Economic Lessons from Natural Disasters.

• Author: Deryugina, Tatyana

Direct economic damage from extreme weather events has been growing faster than GDP for decades, and projections indicate that this trend will continue. The impacts of natural disasters clearly extend beyond the physical damage they cause. They can have both short- and long-term effects on income, health, family formation, and many other aspects of victims' lives. In the aggregate, natural disasters could affect fiscal outcomes and the functioning of important services such as the health-care system.

I have dedicated my work in this area to improving our understanding of some of these impacts and the channels through which they do or do not materialize. Two key themes of my findings are that (1) despite short-run declines in physical health and incomes in the aftermath of a natural disaster, individuals and places are fairly resilient in the medium and long run along these dimensions; and (2) the medium- and long-run effects depend on conditions in affected areas, such as local wage rates and the health of local populations. Additionally, my studies of natural disasters have helped shed light on economic phenomena more generally. For example, this research has demonstrated that place of residence matters substantially for one's longevity, and has generated estimates of the speed with which the US health-care system recovers from temporary disruptions of varying magnitudes.

Transfers to Disaster Victims

In one study, I consider all hurricanes that made landfall in the United States in the period 1979-2002 and estimate how they affect county-level economic outcomes as well as transfers from the federal government into a given county in the decade following landfall. (1) For a typical hurricane, there is no discernible loss in average earnings, while the employment rate falls by 0.6-0.8 percentage points 5 to 10 years after the hurricane (Figure 1, Panels C and D). Yet transfers from the federal government through programs that are not explicitly disaster-related--such as unemployment insurance, public medical benefits, and income maintenance payments--increase substantially and persistently (Figure 1, Panel A). The net present value of these transfers is $780 to $1,150 per capita for the average hurricane and nearly $1,700 per capita for the strongest hurricanes, Category 3 or higher. This substantially exceeds the transfers that are formally labeled as disaster aid, which total $155 to $160 per capita for the average hurricane and $400 to $425 per capita for the strongest hurricanes. By contrast, transfers from businesses to individuals, which likely comprise private insurance payments, add relatively little to the total: $22 to $24 per capita for the average hurricane and $85 per capita for the strongest. These findings demonstrate that the fiscal costs of hurricanes are much higher than previously thought, and suggest that social safety nets could be important determinants of recovery.

Earnings losses are also larger for stronger hurricanes. Category 1 hurricanes cause an estimated earnings loss of just under $500 per capita in net present value in the decade after a landfall, while Category 3 and stronger...