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The costs of natural disasters

by Michael Hicks

Natural disasters, such as hurricanes and tornadoes, have economic costs. They also reveal much about market economies, government planning and response. As I pen this column, Hurricane Dorian is winding its way through the Atlantic. I cannot yet speak to its impact, but I can outline the costs that it, along with other natural disasters, may impose.

North America faces blizzards, large snowstorms, hurricanes, cyclones, earthquakes, flooding and tornadoes. All impose some of the same costs on society, businesses, households and government. There are three distinct types of impacts.

Weather-related natural disasters cause trade interruptions. The effects are often modest, delaying shipments and travel by a few hours or days. Additional damages occur when businesses and conventions close, perishable foods are damaged and families miss reunions and weddings. These impacts tend to be modest, transient and easily insured.

The most costly damages tend to be damages to property and infrastructure. Hurricane Katrina cost more than $150 billion in private and public damages. Natural disasters destroyed homes, business and the contents within, such as furniture or inventory. Public infrastructure such as roadways, bridges and water treatment plants also were destroyed or damaged. Estimates of damages from insurance companies typically ignore most public infrastructure damage estimates, thus understating actual costs to residents.

Natural disasters also kill and injure people in their path. The deadliest Atlantic hurricane appears to be one that came ashore in Galveston, Texas in 1900, which drowned more than 8,000 residents. Estimates of storm-related deaths are fraught with controversy because they potentially address the effectiveness of governmental preparation and response. It is clear that the economic and social impacts due to loss of life are very large.

Finally, natural disasters have the potential to disrupt communities, altering civic life and the effectiveness of institutions. This is especially true when the natural disaster results in large inter-regional migration, such as Hurricane Katrina. I chose my words carefully here, because it is not clear that these disruptions are, on net, negative. More than ten years after Katrina have yet to make clear the full range of economic and social effects, some of which will be positive, others negative. On net, I’d guess it is negative, but that is a not an analytical conclusion.

On net, natural disasters are always unwelcomed. They disrupt trade, destroy property and end lives. These effects are unambiguously negative. Natural disasters also reveal the effectiveness of institutions and government.

Governments mitigate the effect of natural disasters through preparation and response. The most salient form of preparation is in the development of building codes, evacuation plans and survivability of public infrastructure. Response comes in the form of adhering to evacuation plans, effecting rescues and delivering relief. It also includes accommodating broad and effective private sector relief.

In my soldiering days, I was involved in two hurricane responses. One was very effective (Hugo); the other, terrible (Andrew). These responses involved different levels of execution by local military leaders, which revealed the level of national preparation for national disasters. As an economics professor, I reviewed the government’s response to Hurricane Katrina and helped with international flood relief. I can report the nation has steadily improved its response, handing over more of the coordination of assets to experienced professionals.

At the local level, there remain critical differences. It is no coincidence that less effective local governments have poorer preparation and response. Places with good governance are better prepared, typically enjoy more resources with which to mitigate damages and are better at communicating to residents. This is obvious across the Caribbean island nations, which experience highly heterogeneous governance, from the reasonably effective Jamaica to the pitiful kleptocracy that is Haiti. It is also true in the U.S., as any analysis of similar storms affecting the very different quality of governance in New Orleans or Houston will attest.

Too often ignored is the response of the private sector, which has proven better at almost every task than government. In fact, government may only be better than the private sector in the limited domains of enforcing law and order and briefing reporters. Private sector firms affect nearly all the restoration of water, sewer, power and food supplies. Walmart famously delivered water, food and emergency supplies to Katrina, only to be held up by police who were less well-informed about the safety of the region than were the drivers of the delivery trucks.

Before troops are deployed, it is the power companies, the faith community, the Red Cross and large chain stores who are preparing delivery of the most critical items to natural disasters. Maybe the best example of this was the response of private fishing boats to Houston in 2016. With the advent of private sector satellite imagery and drones, even intelligence about local conditions may be better crowdsourced than subjected to staff review and clearance by the Department of Homeland Security.

We are in the midst of another hurricane season, followed by winter storms, then tornadoes and flooding as nature takes its annual course. It is clear we have not crossed some magic threshold in preparation or response to natural disasters. They will continue to affect us, disrupt trade, damage property and end lives prematurely. The only happy conclusion to be drawn from them is that more effective government and more robust private sector response hold the key to mitigating damages and loss of life.

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.