Hurricanes and economic research: an introduction to the Hurricane Katrina symposium.

1. Introduction

Hurricane Katrina wreaked havoc on the United States. The tropical depression that became tropical storm Katrina on August 24, 2005, was the 11th named storm in a busy Atlantic hurricane season. Just one day later, Hurricane Katrina made its first landfall in Southern Florida as a Category One storm, causing both death and destruction. After moving into the Gulf of Mexico, it intensified and made its second landfall August 29, 2005, near the Louisiana-Mississippi border as a strong Category Four storm. The total impact of this killer storm in all of its human and environmental dimensions will not be determined for several years. Estimates of the monetary impact indicate that Katrina was the costliest storm in U.S. history. More than a million Gulf Coast residents were displaced by the storm.

On the other side of the world, nine months before Katrina, the December 26, 2004, Indian Ocean tsunami created devastation that was unimaginable. We learned that people had virtually no warning of the killer wave according to news bulletins that arrived minutes after the natural disaster. In contrast, the tropical depression that became Hurricane Katrina was tracked for more than six days before it made landfall in Mississippi. Again, we watched in disbelief as news commentators showed us the damage and suffering that resulted from destructive wind, waves, and rain. Scenarios projecting a major hurricane making landfall near New Orleans have been studied for the last 20 years. Yet Katrina overwhelmed us in every way. Surely we can do better than this.

As researchers, the failure of the system to deal adequately with the disaster provokes us to apply our intelligence and expertise to understanding the problem and to identify ways to protect our capital stock both human and physical. We cannot and probably should not interfere with the natural processes that create hurricanes. Therefore, the challenge is to identify and adopt strategies that allow a region to reduce the disruption and promote recovery that improves the quality of life for all segments of the population. Resilience is the goal for structural, environmental, and human systems.

The destruction caused by a hurricane is undeniable and has moved front and center on the national stage. Katrina disabled and destroyed much of the region's capital stock, including businesses, production facilities, lifelines, and housing. The forced migration prompted by Katrina highlights the potential for an area to also lose its human capital. The loss of physical and human capital by a region has significant short-term and possibly long-term effects on regional economic growth.

2. Regional Economic Consequences of Hurricanes

Hurricanes and natural disasters disrupt the economic activity of regions in a number of ways as business activity is interrupted and infrastructure is destroyed. In fact, a number of studies have documented the extent to which hurricanes, tornadoes, and other catastrophes interrupt business activity with some of the work geared toward determining how long these effects might last (Rose et al. 1997; Tierney 1997; Webb, Tierney, and Dahlhammer 2000; Rose and Lim 2002).

A number of factors contributed to the findings reported in the literature, such as the type and severity of the event, the economic and political environment of the communities affected, and the state of the economy at the time of the disaster. Recognition of these factors is what has led to a small but growing body of literature that focuses on issues related to recovery and resilience (Burrus et al. 2002; Rose and Liao 2002; Rose 2004). In this research, we attempt to determine the drivers of economic recovery and draw some models from the vast literature on economic growth theory. This line of research includes traditional regional economic tools, such as input-output modeling, to understand the economic effects of disasters (Guimaraes, Hefner, and Woodward 1993; West and Lenze 1994). The results from traditional regional models tell only part of the picture and, as such, researchers have expanded their approach to include other methods, mostly borrowed from macroeconomics. These methods include time series analysis, event studies, and computable general equilibrium analysis (CGE). The studies that use these analytical techniques might shed light on the longer term economic effects of severe storms, such as why some regions never fully recover whereas others are economically stronger in the aftermath of a natural disaster.

The time series analysis of hurricanes has generally been conducted in the framework of an event study or an intervention analysis but has also incorporated analysis of both first and second moments. For example, Ewing, Kruse, and Thompson (2005) estimated a time series econometric model of the Corpus Christi, Texas, unemployment rate that included an intervention variable to capture the effect and recovery activity associated with Hurricane Bret in August 1999. They found evidence that Corpus Christi's labor market improved after the hurricane, controlling for business cycle trends and general movements in the economy. Ewing and Kruse (2001) also found that hurricane recovery activity in Wilmington, North Carolina, was associated with a longer term improvement in the local economic environment. Theoretical reasons for how and why a natural disaster might actually produce improvements in economic indicators are covered in Ewing, Kruse, and Thompson (2003, 2004) and Skidmore and Toya (2002); the latter provided evidence that natural disasters have been associated with higher rates of national economic growth, total factor productivity, and accumulation of human capital for many countries.

The CGE framework offers one way to allow for adaptive behavior, such as substitution or market adjustment in response to input shortages when modeling disruptions in economic activity or performance of a region. Rose and Liao (2002) and Rose and Guha (2003) use CGE modeling that incorporates refinements to reflect short-run and long-run adjustments to input supply disruptions that occur after a natural disaster.

Clearly, from a regional standpoint and, in some cases, possibly a national one, disasters can have an immediate economic effect on the ability of an economy to produce and supply goods and services. The evidence on the intermediate and longer term effects of these events is mixed. Additionally, the debate continues in terms of what might constitute the drivers of recovery and resilience. The majority of research on the regional economic effects of hurricanes and disasters is conducted by examining economic indicators such as output, income, and employment. However, other metrics are being considered. In particular, the housing and financial markets have been examined to observe the effects of hurricanes and natural disasters. Studying these markets allows for particular insights regarding the efficiency of markets and the forward-looking behavior of individuals making decisions that are often related to the arrival of news and information.

Ewing, Kruse, and Wang (2007) examined the effect of severe wind events on the mean and variance of housing price indices of six metropolitan statistical areas that are vulnerable to hurricanes, tornadoes, or both. Their findings showed an immediate but short-lived decline in housing prices after a tornado or hurricane but little difference between the two types of disasters. They suggest that the market response to destruction of real property does not distinguish between the types of wind events that could have produced damage to the region. Furthermore, they conclude that the market serves the purpose of integrating and normalizing the losses. In other housing-related research, Coulson and Richard (1996) provided evidence that unseasonable temperature and precipitation significantly influenced housing starts and completions. In a similar study, Fergus (1999) showed that abnormal precipitation and temperature affect housing construction and concluded that builders adjust production fairly quickly to offset favorable or unfavorable weather effects.

Financial markets are also affected by hurricanes. For example, Lamb (1998) examined the market value of insurance firms and found evidence that 1992's Hurricane Andrew, which hit south Florida and Louisiana, adversely affected the stock returns of property and casualty firms with exposure in these areas. This market response likely is due to the amount of destruction and insured losses. However, Angbazo and Narayanan (1996) noted that a hurricane can have two opposing effects on the value of insurer stock prices. They hypothesize a negative effect because of payments on claims and a positive effect because of expectations of higher future premiums. Ewing, Hein, and Kruse (2006a) also used an event study methodology to examine the effect of Hurricane Floyd; however, they specifically recognize the scientific and media releases occurring during the synoptic life cycle of the hurricane on the market value of insurance firms. Thus, they explain the movements in insurer stock prices as arising from the information describing the development of the storm over time and space. They find significant market reaction to the news concerning the path and strength of the storm before landfall, and their results indicate that markets find reliable time-sensitive reports provided by the National Weather Service, the National Hurricane Center, and other media outlets to be valuable information.