Chad Stone is chief economist at the Center on Budget and Policy Priorities.
Hurricane Sandy's devastating effects on people and property will likely be large—though, at the moment, they seem unlikely to approach those from Hurricane Katrina. Economic forecasters expect a dip in economic activity followed by a recovery that's fueled by repair and reconstruction efforts that, in some cases, could replace old buildings, machines, and infrastructure with newer, better ones. But no one should think that natural disasters are good for the economy.
The Wall Street Journal reports estimates from the disaster-modeling firm Eqecat Inc. of $10 billion to $20 billion in losses insured by private companies, plus additional losses insured by the National Flood Insurance Program as well as uninsured losses, bringing total estimated losses to $30 to $50 billion. By contrast, the two costliest storms on record were Katrina, in 2005, which racked up over $100 billion in losses, and Hurricane Andrew, in 1992, which generated $46 billion in inflation-adjusted losses, according to NOAA estimates. For Sandy, we have only informed guesstimates at this point.
Of Sandy, Eqecat wrote,
Economic damages include property damage from wind, rain and flood, and also include intangibles such as business interruption and additional living expenses. Damage to infrastructure utilities include roads, water and power, and municipal buildings which may or may not be insured. Economic damages are by their very nature very approximate [emphasis added].
Natural disasters like hurricanes and earthquakes damage or destroy productive physical assets like factories, stores, housing, and public infrastructure (the capital stock); they interrupt economic activity (the flow of goods and services produced in a quarter, as measured by gross domestic product or GDP). During the disaster and in its immediate aftermath, economic activity will likely be depressed below what it otherwise would have been, and it takes time to repair and replace damaged physical assets.
Some of the depressed spending during the crisis is merely postponed and made up later. Meanwhile, the repairing and rebuilding of housing, buildings, and infrastructure generates jobs and greater demand for building materials and other goods and services. Those activities may well generate enough jobs and economic activity to boost GDP above what it otherwise would have been for a while after the initial dip. Obviously, these effects are largely concentrated in the affected region and, for Sandy, economic forecasters expect only a modest effect on overall GDP in either the fourth quarter or early next year.
How quickly the capital stock, especially New York and New Jersey's transportation infrastructure, is repaired could affect how quickly the regional economy bounces back. On one of my favorite economics blogs, Econbrowser, Jim Hamilton makes that very point, noting evidence of Katrina's lasting damage to offshore oil-producing infrastructure and the Louisiana economy. Repaired and rebuilt homes, stores, and infrastructure may well be better built and sounder than what they replace but, in the meantime, the economy will not be as productive as it would have been without the damage.
People will get back to work and economic activity should start to rebound fairly quickly in the areas that Sandy hit hard. But, we should remember that, while it's welcome, the GDP generated by repairing damage is not the same as economic stimulus; that is, it mostly just returns the affected region to where it was before the storm, rather than giving it—much less the economy writ large—an economic boost.
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