Abstract
Given the significant, and increasing, risk to life and property posed by natural disasters, it is surprising that comparatively little attention to date has been paid to the economic consequences of these events and to policies designed to respond to them. This dearth of research is doubly surprising considering the degree to which such analysis draws on and complements multiple areas of established economic theory. It is this very gap in the literature that William Kern and the authors of the essays appearing in The Economics of Natural and Unnatural Disasters attempt to fill. The resulting collection provides the reader with not only an overview of the theoretical foundations of disaster research, but also offers specific examples of the improved approaches to analyzing the economic costs of disasters and disaster policy that Kern and his colleagues argue are sorely needed.
Following the introduction, Howard Kunreuther and Erwann Michel-Kerjan contend that the increased vulnerability to disasters is a problem compounded by individuals’ inability to accurately weight the risk of disasters and associated losses, leading to underinsurance and a lack of other individual risk-mitigation strategies in disaster-prone areas. As a remedy, the authors suggest mandatory long-term insurance contracts implemented through the existing National Flood Insurance Program. Kunreuther and Michel-Kerjan argue this policy would not only overcome many of the barriers preventing existing markets from offering long-term insurance but also diversify risk among a larger pool of participants, encourage homeowners to invest in risk-reduction measures, reduce disaster losses to property owners, and decrease the cost of publicly funded postdisaster assistance.
Anthony Yezer highlights the difference between anticipated and unanticipated disaster events, contending that public policy and postdisaster assistance should focus primarily on events of the latter type. Yezer asserts that the greatest component of disasters’ economic impact arises from the effects on individuals’ expectation of similar events in the future, and the economic consequences of the behavioral changes that may result. Yezer further explores the interaction between disaster expectations and the anticipated direct versus indirect impacts arising from disasters, suggesting that, in some circumstances, underinsurance may be a perfectly rational response given individuals’ economic expectations.
Hal Cochrane follows by offering a practical algorithm for quantifying natural disasters’ supply shocks to local economies. Noting weaknesses with existing methods, such as input/output models, computable general equilibrium models, and postdisaster event analysis (both econometric and qualitative), Cochrane offers an alternative model that accommodates excess capacity, imports, and both stimulus and debt effects in estimating the local economic shocks associated with natural disasters. Applying the model separately to Hurricanes Katrina and Andrew, Cochrane’s results underscore the need for careful modeling by illustrating the impact that disaster attributes and local economic capacity can have in producing drastically different economic outcomes from similar disaster events.
Peter Boettke and Daniel Smith highlight the importance of social institutions in determining the relative difficulty of economic recovery following a disaster. Synthesizing existing research on Hurricane Katrina, the authors find that political, bureaucratic, and regulatory institutions acted as a significant barrier to disaster response and recovery, while nonprofits’ and private-sector businesses’ entrepreneurship was often key to postdisaster economic resilience and recovery. This analysis suggests not only that policies that work well in ordinary, predisaster economic circumstances may be ill-suited to supply the rapid, flexible response required in the wake of a disaster, but also that a cross-sector response, involving public, private, and nonprofit actors, may enhance postdisaster economic resilience.
Kevin Sutter and Daniel Simmons conclude the volume by analyzing the economic costs of tornadoes, statistically modeling the variation in tornado injuries and fatalities as a function of weather, population, and policy characteristics. Using these regression results, the authors consider the cost-effectiveness of a number of policy and individual responses to tornadoes, such as the National Weather Service’s use of Doppler radar and, more recently, highly targeted Storm Based Warnings, residential tornado shelters, and improved construction regulations for mobile homes, as well as highlighting situations in which tornadoes are more likely to cause injury and death, and where increased policy attention and scholarly investigation might therefore be warranted.
There are a number of respects, however, in which The Economics of Natural and Unnatural Disasters falls short. Analysis of the historical role of U.S. government policy, such as FEMA assistance and SBA disaster lending, in increasing moral hazard and economic vulnerability, while noted by Kunreuther and Michel-Kerjan, is not directly addressed. Likewise, aside from consideration of the National Flood Insurance Program, the volume lacks direct evaluation of existing disaster response and recovery policies; given its visibility and the volume of aid disbursed, an explicit evaluation of FEMA’s assistance programs is especially conspicuous by its absence. Outside of Cochrane and Sutter and Simmons’s careful analyses, the volume’s essays also display a lack of empirical evaluation, which is somewhat surprising given the apparent amenability of disasters’ direct, if not indirect, economic impacts to quantification.
At times, the work is also inconsistent in terms of its coherence. The literature reviews in the first three essays often treat the same general topics, and the volume might be better served by leading with a single essay providing an overview of the literature. Likewise, the vastly different perspectives on individuals’ risk assessment ability presented by Cochrane and Kunreuther and Michel-Kerjan and Yezer might present considerable confusion to those unable to reconcile the two positions. Lacking any explicit connection, it is often left to the reader to supply the necessary integration between essays that result, paradoxically, in an introductory volume on disaster economics that is best appreciated by those who have already had some level of introduction to the topic.
Yet despite its shortcomings, the work can also be seen to have considerable merit. Individuals looking for a sound recap of the theoretical foundations of the economics of disasters, a persuasive case for the practical importance of such investigation, an illustration of the variety of questions and disciplines that may be brought to bear in analyzing disaster impacts, and a spark for future research creativity should have no trouble finding something to interest them in this volume. Those looking for evaluations of existing disaster policy and prescriptions for policy improvement may find this collection’s five essays less useful in directly addressing such practical needs. The Economics of Natural and Unnatural Disasters thus warrants consideration for a place on the bookshelf of those interested in public policy and local economic development, and particularly for scholars interested in making their own contribution on the subject.