The Financial Effects of a Natural Disaster

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 greater frequency of large-scale natural disasters in recent decades means that the financial impact is becoming costlier than at any time in recent history. 

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

Natural Disasters Becoming More Common

While dangerous weather events have always occurred, government data suggest that they’ve been happening more often over the past several years. According to the National Centers for Environmental Information (NCEI), 2020 was the sixth consecutive year in which 10 or more climate and weather events that cost $1 billion or more impacted the United States. From 2018 to 2020, there were 50 such events that, together, caused a total of $237.2 billion in damage.

From 2010 to 2019, there were 119 climate and weather events that cost $1 billion or more, causing an average of $80.2 billion in damage per year. The decade before that (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 (NOAA). 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 regions and 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 West and greater rainfall in the East.

Because 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 the NCEI, 2020 was the second warmest year overall.

All figures adjusted for inflation. Source: National Centers for Environmental Information

Who Pays for Natural Disasters?

Climate- and weather-related calamities cause 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 Texas Comptroller’s Office, the roughly $130 billion price tag for Harvey was met by the following sources:

• Federal Emergency Management Agency (FEMA): provided payments to individuals, state and local governments, and 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

Impact of Natural Disasters on Taxpayers

Just how big of 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 U.S. 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 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 of Mexico 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 the Economy

Major storms can come at a heavy price for certain businesses, including stores and restaurants that depend entirely on a local customer base.

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 an $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 inflicted on the Gulf Coast. Following the hurricane and its associated flooding, the researchers concluded that not only businesses but also workers came out of it in good shape compared to those in similarly sized cities unaffected by Katrina. Income levels of those in the storm’s path rose or even exceeded those of other urban areas within a few years, the researchers 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.