The Economics of Natural Disasters: Mitigating the Impact

BY DAVID PARKER

A hurricane struck the United States Gulf Coast, causing more than $200 billion in damage. A flood in the Mississippi River Basin damaged or destroyed more than 50,000 homes. A California firestorm cost $120 million to extinguish, and an earthquake caused the collapse of elevated portions of six major freeways.1 These are a few of the catastrophic losses that occur all too often within the United States. Natural disasters, despite their origin, boast one invariable-the irreplaceable loss of life and the loss of property, businesses, and infrastructure that must be rebuilt.

The recovery of a standard household and business environment takes time and money. The resources necessary come from various entities, all of which profoundly influence the economy. For a sustained recovery, rebuilding should focus on the lessons learned from past disasters. Citizens and private insurers, along with local, state, and federal governments, should anticipate greater losses from future disasters. Preparing a more disaster-resilient society can ease the burden of these events and reduce the impact on local and national economic interests.

Dealing with flooding from thunderstorms, tropical storms, and hurricanes is a way of life on the Gulf Coast. In this year alone, flooding in some parts of the Houston, Texas, metropolitan area reached 250- and 500-year flooding levels. The rainfall has nowhere to go. Over the past 15 years, the amount of paved area in and around Houston has grown 25 percent.

Since 2001, the Harris County Flood Control District has bought out 3,000 homes in flood-prone areas to get people to move to safer ground. It has built computerized simulation models to help design flood prevention measures and assess the impact of development. Despite all the efforts, people now worry that every rainstorm may bring renewed or new flooding problems (photos 1-3).

<b>(1)</b> The heavy rainstorms of April 2016 resulted in flooding that caused extensive damage in Houston, Texas, and adjacent counties. (<i>Photos by Jann Tracey, Federal Emergency Management </i><i>Agency.)</i>
(1) The heavy rainstorms of April 2016 resulted in flooding that caused extensive damage in Houston, Texas, and adjacent counties. (Photos by Jann Tracey, Federal Emergency Management Agency.)

Background

Natural disasters in the United States have a significant impact on the local and national economy.2 Although a disaster’s immediate consequences can be easy to see and measure, the economic cost is more difficult to calculate. The trouble lies in gauging the disaster on a broader scale.3 Most of the loss from a disaster occurs when physical assets such as homes, utilities, roads, and natural resources are destroyed. Disasters are becoming more common and extreme with the increasing population and more people living in disaster-prone areas.4 The country is also becoming more prosperous. Increased wealth leads to higher priced homes and costlier infrastructures.

According to the National Oceanic and Atmospheric Administration (NOAA), severe weather events inflicting at least $1 billion in damage have increased from two a year in the 1980s to more than 10 per year since 2010.5 The recovery phase of a disaster is where mitigation planning should begin.6 Mitigation activities can create a stronger, more stable, and environmentally balanced community that is better prepared for future events. Additionally, mitigation can bring a renewed vitality to a once disaster-prone area.7 With many people hesitant to carry out any mitigation activities, the government continues to spend an inordinate amount of money on disaster relief. The rise in cost is partly because of the expectation that the federal government is responsible for the immediate care of U.S. disaster needs. This thought leads many people to rely solely on the government for disaster assistance.8

The increasing severity of recent natural disasters has elected officials quickly calling for federal support. Between 2001 and 2010, there were twice as many major disaster declarations than between 1981 and 1990. (5) A major disaster declaration will bring the full power of federal disaster assistance to an affected area. Residents have less of a financial incentive to provide for their own protection when the government provides relief at little or no cost. The federal government reports it spent an estimated $136 billion on disaster assistance from 2011 through 2013. (5) Nevertheless, exactly how much money the federal government spends on disaster relief is difficult to tally because of the appropriations and relief supplements that are continually added to cover disaster costs.

Direct Economic Impact

Natural disasters cause direct and indirect economic losses. Direct losses are simpler to calculate because damage to built structures has a measurable worth-e.g., insurance value. A natural disaster’s direct impact on the economy includes casualties, structural damage, infrastructure damage, and rebuilding efforts. (4) In 2005, Hurricane Katrina affected the Gulf Coast from Alabama to Louisiana, killing more than 1,800 people and displacing another 1.3 million. In New Orleans, the hurricane’s destructive force was the storm surge that broke through the levee system surrounding the city. The ensuing flood devastated entire neighborhoods, trapping and killing many people in their homes.9 A disaster will generally cause the loss of local infrastructures such as roads, communication systems, and common utilities. However, a natural disaster can influence the entire nation if the disaster is large enough to affect a major U.S. economic activity. Although these interruptions in the national economy may be short in duration and limited in direct financial loss, they can nevertheless play a critical role in U.S. economic stability. (2) The loss of vital national infrastructures such as oil and gas production facilities profoundly affects the entire economy. The loss of these systems, even temporarily, can have far-reaching and long-lasting economic consequences.

Hurricane Katrina partially damaged the region containing the nation’s largest oil and gas production industry. After the storm, prices for a gallon of gas reached a record high when approximately 95 percent of Gulf Coast production capacity was shut down. One year after the storm, oil production was still 30 percent below average.10 This combination of lower oil production, higher gas prices, and a large number of unemployed industry workers resulted in a 1.8-percent drop in the gross domestic product for the remaining three months of that year. (10)

<b>2) </b>A collapsed bridge in Waller County, Texas. Raging creek water rose to 18 feet, damaging many roads and bridges.
(2) A collapsed bridge in Waller County, Texas. Raging creek water rose to 18 feet, damaging many roads and bridges.

Indirect Economic Impact

Natural disasters also have an indirect impact on the economy. Indirect losses are more complex to analyze and therefore have the most tendencies for over- and underestimation. Indirect losses include unemployment, a diminished tax base, and the loss of personal and business productivity. (4) As a direct result of Hurricane Katrina, 190,000 Louisianans and 27,000 Mississippians lost their livelihoods. (9)

People also lost personal time with longer commutes to work or simply having to deal with the inconveniences that come in a disaster situation. Other losses include the rerouting of goods and services around affected areas, lost tourism, and utility disruptions. (2) A strong and vibrant tax base is vital to any community. With the loss of jobs and the closing of roads and businesses comes the loss of tax revenue.

Conversely, what the disaster may take away from a community it can also help to give back. The rebuilding and recovery efforts will generate jobs and services. Workers from inside and outside the area will generate activity that will create a temporary increase in sales of goods and services, boosting tax revenues and employment.11

With the federal government at times slow to fund recovery efforts for business redevelopment, officials in disaster areas can forge new opportunities through self-reliance and innovation. In 2011, a tornado in Joplin, Missouri, affected nearly 500 businesses and 5,000 employees. (11) To get the town back in operation, the Chamber of Commerce looked for outside funding capital that was free from the restrictions of the federal government. The Joplin Tomorrow Fund was established to provide loans at very low to no interest for businesses to rebuild, expand, or relocate. In two years, nearly 85 percent of businesses that were affected by the tornado were back in business, and there were 30 new businesses. (11)

After Hurricane Katrina, the Louisiana Economic Development Association used the new flood control system and the appearance of a city in transformation to attract new investors to New Orleans and the surrounding areas. Through this initiative, the city was able to secure funding for the development of a new multibillion-dollar biomedical research district. Other areas near the city were able to attract new businesses as well. An Illinois company built a new fertilizer plant, and a South African energy company invested billions in an energy complex. (11)

Efforts to Mitigate Disasters

Carby(12) maintains that the most effective and the most logical disaster mitigation steps are to not build and live in high-risk areas. Mitigation measures known to reduce economic impacts include identifying potential hazards and threats. The Federal Emergency Management Agency has a uniform method for calculating the potential loss from natural disasters. The Hazus system uses geographic information technology to estimate the physical and economic impact a disaster can inflict on a particular area. Although the system can help in disaster preparedness, response, and recovery, Hazus’ main function is to determine disaster losses and which mitigation principles are the most beneficial to practice.(13)

ResilUS is a hazard-related damage and recovery system that uses different factors to evaluate critical services and community resources. The system is also used to represent how the characteristics and activities of households and businesses interact with the built environment, policy decisions, and the political nature of a community. ResilUS can also be used as part of a disaster response exercise to provide a basis for the incorporation of long-term recovery planning.(14)

Design and construction applications also enhance mitigation. Among the lessons learned from the 2003 firestorm in southern California was the need for enhanced building and zoning codes and the use of fire-resistive building materials during reconstruction. In 2007, the area experienced another significant wildfire that would test the mitigation enhancements instituted after the 2003 event. Homes that included boxed-in eaves, stucco exteriors, double-pane windows, and concrete tile roofs were spared from most of the destruction.(15)

Providing financial incentives can entice communities to improve their disaster resilience. In 1998, the city of Napa, California, passed a half-cent sales tax increase that was used to fund risk reduction projects that included flood protection, drainage improvements, watershed management, and dam security. The project was tested a few years later when 10 inches of rain fell in the area in a short time. (6) With just 40 percent of the project completed, the area sustained no major economic losses.

The proper use of land planning, which includes land acquisition, is another component of disaster mitigation. After the 1993 Mississippi Basin flood, an entire town decided to allow the river to reclaim its natural floodplain. Valmeyer, Illinois, a town of 900 people, started over by relocating to a higher portion of land not far from its original site.(16)

Proper insurance coverage can also assist with disaster recovery by easing future financial burdens placed on government agencies. (6) California is known to have frequent and violent earthquakes. The average reported direct loss for the Northridge earthquake in 1994 was $17 billion.(17) Of that total, an estimated $14 billion was insured loss, while uninsured losses totaled another $28 billion. The Small Business Administration alone approved disaster loans covering $3.3 billion, almost 64 percent of all the federal assistance.

Many people assume the potential for a large-scale disaster or the chance that disaster will strike twice in the same area is minimal. They fail to learn from past disasters because the memories of the unpleasantness fade with time. This assumption may lead individuals to believe the time and resources necessary to undertake risk management activities such as insurance coverage is not worthwhile. An example is in California, where even with the realized risk, nearly 90 percent of people still do not have earthquake insurance. (8)

With its persistent hurricane activity, the Gulf Coast is another region prone to disasters. Hurricane Katrina caused the most storm damage in U.S. history. However, a recent study found that more than 83 percent of respondents had taken no mitigation steps to strengthen their homes.

An increase in exposed population and the increased risk value will also directly influence economic loss. In Florida, the population has grown from 13 million in 1970 to 19 million in 2010. (8) Many of these people live in coastal areas where the likelihood of another hurricane strike is high.

<b>(3)</b> Near Brookshire, Texas, floodwaters forced this 10-foot culvert downstream and damaged the road over it.
(3) Near Brookshire, Texas, floodwaters forced this 10-foot culvert downstream and damaged the road over it.

Immediate actions to mitigate these potential losses include provisions for affordable insurance coverage. Many home and business owners look at the short term when deciding on risk-reduction measures. Insurance companies can encourage people and business to purchase proper insurance coverage by offering incentives. Offering insurance premium reductions to encourage investment in mitigation activities could also result in decreased losses from future disasters.

Another measure is for the insurance company to offer multiyear instead of one-year contracts based on risk factors. (8) With a multiyear contract, a premium cannot be increased or canceled because of the area or regional losses incurred by the insurance company.

Disasters will continue to take a toll on local and national economics, and though many variables influence the economy, determining the true impact of a disaster is nearly impossible. (2) The economic recovery of an affected area depends on factors that include the condition of the economy prior to the event. If the economic environment was poor prior to the disaster, the chances are that it will remain poor. On the other hand, if the economic environment was stable or if it were on the rise, the recovery should be swift. (2)

The United States is in a new era where catastrophic disasters are commonplace, with each disaster appearing worse than the last. Although society knows the steps that need to be taken to protect them from a disaster, people still expect the federal government to be there when the next disaster strikes. Disaster recovery has progressed from the past incident-driven philosophy to a national movement to ensure community resilience from future disasters. (8)

Preparing for the next challenge should include planning for future events through past lessons learned. Those lessons when properly applied to risk reduction efforts will ease the economic burdens placed on society during and after a time of crisis. Most people and businesses focus on short-term solutions and gains. Their reluctance to spend money for long-term benefits may be caused by unwillingness to wait for a balance in the cost-benefit ratio. (8)

I believe that the best path for sustained disaster mitigation is self-reliance through proper insurance coverage. Though gaps exist in the private insurance markets, particularly for people who reside in disaster-prone areas, the federal government usually steps in and provides coverage with plans like the National Flood Insurance Program (NFIP).18 The principal problem with the program is its inability to remain solvent and pay claims swiftly, especially when several catastrophic events happen within a short time frame.

After Florida was hit with four hurricanes in 2004, NFIP borrowed $16 billion dollars from the government to cover the losses. (18) In 2013, $9.7 billion dollars in unbudgeted borrowing capital had to be approved by Congress to support all the claims that NFIP received from Hurricane Sandy.(19)

This additional spending for government-backed insurance directly affects all taxpayers. These taxpayers will be responsible for the added costs through tax increases or cuts in other governmental programs. This practice amounts to double taxation for a vast majority of the country that subsidizes people who choose to live in areas prone to disasters.

It can be argued that the federal government, by providing low cost taxpayer-backed disaster insurance, is encouraging people to continue to develop and live in high-risk areas destined for future disasters and catastrophic loss. (18) It is recognized that in many of these areas, private insurance companies will not write policies. Therefore, I am not suggesting that all areas prone to disasters such as Southern California or the Gulf Coast should be left uninsured. However, some areas should be left undeveloped and uninhabited. The example of the Illinois town proves that nature and people can find a balance without the enduring destructive hardships and major financial losses.

References

1. Gastin, JF. (2007). Disaster and Recovery Planning: A Guide for Facility Managers (4th ed.). Lilburn, Ga: The Fairmont Press.

2. Kliesen, KL. (1994). “The Economics of Natural Disasters.” The Federal Reserve Bank of St. Louis. Retrieved from http://bit.ly/1DYCGXv.

3. Elmerraji, J. (2011, March 11). “Financial Effects of Natural Disasters.” Forbes. Retrieved from http://bit.ly/29yALgR.

4. Kousky, C. (2012). “Informing Climate Adaptation: A Review of the Economic Costs of Natural Disasters, Their Determinants, and Risk Reduction Options.” Retrieved from http://bit.ly/29BGiqc.

5. Plumer, B. (2013, April 29). “The government is spending way more on disaster relief than anybody thought.” The Washington Post. Retrieved from http://wapo.st/1T70IGT.

6. Haddow, G. (2004). Case Studies in Emergency and Risk Management. Emmitsburg, MD: Department of Homeland Security/FEMA.

7. McEntire, DA. (2007). Disaster Response and Recovery. Danvers: Ma. John Wiley & Sons.

8. Kunreuther, H, & Kerjan, EM. (2011). “People Get Ready.” Issues in Science and Technology, 28(1), 39+. Retrieved from Academic OneFile database. http://issues.org/28-1/kunreuther/.

9. Bullock, JA, Coppola, DP, & Haddow, GD. (2011). Introduction to Emergency Management (4th ed.). Burlington, Ma: Butterworth-Heinemann.

10. Herman, C. (2006, August 25). “Katrina’s Economic Impact: One Year Later.” ABC News. Retrieved from http://abcn.ws/1PXL14u.

11. Regions: Americas-After the storm. (2013, February 1). Foreign Direct Investment. Retrieved from Academic OneFile database.

12. Carby, B. (1997, October). “The do’s and don’ts of risk reduction.” UNESCO Courier, 19. Retrieved from Academic OneFile database.

13. Federal Emergency Management Agency. (2014). “Hazus.” Retrieved from http://www.fema.gov/hazus.

14. Chang, S E, & Miles, S B (2011). “ResilUS: A community based disaster resilience model.” Cartography and Geographic Information Science, 38(1), 36. Retrieved from Academic OneFile database. http://bit.ly/29KF5hz.

15. Federal Emergency Management Agency. (2008). “Southern California Best Practices: Southern California Wildfires of 2007.” Retrieved from http://bit.ly/29vC4O1.

16. Leonard, MD. (2013, August 1). “Valmeyer’s relocation moved quickly as people took matters into their own hands.” St. Louis Beacon. Retrieved from http://bit.ly/29MZGR6.

17. Petak, WJ & Elahi, S. (2001). “The Northridge earthquake USA and its economic and social impacts.” Retrieved from http://bit.ly/29MZD7x.

18. Schiffer, L. (2007). “When the Government is Your Reinsurer.” Retrieved from http://bit.ly/29uSpDr.

19. Curry, T. (2013, January 13). “Congress votes to expand borrowing authority for Sandy flood claims.” NBC News. Retrieved from http://nbcnews.to/29yNqAB.

DAVID PARKER is a 31-year veteran of the fire service and a captain/paramedic with a midsize department in Texas. He is an emergency services commissioner for Harris County Emergency Services District 29 and a fire/arson investigator for the Harris County Fire Marshal’s Office. He has a master’s degree in emergency services management and is a certified fire executive and a fire service chief executive officer.

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