GC23C-06 Modeling and Assessing the Propagation of the Economic Effects of Extreme Events

We investigate the response of a regional economy to external shocks impacting its productive resources to understand forces and patterns, stabilities and instabilities, foresight, and the resilience of co-evolving human and natural systems in the context of multiple and compounding stressors. We apply a multi-system, multi-sector (MSD) modeling framework built on available socio-economic data of the US economy, using the Mississippi River Basin (MRB) as the geographic focus for our test-case. The MRB is the 4th largest watershed in the world and produces 92% of the nation’s agricultural exports, supplies water to 50 major cities along its route and contains up to 326 thermoelectric power plants generating 227 GW annually. Several states in the MRB have below-average economic development levels relatively to the U.S. and have been subject to diverse climate shocks, such as flooding, which seem to increase in intensity and frequency in past decades. Our MSD framework represents the U.S. economy at regional and state levels and the economic interconnections among them, and captures the overall flow of goods and services and transactions among consumers and industries, assuring supply and demand balance in all markets and consistency in income and expenses for all economic agents. We stress-test negative shocks on productive resources (vintage capital and labor) in a particular state (Kentucky). We apply different combinations and levels of shocks and assess main economic adaptation and recovery mechanisms, and how they propagate among sectors and surrounding and distant regions. We also test alternative assumptions about how human systems react to the shocks, which influence the speed and level of recovery as also as potential tipping points on economic growth. A methodological focus of our investigation is on how to represent extreme shocks in a consistent economic-wide modeling framework and evaluating its propagation through markets and economic agents. Figure 1 illustrates some overall macroeconomic impacts from a shock damaging 10% of the existing capital stock in KY at the initial period. Our approach allows stress-testing interconnected systems within the Mississippi River Basin, and exploration issues of generalizability and extensibility, with the goal of advancing MSD understanding and methods.