As we witness another hurricane hit the U.S. mainland, we recount our own region's past disasters and lessons we have learned regarding the economic impact of these events. It was six years ago that Hurricane Katrina struck, and we have written about that experience in past posts. Data are still coming in, but it appears that while flooding associated with Hurricane Irene caused severe damage in several areas, destruction was not as bad as many had forecast. Looking back at previous disasters can help us understand what lies ahead in terms of the economic impact of Irene.
In the Wall Street Journal's Real Time Economics blog, Conor Dougherty writes that:
"Areas hit by some of the biggest natural disasters have in many cases recouped the economic losses in the form of federal aid and insurance payments, according to data from Moody's Analytics and the Insurance Information Institute. Here's a chart of past disasters, their cost and the eventual tally of aid and insurance payments.
"Hurricane Katrina, which hit in August 2005, has been by far the most costly natural disaster in recent history, resulting in $140 billion in damage and lost output. (That figure is in 2011 dollars and does not include the impact of higher energy prices after the storm.) But over the following months and years, businesses, residents and governments in the area collected a total $149.2 billion in aid and insurance payouts.
"There is no dollar figure that can be attached to the loss of life, emotional toll and massive loss of population that lingers six years later. But with Hurricane Irene barreling down on the Eastern seaboard, it's worth noting the damage of lost property and output is often made up in the end."
A recent Brookings Institution publication, Resilience and Opportunity Lessons from the U.S. Gulf Coast after Katrina and Rita, makes another point about economic recovery from natural disasters:
"Opportunity is a critical component of post-disaster recovery. It is defined by the extent to which a community uses a disaster as an occasion not simply to return to normal but also to achieve a new and better standard of living."
What is the Fed's role in helping the economy recover from natural disasters? The first response is through our role in the payments system. Federal Reserve officials helped to ensure the country's payments and financial systems get back online as quickly and efficiently as possible. The Atlanta Fed's response to Hurricane Katrina is one example.
Our superb economic education staff also used Hurricane Katrina to develop a financial and economic education tool in Katrina's Classroom: Financial Lessons from a Hurricane. The program is a four-chapter, DVD-based curriculum developed to help people prepare for disasters and recover from them.
Another question to be addressed in the wake of a natural disaster is what the role of monetary policy should be. Again, looking back to Katrina, the discussion was primarily about the potential impact on overall economic activity and inflation from reduced oil supply and transportation disruptions on the Mississippi River. At the Atlanta Fed, the view was that trying to mitigate a temporary supply shock by easing policy may have adverse implications for the economy down the road. Some economic research goes so far as to suggest policy should tighten in response of temporary supply disruptions from disasters. In 2007, the St. Louis Fed published a study, "Monetary Policy and Natural Disasters in a DSGE Model: How Should the Fed Have Responded to Hurricane Katrina?" Authors Benjamin D. Keen and Michael R. Pakko wrote:
"In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This paper uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster. We show that … a nominal interest rate increase following a disaster mitigates both temporary inflation effects and output distortions that are attributable to nominal rigidities."
Similar to how hurricane forecasters have improved their models by taking advantage of past experience and applying lessons learned, economic forecasters are also trying to improve their understanding of the economic effects of disasters and the optimal policy responses.
By Mike Chriszt, an assistant vice president in the Atlanta Fed's research
department