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The costs of natural disasters

Michael J. 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. 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. Public infrastructure such as roadways, bridges and water treatment plants 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. 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. 

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.

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. 

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.