On March 13, 2020, President Trump declared a nationwide emergency pursuant to Sec. 501(b) of the Stafford Act. As a result, FEMA is coordinating the full federal response along with the U.S. Department of Health and Human Services and the White House Coronavirus Task Force. The CARES Act was signed into law two weeks later. Understanding the economic dynamics of natural disasters can help identify the relevant sections of the CARES Act for the current economy and identify potential opportunities and threats posed by the COVID-19 pandemic, in comparison with the typical sorts of natural disasters (e.g., floods, earthquakes, and hurricanes) that are usually FEMA’s focus.
Typical natural disasters and corresponding policy responses can be categorized into two broad phases: a crisis phase and a recovery phase.
Direct economic effects are felt in the “crisis” phase, as the disaster is occurring. With floods, earthquakes, and hurricanes, physical capital like buildings, highways, and infrastructure are rapidly destroyed. Labor is temporarily halted or moved away from the affected region until the immediate threat passes. During this phase, unemployment jumps and economic output declines.1 Losses can be mitigated to some extent but are, generally, unavoidable. Stop-loss policies, such as stacking sandbags and/or boarding windows before the storm or immediately supplying food, water, medicine, and shelter afterward, are the chief concern, with looting, rioting, and additional threats to life and property mounting if such resources are not forthcoming in short order.
The recovery phase begins after the immediate threat has passed. Physical capital and labor can remain impaired for some time following a disaster, even though the immediate threat has abated. Over time, prospects for workers and businesses improve as the business environment becomes more certain. Employment eventually increases and output rises.
In the recovery phase, policy focus shifts to restoring employment, output, and profitability. In the recovery phase, low-interest loans can help businesses reestablish themselves and regain volume. But that growth should be distinguished from the apparent “bump” that occurs to economic growth from inflows of insurance payouts funneled to construction firms to help rebuild buildings, highways, and infrastructure. Until such infrastructure is operational, expanded unemployment benefits, income support, and housing assistance are still required for those impacted by the disaster.
The crisis and recovery policies are interrelated. For instance, the success of the recovery phase is inherently linked to the certainty of the crisis response.2 Managing uncertainty decisively within the crisis, therefore, yields stronger recoveries, after controlling for the magnitude and duration of the event.3
The timing and extent of disaster assistance funding from federal and local governments are also critical elements. Greater assistance in a timelier fashion in both phases is associated with reduced losses and stronger recoveries.4
Let’s apply those insights to the current situation. Due to the slow-moving nature of the COVID-19 pandemic, the crisis and recovery phases may overlap more than with other natural disasters. That overlap presents opportunities and threats. CARES Act provisions such as the Paycheck Protection Program and Emergency Unemployment Provisions may apply to both phases, while others such as the Economic Injury Disaster Loans may be a tool more traditionally used in recovery.
In general, recovery policy based upon counter-cyclical economic measures typically used to fight recession tends to have limited effectiveness during the crisis phase. Businesses are not going to plan expansion while they are still focused on stacking sandbags and boarding up windows during continued crisis. Given the long-term nature of the COVID-19 pandemic and the need for the “end” of the crisis phase to be declared by government edict, such uncertainty is currently high and expected to remain so for the foreseeable future.5
The slow-moving nature of the COVID-19 pandemic also, however, presents advantages over a typical natural disaster. Because communication and transportation links remain available, there is less worry about food and water. But those also confer the ability to use the idle time while people are sheltering in place for worker training, perhaps by encouraging those temporarily unemployed to pursue education certificates online by awarding them higher benefits contingent upon doing so. A better-skilled work force can help speed recovery after the pandemic has passed.
Similarly, creative solutions may also be used to incentivize technology updates, road and transport infrastructure development, or long-avoided maintenance projects. For instance, highway traffic is low as a result of non-essential labor sheltering in place, creating an advantageous environment for critical infrastructure work and improvements with appropriate health-related distancing and cleanliness protocols. Such programs could provide temporary boosts to certain economic sectors while others remain offline.
Such training and infrastructure development program suggestions fit natural disaster paradigms suggesting economies can “build back better,” attaining higher economic productivity after recovery as a result of infrastructure and technology updates.6 Preparing a recovery program now, while managing the unfolding crisis, could reduce the lag with which positive effects accumulate in the recovery phase Proactive steps taken now could help our economy emerge from the crisis with a stronger labor force and physical capital base than before.
1See Kliesen, Kevin, “The Economics of Natural Disasters,” Federal Reserve Bank of St. Louis, April 1994.
2See Bailey, Martin Neil, “Can Natural Disasters Help Stimulate the Economy?,” Brookings Institute, September 2011.
3See Kliesen, op. cit.
4See Kliesen, op. cit.
5See Ginsberg, Alexander B., Dixon, David B., and Liu, Jenny Y., “COVID-19 Relief: Understanding SBA Loan Opportunities Under the CARES Act,” Pillsbury Winthrop Shaw Pittman LLP, March 27, 2020.
6See Botzen, W.J. Wouter, Deschenes, Olivier, and Sanders, Mark, “The Economic Impact of Natural Disasters: A Review of Models and Empirical Studies,” Review of Environmental Economics and Policy, Vol. 13, Issue 2, Summer 2019.