The social safety net catches people after a hurricane, but this cost to society is generally not accounted for in standard estimates of a hurricane's economic impact.
The Role of Transfer Payments in Mitigating Shocks: Evidence from the Impact of Hurricanes
Abstract: Little is known empirically about how aggregate economic shocks are mitigated by social safety nets. I examine the effect of hurricanes on US counties. While I find no significant changes in population, earnings, and the employment rate 0-10 years after landfall, there is a substantial increase in non-disaster government transfers. An affected county receives additional non-disaster government transfers totaling $654 per capita, which suggests that the lack of changes in basic economic indicators may be in part due to existing social safety nets. The fiscal costs of natural disasters are also much larger than the cost of disaster aid alone.
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The number of construction firm locations (establishments) declines by 1.6% each year with no change in the mean. Construction employment is on average 7.6% lower in the ten years following the hurricane, and declines by 2.0% per year. The overall decline in employment suggests a drop in construction demand. This is confirmed by estimates of per capita single family housing starts, which are 8% lower on average. Wages increase by an average of 6.8%, but then fall by 0.9% each year, suggesting there may be a temporary change in the composition of construction labor demand (e.g., more demand for specialized workers) or lower labor supply…
One possible interpretation of the decline in the local construction sector is spatial: the con- struction industry may have simply moved to nearby counties without any net effect on the sector. The implications of spatial changes, while non-trivial for the local economy, are different than if there’s a widespread capital shock. However, the fall in per capita housing starts provides evidence of a significant decrease in construction demand. Thus, the downturn in the local construction sector is not solely driven by spatial shifts in construction activity.
There is no change in the employ- ment rate or per capita net earnings. Using 95% confidence bounds, I can rule out a decrease in mean earnings greater than 1.8% and a decrease in the mean employment rate greater than 0.5% The mean shift test for transfers indicates a 2.1% average increase in per capita government to individual transfers, equivalent to about $69 per person per year. Per capita business to individ- ual transfers in the eleven years following the hurricane are estimated to be 4.8% higher than the pre-hurricane transfers, or about $3.9 per year. There are no significant changes in the trends of any of these variables. Assuming a 3% discount rate, the present discounted value (PDV) of all government transfers is about $654 per capita, and the PDV of transfers from businesses is $37 per capita. Thus, post-hurricane transfers from general social programs are larger than transfers from disaster-specific programs and much larger than insurance payments. Because the non-disaster transfers are still significantly larger 10 years after the hurricane, the estimate of $654 per capita should be viewed as a lower bound.
The subcomponents of total government transfers to individuals are: retirement and disability insurance benefits (which includes workers’ compen-sation), medical benefits (which includes Medicare and Medicaid), income maintenance (which includes Supplemental Security Income, family assistance, and foot stamps), unemployment ben- efits, veterans’ benefits, and federal education assistance. A separate analysis of each of these components (following the same procedure as for total transfers) reveals that increases in medical and unemployment benefits explain the overwhelming majority of the net increase in total non- disaster transfers. Specifically, public medical benefits increase significantly by $435 per capita in PDV, of which $106 is Medicare spending. The estimated change in Medicare spending is not significant. 18 Because there is no significant increase in Medicare spending, the increase in pub- lic medical spending is likely due to changes in the number of people eligible for public medical benefits rather than increased medical spending on existing recipients.
Unemployment benefits increase by about $280 per capita in PDV. There is no significant change in aggregate income maintenance (although some subcomponents, such as family assis- tance, do increase slightly) and no significant change in retirement and disability insurance bene- fits, per capita federal education assistance, or per capita veteran benefits. Thus, the majority of the increase in transfers is accounted for by unemployment insurance and public medical benefits.