The Financial Impact of Natural Disasters: Beyond Disaster Aid

 Recent wildfires in California and catastrophic flooding in Louisiana have drawn public attention to natural disasters across the United States. Yet little is known about the total financial impact of extreme weather events, particularly on non-disaster social programs. Considering that the frequency and intensity of extreme weather events is expected to rise as a result of climate change, understanding the financial effects of natural disasters is increasingly important.

A recent study, published as an NBER Working Paper in May 2016, estimates the total cost of hurricanes in the United States by combining disaster response costs with indirect costs borne by social safety net programs. The study’s author, Dr. Tatyana Deryugina of the University of Illinois, estimates that on average, $780-$1,150 of non-disaster government payments are awarded to victims of hurricanes in the ten years after an event, in addition to $155-$160 of disaster-related aid. Deryugina also finds that non-disaster payments increase by 1.3 to 3.9 percent after a hurricane (relative to a mean of $4,700 per person) and continue to increase post-hurricane.

In the study, Deryugina uses a differences-in-differences framework to compare US counties that experienced hurricanes between 1979 and 2002 with unaffected neighboring counties for ten years before and after each hurricane. Government payments were categorized as following: medical spending (excluding Medicare), disability insurance (SSDI), Social Security, and Medicare, with all four categories experiencing increased payments in the years following a hurricane. Medicare and other medical spending experienced the largest relative increases; increases in SSDI and Social Security spending were marginally significant, with effects becoming statistically insignificant two and seven and a half years post-hurricane. Government payments increased as hurricane intensity increased, with Category 3 and above hurricanes garnering the largest payments. However, statistically significant increases in government payments were also observed after weaker Category 1 and 2 hurricanes.

Other demographic trends—including population changes, average earnings, and unemployment rates—were also compared between the affected and unaffected counties in order to control for external factors that could affect social program payments. Interestingly, the study finds no significant decrease in population, average earnings, or unemployment rates in affected counties immediately following a hurricane (although a significant decrease in the unemployment rate was observed five to ten years after a hurricane). The failure of these trends to explain differences in social program participation suggests that safety net programs like Medicaid provide meaningful aid to people affected by disasters in addition to “traditional” beneficiaries of these programs.

Not only does the study present a more comprehensive estimate of a hurricane’s total financial impact, but it quantifies impacts on a per capita basis, a notable difference from previous academic work that typically focuses on country-level aid and remittances. Overall, the estimates indicate that non-disaster programs provide a greater share of financial support to victims than either disaster aid or private insurance payments. Notably, the combined payments from these programs appear to compensate individuals for the immediate capital damage of a hurricane, which is estimated by FEMA to be $700 per person per major hurricane during the study period.

These findings are important because they illustrate that current estimates of hurricane-related costs, which are typically based on disaster aid figures alone, significantly underestimate the total fiscal impact. Considering that $19 billion was spent on hurricane-related disaster aid and $67.7 billion on other disasters through formal federal disaster declarations between 1979 and 2002, this omission is significant. Budgeting for disaster aid and recovery should reflect these increased costs. In addition, policies supporting disaster mitigation, such a comprehensive floodplain planning, should be prioritized, especially in disaster-prone areas.

Article source: Deryugina, Tatyana. “The Fiscal Cost of Hurricanes: Disaster Aid Versus Social Insurance.” National Bureau of Economic Research: Working Paper No. 22272, 2016. 

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