Wednesday, October 26, 2016

The Fiscal Cost of Hurricanes: Disaster Aid Versus Social Insurance

Little is known about the fiscal costs of natural disasters, especially regarding social safety nets that do not specifically target extreme weather events. This paper shows that US hurricanes lead to substantial increases in non-disaster government transfers, such as unemployment insurance and public medical payments, in affected counties in the decade after a hurricane. The present value of this increase significantly exceeds that of direct disaster aid. This implies, among other things, that the fiscal costs of natural disasters have been significantly underestimated and that victims in developed countries are better insured against them than previously thought.
[The study] 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.
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. 

by Tatyana Deryugina
National Bureau of Economic Research (NBER)
NBER Working Paper No. 22272; Issued in May 2016
Hannah Bent" The Financial Impact of Natural Disasters: Beyond Disaster Aid" October 12, 2016 Chicago Policy Review

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