The Financial Effects of a Natural Disaster

Natural disasters, ranging from hurricanes and earthquakes to droughts and floods, have the potential not only to disrupt local residents' lives but also to impose significant costs on governments, businesses, and individual residents. Larger disasters, like Hurricanes Katrina and Harvey, have caused tens of billions of dollars in damage.

Individual property owners in the affected area bear the brunt of these costs. However, the general public picks up a sizable portion of the tab through local and federal disaster funds, as well as homeowner insurance policies that cover much of the subsequent rebuilding. Because of the increased frequency of large-scale natural disasters in recent decades, the financial impact is becoming more costly than at any other time in recent history.

Meanwhile, the unforeseen events of 2020 and 2021 are proving to be more expensive than any natural disaster that the United States has faced, not to mention their impact on the global economy. On March 27, 2020, then-President Donald Trump signed the CARES Act, a $2 trillion coronavirus emergency stimulus package, into law. It was followed by a $900 billion stimulus package signed into law in December 2020. President Biden signed the American Rescue Plan Act of 2021, a $1.9 trillion coronavirus rescue package, into law on March 11, 2021.

Natural Disasters Becoming More Common

While dangerous weather events have always occurred, government data indicate that they have become more common in recent years. According to the National Centers for Environmental Information (NCEI), 2020 was the sixth consecutive year in which the United States was affected by ten or more climate and weather events costing $1 billion or more. From 2018 to 2020, 50 such events occurred, causing a total of $237.2 billion in damage.

There were 119 climate and weather events that cost $1 billion or more between 2010 and 2019, causing an average of $80.2 billion in damage per year. Only 59 billion-dollar events occurred in the United States between 2000 and 2009, with an average cost of $52 billion. In the 1990s, there were even fewer major weather disasters: 52, costing an average of $27 billion per year.

According to the NCEI, a division of the National Oceanic and Atmospheric Administration, a number of factors are contributing to the increase (NOAA). For one thing, Americans now have more physical assets in vulnerable locations than in previous decades. Much of the recent housing growth has occurred in coastal regions and river floodplains, which are more vulnerable to severe weather events.

According to the NCEI, global climate change is making these occurrences more common than in previous decades. This shift has the potential to have a wide range of consequences in the United States, including drought and increased wildfires in the West and increased rainfall in the East.

Because the Earth's average temperature has been steadily rising, the frequency of those climate-related events may only increase in the coming years. 2020 was the second warmest year on record, according to the NCEI.

Who Pays for Natural Disasters?

Climate and weather-related disasters have both direct and indirect economic costs. The direct costs, such as damage to commercial buildings and homes, or the need to repair roads and power lines, are perhaps more obvious. Natural disasters, on the other hand, have an indirect impact on local communities, such as the disruption of businesses due to property damage or the inability of employees to report to work.

While a variety of disasters can cause extensive property damage and disruptions in commerce, hurricanes have been the most expensive events in recent history. High winds and heavy rainfall can wreak havoc across a large geographic area in a matter of days or even hours.

Hurricanes and other natural disasters are typically covered by a variety of public and private sources. This was the case with Hurricane Harvey, which wreaked havoc on Houston and its surrounding areas in the summer of 2017. The Texas Comptroller's Office reported that the roughly $130 billion price tag for Harvey was met by the following sources:

• Federal Emergency Management Agency (FEMA): made payments to individuals, state and local governments, and National Flood Insurance Program beneficiaries.
• Small Business Administration: provided home loans and business loans
• Department of Housing and Urban Development of the United States
• Block grants
• State and local funds
• Private insurance companies
• Nonprofit organizations

Impact of Natural Disasters on Taxpayers

How much of an impact do these payments have on federal taxpayers? Damage from hurricanes and other storms is expected to cost the United States government $17 billion per year, according to a 2019 Congressional Budget Office (CBO) estimate. Approximately $11 billion of that is due to losses in the public sector, $4 billion is for direct aid to individuals, and about $1 billion is for administrative costs. According to the CBO, FEMA would have to raise premiums for its federal flood insurance programme to make up for the projected shortfall.

Individuals living outside of the affected area, on the other hand, may face additional costs in addition to federal funds. Consumers may have to pay more for certain commodities, such as livestock and produce, that are lost due to weather events in some cases. Following Hurricanes Katrina and Rita, which both decimated refineries in the Gulf of Mexico region within a month of each other, gasoline prices rose by roughly 30%, dramatically increasing transportation costs for both consumers and businesses.

Impact of Natural Disasters on the Economy

Major storms can be costly for certain businesses, such as stores and restaurants that rely solely on local customers.

However, research indicates that the impact of natural disasters is typically regional—and businesses in the affected area typically recover quickly as they rebuild their property and replenish their inventories. According to Moody's Analytics, even a storm the size of Hurricane Harvey only impacted economic output by $8.5 billion, a negligible portion of the United States' gross domestic product (GDP) of approximately $19 trillion in 2017.

Separately, despite the massive damage inflicted on the Gulf Coast, economists from the University of Chicago and the University of Illinois discovered in 2014 that the effects of Hurricane Katrina were relatively minor. Following the hurricane and its associated flooding, the researchers concluded that not only businesses, but also workers, fared well in comparison to those in similarly sized cities that had not been affected by Katrina. The researchers discovered that income levels in the storm's path rose or even exceeded those in other urban areas within a few years.

The Bottom Line

Natural disasters have historically exacted a high financial toll on governments, businesses, and private citizens. Storms and other weather-related events are becoming more frequent as a result of climate change. And, as Americans continue to build in vulnerable areas, the average cost of rebuilding is rising.