Natural disasters—from hurricanes and earthquakes to droughts and floods—have the power not only to upend the lives of local residents, but also to create a substantial expense for governments, businesses, and individual residents. Larger disasters, such as Hurricanes Katrina and Harvey, have left tens of billions of dollars in damage in their wake.
Those costs are borne most acutely by individual property owners in the area affected. However, the public also picks up a large part of the tab through local and federal disaster funds, as well as homeowner insurance policies that pay for much of the rebuilding afterward. The fact that we’ve seen large-scale natural disasters with greater frequency in recent decades means that the financial impact is becoming costlier than at any time in recent history.
The coronavirus outbreak, meanwhile, is proving to be costlier than any of the natural disasters the U.S. has faced, not to mention the economic impact around the world in the wake of the global pandemic. To that end, President Trump signed a $2 trillion coronavirus emergency stimulus package, called the CARES Act, into law on March 27th.
- Weather data suggest that natural disasters are on the rise, due in part to climate change and increased building in vulnerable areas.
- Businesses often suffer direct expenses, such as the cost of renovating damaged property and equipment, as well as indirect expenses from lost revenue.
- Researchers have found that the economic impact tends to be regional and fairly short-lived—even larger storms have had a relatively small impact on domestic GDP.
Natural Disasters Becoming More Common
While dangerous weather events have always occurred, government data suggest they’ve been happening more often over the past several years. According to the National Centers for Environmental Information, or NCEI, the decade from 2010-2019 saw 119 climate and weather events that cost $1 billion or more. Together, those events caused an average of $80.2 billion in damage per year.
The decade before that, from 2000-2009, saw only 59 billion-dollar events in the United States, at an average cost of $52 billion. And the 1990s saw even fewer large weather crises, 52, which cost an average of $27 billion per year.
A number of factors are contributing to that uptick, according to the NCEI, a division of the National Oceanic and Atmospheric Administration. For one, Americans simply have more physical assets in vulnerable locations than in decades past. Much of the recent housing growth has occurred in coastal reasons and in river floodplains, which are at greater risk when hazardous weather events occur.
The NCEI also suggests that global climate change is making these occurrences more common than in decades past. This shift can have a wide range of effects in the U.S.—including drought and increased wildfires in the Western part of the country and greater rainfall in the Eastern states.
Because the earth’s average temperature has been ticking up at a fairly steady pace, the frequency of those climate-related events may only increase in the years ahead. According to NCEI, nine of the ten warmest years on record have occurred since 2005. Last year was the second-warmest overall, at 2.07 degrees Fahrenheit above the pre-industrial average.
|Top 10 Costliest Disasters in U.S. Since 1980|
|1||Hurricane Katrina (2005)||$168 billion|
|2||Hurricane Harvey (2017)||$130 billion|
|3||Hurricane Maria (2017)||$93.6 billion|
|4||Hurricane Sandy (2012)||$73.5 billion|
|5||Hurricane Irma (2017)||$52 billion|
|6||Hurricane Andrew (1992)||$50.2 billion|
|7||U.S. Drought/Heatwave (1988)||$44.4 billion|
|8||Midwest Flooding (1993)||$37.7 billion|
|9||Hurricane Ike (2008)||$36.6 billion|
|10||U.S. Drought/Heatwave (2012)||$33.9 billion|
All figures adjusted for inflation. Source: National Centers for Environmental Information
Who Pays for Natural Disasters?
Climate and weather-related calamities cause both direct and indirect costs to the economy. The direct costs are perhaps more obvious, whether it’s damage to commercial buildings and homes or the need to repair roads and power lines. But natural disasters also affect local communities in less obvious ways, through the disruption of businesses because of property damage or the inability of employees to report to work.
While a number of disasters are capable of creating extensive property damage and interruptions to commerce, the most expensive events in recent history have been hurricanes. Their combination of high winds and heavy rainfall can wreak havoc over a wide geographic area in a matter of days or even hours.
The expenses for hurricanes and other events are usually picked up by a variety of public and private sources. Such was the case with Hurricane Harvey, which devastated Houston and its outlying areas in the summer of 2017. According to the comptroller’s office for the State of Texas, the roughly $130 billion price tag for Hurricane Harvey was met by the following sources:
- Federal Emergency Management Agency (FEMA): provided payments to individuals, state and local governments, and to beneficiaries of the National Flood Insurance Program
- Small Business Administration: provided home loans and business loans
- U.S. Department of Housing and Urban Development
- Block grants
- State and local funds
- Private insurance companies
- Nonprofit organizations
Costs from natural disasters are borne by state and local governments, the federal government, insurance companies, businesses, and individuals.
Impact of Natural Disasters on Taxpayers
Just how big an effect do these payouts have on federal taxpayers? According to a 2019 Congressional Budget Office (CBO) estimate, damage from hurricanes and other storms is expected to cost the United States government $17 billion a year. Roughly $11 billion of that is due to losses to the public sector, $4 billion covers aid that goes directly to individuals, and about $1 billion is allocated to administrative costs. The CBO projects that FEMA would have to increase the premiums for its federal flood insurance program in order to correct its projected shortfall.
However, individuals outside the damaged area may face certain additional costs beyond federal expenditures. In some cases, consumers have to pay more for certain commodities, including livestock and produce, that are lost due to weather events. In the wake of Hurricanes Katrina and Rita—which decimated refineries in the Gulf region within a month of each other—the price of gasoline spiked by roughly 30%, dramatically increasing transportation costs for both consumers and businesses.
Impact of Natural Disasters on Economy
Major storms can come at a heavy price for certain businesses, including stores and restaurants that depend entirely on a local customer base. They can also be devastating on an emotional level, as people lose cherished assets and sometimes even loved ones.
However, research suggests that, from a purely economic point of view, the effect of natural disasters tends to be 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 created a $8.5 billion dent in economic output, a tiny fraction of the U.S. gross domestic product (GDP) of approximately $19 trillion in 2017.
Separately, a 2014 paper by economists at the University of Chicago and the University of Illinois found that the effects of Hurricane Katrina were relatively small, in spite of the enormous damage it inflicted on the Gulf Coast. Following the hurricane and its associated flooding, the researchers concluded that not only businesses but workers came out in good shape compared to those in similarly sized cities unaffected by Katrina. Income levels by those in the storm’s path rose or even exceed those of other urban areas within a few years, they found.
The Bottom Line
History has shown that natural disasters are capable of exacting a heavy financial toll on governments, businesses, and private citizens. Because of climate change, the frequency with which storms and other weather-related events have occurred is picking up. And because Americans continue to build in vulnerable regions, the average cost of rebuilding is steadily increasing.
National Centers for Environmental Information. “Billion-Dollar Weather and Climate Disasters: Overview.” Accessed April 6, 2020.
National Centers for Environmental Information. “Billion-Dollar Weather and Climate Disasters: FAQ.” Accessed April 6, 2020.
National Oceanic and Atmospheric Administration. “2019 was 2nd hottest year on record for Earth say NOAA, NASA.” Accessed April 6, 2020.
Comptroller’s Office of Texas. “A Storm to Remember: Hurricane Harvey and the Texas Economy.” Accessed April 6, 2020.
Congressional Budget Office. “Expected Costs of Damage From Hurricane Winds and Storm-Related Flooding.” Accessed April 6, 2020.
Oil & Gas Journal. “Hurricane Rita Idles Refineries, Oil and Gas Output.” Accessed April 6, 2020.
Energy Information Administration. “U.S. Average Retail Gasoline Prices Increase in Wake of Hurricane Harvey.” Accessed April 6, 2020.
Wall Street Journal. "Big Storms Leave Small Marks on the U.S. Economy." Accessed April 6, 2020.
National Bureau of Economic Research. “The Economic Impact of Hurricane Katrina on its Victims: Evidence from Individual Tax Returns.” Accessed April 6, 2020.