violent storms.