Low-Energy Fridays: How should we think about rising hurricane costs?
As the Southeastern United States continues to reckon with the terrible loss of life and property brought about by Hurricane Helene, some are beginning to think about what it will cost to rebuild. Storms that cause over a billion dollars in damage are becoming more frequent in the United States, and policymakers have an array of options to mitigate human suffering from natural disasters. Given Helene’s preliminary damage estimate of $20-$34 billion, a better understanding of hurricane costs and policies that could successfully reduce them is needed.
First, let’s start with the economic costs. These can be complicated and can stretch far down causality chains—for example, analyzing how hurricane risk affects property value and insurance costs. But let’s focus now on the direct effects. Hurricanes cause capital loss in the form of damaged property and lost labor output, and they can potentially cause loss of life, which itself carries an economic cost on top of obvious tragedy.
When talking about the “cost” of a hurricane, people are usually referring to the direct value of damaged property—specifically, the replacement cost for that property. This replacement cost is going up. While one might be inclined to attribute this to increased storm intensity from climate change (which is no doubt a factor), the larger contributor is increased property value. Roughly 55 percent of storm damage cost increases currently come from rising property value, while 45 percent come from increased storm intensity attributable to climate change. As people get richer, they’re more likely to pay a premium for water views, thereby increasing the population (and property values) in at-risk coastal areas. Loss of life from hurricanes can be hard to quantify, but some estimates show an increase while others show a decrease. Better disaster preparedness, forecasting, and emergency responsiveness can limit loss of life, so it’s hard to predict if these factors overtake the exacerbated storm risk from climate change.
Labor costs can be harder to appreciate. While everyone understands that people probably can’t get to work during a hurricane (and will likely not be paid that day), it’s important to understand that at least some portion of that activity will get shifted to other days. It isn’t always clear how much economic activity gets shifted around, but the result is that the aggregate labor output over a year may change less than what observations of productivity during a hurricane would indicate. We see this at play in questions about the broader impact of climate change on labor productivity.
Importantly, rebuilding after a hurricane doesn’t improve net wealth. The “broken window fallacy” illustrates this. While one could argue that breaking windows is good because window makers get more money, the position ignores the lost opportunity of using those same funds for a more productive purpose. This is also why wars, contrary to what many argue, do not grow the economy. Overall, the lost economic output caused by hurricanes is estimated at around 0.3 percent of gross domestic product (GDP) annually.
We know that hurricanes inflict a lot of property damage and that damage will likely increase in the future due to the combination of rising storm intensity and heightened property value. But how does this impact the federal budget?
A common refrain used to justify certain climate policies is the increased federal costs of disaster relief. While it is true that climate change’s effect on storms worsens the budget outlook for the United States, its significance in the overall budget picture is minute. In 2019, the Congressional Budget Office (CBO) estimated federal hurricane relief spending at $17 billion per year ($22 billion in 2024 dollars), with a likely increase of 40 percent by 2075. But the four largest federal budget outlays for 2024 are health care subsidies ($1.8 trillion), Social Security ($1.3 trillion), the defense budget ($954 billion), and interest payments on existing federal debt ($892 billion).
Total annual federal spending comes to $6.8 trillion with $4.9 trillion of revenues, leaving a deficit of $1.9 trillion (6.7 percent of GDP). Overall, using the CBO estimates, we can expect hurricane relief to equal less than half a percent of the federal budget. Incidentally, this means that federal aid after high-cost events like Helene should not be blamed for the nation’s fiscal woes. The caveat regarding climate and the budget, though, is that the broader effects of climate change are harder to pin down. The CBO generally estimates that these effects will reduce long-term GDP by 1 percent, commensurately reducing future tax revenues.
We know from the data that natural disasters are expensive and rising in cost; however, they are not the primary drivers of the nation’s federal budget problems. Federal relief for hurricanes is a growing-but-manageable expense that is critical to mitigating the suffering of the hardest-hit Americans. Federal subsidies aimed at climate policy have little effect on this outlook—partially because some of climate change’s effects are baked in, but also because rising property value is a larger factor. Resilience, or the hardening of vulnerable infrastructure and property to resist storms, is more likely to reduce hurricane costs and death tolls. Every $1 of federal resilience investment saves an estimated $3 of future loss from storm damage, and recent estimates show up to $13 in avoided losses per dollar spent.
Hurricane Helene, like other major disasters before it, will offer a wakeup call that the prevailing expectations of disaster mitigation and costs in the United States are insufficient. But it is important for policymakers to focus on what policies can truly reduce costs and human suffering rather than using recent events to justify their preferred policies.