Thread by @TDeryugina

The current COVID-19 situation reminds me in many ways of Hurricane Katrina, which devastated the Gulf Coast in 2005. I've studied the latter disaster in my research, and I think we can learn a lot from it. Summary follows, full post is here: medium.com/@tatyana_57116…

Both COVID-19 and Hurricane Katrina are large external shocks that have nothing to do with overvalued housing markets, excessive leverage, or a sudden drop in consumer confidence. Let me tell you more about Hurricane Katrina.

Hurricane Katrina flooded most of the city of New Orleans, making it unlivable. It killed nearly 2,000 people, most of them elderly. Hospitals, schools, and businesses closed for extended periods of time. Across the Gulf region, an estimated 230,000 jobs were suddenly lost.

Together with Laura Kawano and Steven Levitt, we used tax return data to study the short- and long-run economic impacts of Hurricane Katrina on those who lived in New Orleans prior to the hurricane. Published version of the paper is here. aeaweb.org/articles?id=10…

In 2005–2006, average annual labor incomes of New Orleans households affected by Katrina fell by $2,000-$2,300 (note that all dollar amounts are in 1,000s of dollars in the graphs below). That’s a big chunk of the average ($33,000/year in our sample).

The share of households reporting no labor income in 2006 rose by 4.2 percentage points, which implies that the average income drop is driven by a smaller subset of individuals who lost most or all of their income.

Unfortunately, I think a picture like this is also a likely outcome with COVID-19. Unless the restrictions are lifted very soon, people who lost their jobs are unlikely to immediately find a new one that pays the same amount of money.

(Note that I am not saying that we should lift the restrictions and let the virus spread; my goal is only to describe what will likely happen on the economic impact side.)

Now here’s the good news: incomes recovered by 2007–2008. In our sample, incomes ultimately increase to above their pre-Katrina levels, but I think that finding is specific to our study and is unlikely to materialize with COVID-19.

If Hurricane Katrina didn’t produce a scarring effect, I doubt that COVID-19 will either (absent some low-probability outcome like a breakdown of social order).

Of course, there was a policy response to Katrina. Restrictions on who could qualify for unemployment insurance payments were loosened and eligibility review controls were temporarily eliminated (to facilitate quick receipt of payments).

Among the victims we tracked, the share of people receiving any unemployment insurance (UI) benefits increased by over 27 percentage points in 2005, over a mean of 7.5 percent.

Individuals living in the disaster area could also withdraw up to $100,000 from their retirement accounts without paying an early withdrawal penalty and could spread the tax payments on those withdrawals over three years. And withdraw they did.

We also saw Social Security Disability Insurance receipt (SSDI) increase temporarily but substantially. Although our estimates are somewhat imprecise, they suggest that SSDI receipt increased by nearly 30 percentage points in 2008–2009.

What's the takeaway? If we want to avoid income losses, widespread business closures, drawing down of retirement savings, and a push of people into SSDI, the government will have to be more aggressive than it was in response to Katrina.

I believe this statement signed by over 800 economists summarizes what needs to be done quite well. columbia.edu/~wk2110/Corona…

To paraphrase, here's what the statement proposes.

1. Invest money into shortening the duration of the lockdown (testing/vaccines/treatments, etc)

2. Provide financial and other assistance to help small and medium businesses stay in business

3. Provide financial and other assistance to individuals whose incomes are affected by the lockdown

4. Support the functioning of financial markets so that large businesses are not threatened

The devil is in the details, of course, but there are many capable economists who can help get the details right.

The government made many mistakes when it came to the Hurricane Katrina response, as it has responding to this pandemic. However, unlike Hurricane Katrina, COVID-19 is far from over. Whether our government will ultimately do better this time around remains to be seen.