Planet Money - The natural disaster economist

Episode Date: September 27, 2023

There seems to be headlines about floods, wildfires, or hurricanes every week. Scientists say this might be the new normal — that climate change is making natural disasters more and more common.Tatyana Deryugina is a leading expert on the economics of natural disasters — how we respond to them, how they affect the economy, and how they change our lives. And back when Tatyana first started researching natural disasters she realized that there's a lot we don't know about their long-term economic consequences. Especially about how individuals and communities recover.Trying to understand those questions of how we respond to natural disasters is a big part of Tatyana's research. And her research has some surprising implications for how we should be responding to natural disasters.This episode was hosted and reported by Jeff Guo. It was produced by Emma Peaslee and edited by Jess Jiang. It was fact checked by Sierra Juarez and engineered by Josephine Nyounai. Alex Goldmark is our executive producer.Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. The other day, I got a chance to talk to someone who really changed how I think about economics and economic research. I kind of want to just ask you, do you remember me? No. You mean, have we met before? Tatiana Derugna is an economist and a professor at the University of Illinois. Yeah. Okay. I'm sorry. I do not. You have no recollection whatsoever. No. I'm so sorry. Before she was a professor, Tatiana was a teaching assistant. In fact, she was the teaching assistant for a class that I took in college. Oh, wow. I'm sorry I don't remember you, but that's so cool.

Tatiana did not remember me at all, but I remembered her because the point of that class was to teach us how to write an economics research paper. And the thing I learned from Tatiana was that being an economist is hard. You want to answer all these big, important questions, but you need data. And even more than that, you ideally want something random that happens to one group of people, but not another. Economists call this a natural experiment. I remember you telling us about the project that you were working on, which was about hurricanes. And we were thinking, oh, yeah, like hurricanes, terrible things. But what a perfect subject of an economics paper because hurricanes are random. They're kind of like these great natural experiments. Like that's very interesting. Yes, that's from an

economist standpoint. That is a great feature of a hurricane is the unpredictability of it, the fact that people do not see it coming. Yes, that is an extremely economist-y viewpoint. But studying hurricanes was just the start for Tatiana. Over the past decade, Tatiana has made an entire career out of studying natural disasters. And her research? Well, these days, it's become really, really important. Hello and welcome to Planet Money. I'm Jeff Guo. It feels like every week we see another headline about a record-breaking earthquake, wildfire, hurricane. Scientists say this might be the new normal, that climate change is going to make the weather weirder and wilder and deadlier. Which is why, today on the show, I wanted to talk to Tatiana.

Because she's become this leading expert on the economics of natural disasters. How we respond to them, how they affect the economy, and also how they completely change our lives. how they affect the economy, and also how they completely change our lives. That research project that Tatiana started about hurricanes, it led to this surprising, almost unbelievable conclusion. And it completely altered how I see the world. Way back when Tatiana started researching natural disasters, she realized there's actually a lot we don't know about their long-term economic consequences. Like, yeah, there are macroeconomic studies about, like,

what happens to a country's GDP after a disaster. But we know a lot less about how individuals, how communities recover from these things. Trying to understand those questions, how we respond to natural disasters, how we should be responding to natural disasters, that is a big part of Tatiana's research. So to start off our conversation, we talked about the different ways our society handles disaster relief, from insurance to federal aid to charity. For instance, one of Tatiana's recent studies looked at tornadoes to try to answer this simple question about charitable donations that, for a long time, we didn't actually know the answer to. Yeah, so in that study, we are trying to understand whether charitable giving in the aftermath of a disaster comes at the expense of other causes. Because whether we see this extra charitable giving

as a good thing kind of depends on where it's coming from in people's budgets. Oh, yeah. Because it's a good thing if it's coming out of the junk food budget, but maybe less of a good thing if it's coming out of the money I was going to give to orphans budget. Exactly, exactly. And what did you find? Well, we found that total giving went up in the aftermath of a tornado. The charity budget got bigger in a tornado year. Yes, exactly. The charity budget got bigger, and we also find some evidence that it got bigger in a tornado year. Yes, exactly. The charity budget got bigger,

and we also find some evidence that it got bigger persistently. If you look at giving the next year, it remains slightly elevated. Oh, interesting. So it expanded not just in that year, but in subsequent years as well. It made people more charitable? Yes. Why do you think that is? So the cynical explanation is that they got on Red Cross's mailing list and started getting lots of texts and phone calls from the Red Cross. But the less cynical explanation is, you know, it feels good to give.

And so maybe people realized, hey, I don't miss that junk food that I would have bought. I really like feeling like I was able to help a human being in need. And they continue to give more because of that experience. Yeah, yeah, I definitely buy that argument. But in the grand scheme of things, is this kind of individual charitable giving, is that a big part of how people in America recover from natural disasters? No, for most people, it's going to come from hopefully their insurance policy that they had, as well as from the government. It feels like if climate change is going to make these natural disasters more and more common, does the way that we have to do insurance also have to change? Absolutely.

So the insurance market is in a huge turmoil right now because they're realizing that the risks are going up. And so premiums have to go up. But they're running into a lot of resistance. Well, you hear in Florida, right, like all these insurers that are saying, well, we can't deal with this market anymore. We're going to pull out. We don't really want to offer insurance in Florida anymore. Yes. And you see a similar thing happening with California and wildfire insurance. Partly it happens because there's limits on what premium increases they can put in. And so they're saying, well, if we can't do these premium increases, then we're not going to be in this market at all.

Oh, so what you're saying is like the government won't let them raise the price of insurance enough to make the insurance work? In some cases, yes. Oh, because I see how that makes sense. Like you don't want insurers to price gouge. Exactly. Yeah, I think it's a market that needs some regulation, but it's a cost, a price of the kind of risk that they're going to be living through. Yes, exactly.

And that is why it can be a very useful tool. I think where we can do better is communicating to people that this isn't just price gouging. This actually reflects our best guess as to the risk that you're facing. our best guess as to the risk that you're facing. And I think a lot of people probably have a hard time believing that because disasters are very rare things. And so there's almost like this sense of it can't happen to me. This is an outrageous price. Nothing's happened, you know, in the last 20 years, therefore, it's not going to happen. Coming up, we talk about a paper of Tatiana's that totally surprised me, totally changed how I see the world. It was about Hurricane Katrina. So I want to talk about this one paper of yours. And I remember reading it a couple years back.

And when I read it, I was like totally blown away. Like it was so, so surprising, the thing that you found. And this was a paper about Hurricane Katrina. And I think it really changed how I think about not just natural disasters, but I think this was a paper that kind of revealed something deeper about society and about how we choose to live our lives. And I'm excited to talk to you about it. Yeah, I'm excited to tell you about it. So when it came to studying Hurricane Katrina, in my fourth year of grad school, I was a visiting PhD student at the University of Chicago, and I spent quite a bit of time talking to Steve Levitt. The Freakonomics guy. Yes, yes. So at one point, we were discussing Hurricane Katrina and wondering what happened to the victims in the long run. Did they recover back to where they were? Were they permanently scarred by this hurricane? And I thought, okay, maybe actually this is a question we can answer.

Yeah. So what were you expecting to find? So I thought that we would find persistent long-term declines in income. Given how bad the hurricane was, how many people were involuntarily displaced, I thought that not only we'd find kind of a sharp decline in income in the short run, but it would persist for years. Like it would scar their careers and sort of their lives and their financial situation. Exactly. Exactly. But it's still useful to know, right, just to be able to quantify how bad it is. And it's very surprising to me that we didn't actually know the answer to this, to this like, you know, five years, 10 years down the road question. 10 years down the road question. Yeah. And I think, you know, when you know what we had to do to get that answer, it's perhaps less surprising because we ended up teaming up with an economist

who was working at the U.S. Treasury and had access to individual tax records. And that's how we were able to identify people who were living in New Orleans before the hurricane and then track them through their tax records regardless of where they move to afterwards. So you do need very specialized, hard-to-access data to do these kinds of studies. Because that tax data, they keep that locked up, right? It's very hard to get access to that. Oh, yes. I never touched the data myself. Oh, my gosh. They wouldn't let you?

No, no. Yeah. Laura Kawano, our co-author at U.S. Treasury at that time, she was the one that did all the data work. So it's very well protected. compared them to other people who lived in similar places, just to get a sense of what their life might have been like if the hurricane hadn't happened. And when you made that comparison, and you got all the data together, and you crunched everything, what did you find? Well, we found that in 2005 and 2006, people from New Orleans were doing noticeably worse. Okay, so it's like immediately after the hurricane, like people are not doing well. That makes sense. Yes, immediate drop in income.

But then by 2007, they had recovered back to where they would have been absent the hurricane. They would have been absent the hurricane. And then starting in 2008 and pretty steadily after that, they were making more than these comparison individuals and therefore more than they would have made absent the hurricane. So you're saying that – and this is what I thought was so surprising about this paper. Like you're saying that the people who were affected by Hurricane Katrina, like they ended up making more money than they would have otherwise. Yes, exactly. What was your reaction when you when you first figured this out? Well, my first reaction was, did we mess something up? Is this wrong? Whenever you have a surprising finding, the first thing you want to do

is make sure that it's not surprising because you made a mistake somewhere. And then when we figured out that, no, these are the right results, of course, the next question is, why? How did this actually happen? So why were people earning more money after this hurricane? Like, what was the explanation that you all were able to come up with? Yeah, so there's a couple of possible explanations that we looked at. And in fact, we found that it was two things that mattered. it was two things that mattered. The first one is kind of a straightforward one where New Orleans became a more expensive city to live in. And as a result, wages also increased to compensate for the greater cost of living. Because so much housing was destroyed, The supply of housing kind of relative to demand was low.

And so housing prices increased as a result of the hurricane. They weren't, it wasn't necessarily that housing got better, at least in the short run. But this is actually something that we do see with natural disasters is in the immediate aftermath. It's not uncommon for housing to get more expensive because of the destruction of the hurricane. So there was like, so there's like, kind of like in some kind of inflation that was happening in New Orleans. Exactly. But then there's this other explanation that I thought was really interesting and surprising. Yeah. So another key reason for why incomes went up in the long run is because people moved to higher wage places, to more

economically prosperous places, and were able to earn kind of the prevailing wage for that area, which was higher than what they were earning in New Orleans. So you were able to see using this data, you were able to see, oh, they were filing their taxes in New Orleans. And then after Hurricane Katrina, they moved to this other place. It's a lot richer, maybe Chicago, and they're filing their taxes from Chicago and they're earning a lot more money than they would have.

Exactly. Yeah, that's amazing. Yes, which I think raises the question of, you know, why were people living in New Orleans in the first place? Like, you know, because obviously they could have moved even without the hurricane. So why were they staying in a place where they were earning less than they could have somewhere else? You did this follow-up paper, right, where you looked at not just financial well-being,

but like physical well-being. And what did you find in that paper? Yeah, so we got another set of administrative records, this time from Medicare. So we were able to track the locations and mortality of individuals age 65 and older, and also individuals on long-term disability. And we again looked at people who were in New Orleans the year before the hurricane and tracked what happened to their mortality. And what we found is that in the year of the hurricane, we see a lot of excess mortality, a lot of extra deaths due to the hurricane. This is unfortunately not particularly

surprising. But what is surprising is we then find a decrease in the mortality rate to the point that by almost a decade later, you're more likely to be alive if you were in New Orleans than if you were in one of our comparison cities. So if you survived the hurricane in New Orleans, you were more likely to be alive? No, this is actually not conditional on surviving the hurricane. So even counting the extra deaths from the hurricane, you're more likely to be alive by the end of 2013 than if the hurricane hadn't happened. Wow. And so what was driving that? So we found that in this case, the main explanation is relocating to lower mortality places. So New Orleans was not prosperous economically.

It was also at the bottom in terms of public health care metrics. And in most cases, people moved to lower mortality places. And we found basically a one-for-one relationship of the mortality in the place you move to and your own subsequent mortality. move to and your own subsequent mortality. And that can explain most of the mortality decrease we observe in total. Oh, wow. And so putting together these two papers, what you're finding, is that Hurricane Katrina caused people to move, evacuate, and a lot of people ended up staying in places where wages were higher, where communities were literally healthier. And this caused people to earn more money than they would have and also live longer than they would have. Exactly. Yes, that's right. And I feel like that really just puts an emphasis point on the question. Then if that's true, if people were better off leaving New Orleans, why didn't they move earlier? Why did they stay? Why did it take a hurricane to force them from this place, which, according to the data, right, wasn't great for their salaries, their income, wasn't great for their health even.

Yeah, and I think it's a really important question. And it's not just kind of an interesting from an academic standpoint question, but it has ramifications for how we deal with climate change. Yeah. I mean, I feel like as we try to make that very difficult choice of do we stay in a place that's going to get constantly ravaged by an increasing number of whatever, wildfires, tornadoes, hurricanes, whatever, when is it worth it to stay and when is it worth it to go, right? Yes, exactly. So that's a question an individual can ask themselves, but it's also a question that local governments should be asking of how do we deal with these communities as a whole? Because as an individual, there's only so much you can

do on your own because of the difficulties of coordinating and the difficulties of knowing what risk you even face and so on. So I think this is one area where we almost certainly will need governments to be thinking as well. Yeah. And so the reason I thought that this Katrina research of yours was so interesting and so profound is that it kind of – it's another reason to study natural disasters. It's not just that we need to understand natural disasters because we need to understand how we deal with them and how we can respond to them efficiently or whatever. deal with them and how we can respond to them efficiently or whatever. But like, a natural disaster is this thing, this massive dislocation that it breaks us out of our regular lives. And, you know, it forces us sometimes to move away from the place that we have called home for many years. And in doing that, by forcing this giant change onto people, it can reveal something deeper, I think, about how our society works. And in this case, it's not just a paper about Hurricane Katrina, right?

It's a paper about the power of place, the power of our communities or our adopted communities to change the trajectory of our lives. Yes, exactly. I think that's a key takeaway lesson from this line of research is that where we live really matters for our economic well-being and for our physical well-being. And it's ultimately, you know, as an individual, we can never know what would have been for ourselves personally. But as researchers, we can try to answer questions like these with data. And I think that's really neat. Tatiana, we have had such a fascinating conversation today. Thank you so much for talking to us. Thank you very much for having me here. It's been a pleasure. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.