Disaster has economic benefits, too

Posted: October 30, 2012

By Peter Morici

Hurricane Sandy will likely have devastating effects on lives and property. However, gauging its full impact on an economy still struggling to recover from the Great Recession - though with substantial resources to overcome adversity - is far more complex than merely adding up insurance payouts and uninsured losses.

Disasters can give an ailing construction sector a boost, while unleashing reinvestment that actually improves stricken areas and the lives of residents. Ultimately, Americans always seem to emerge stronger and rebuild better in the wake of disaster.

Sandy is an unusual storm, so it's especially difficult to predict its effects. Having come late in the Atlantic hurricane season, and having converged with cold fronts from the west and north, it is really a post-tropical cyclone, and it has the potential to deliver epic destruction. However, partly because of the recent memory of Hurricane Irene, which struck the East Cost in August 2011, there was a commendable level of anticipation and preparedness among federal and state officials. That should mitigate some of the potential losses, especially loss of life.

Early damage estimates for Hurricane Irene were around $7 billion, but losses ultimately reached $15 billion to $20 billion. It seems likely that Sandy will be responsible for even more destruction. Add to it the loss of about two days of commercial activity, spread over the course of a week and across 25 percent of the economy, and economic losses would amount to about $35 billion to $45 billion.

However, especially in an economy with high unemployment and underused construction resources, Sandy will probably unleash $15 billion to $20 billion in private spending directly related to reconstruction.

That figure could grow as many rebuild larger and better than before. Consider a struggling restaurant, for example, whose owner invests his insurance settlement in a new and more attractive business. In areas like the Jersey Shore, older, smaller homes on large plots may be replaced by bigger dwellings that can accommodate more families during the tourist season. The Outer Banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.

None of this is meant to discount the storm's costs to individuals and the temporary or even permanent disruption to lives and communities, much of which cannot be quantified. However, when government authorities facilitate quick and effective rebuilding, the process of economic renewal can leave communities better off than before in many tangible ways.

Some $15 billion to $20 billion spent on rebuilding after the storm would yield about $27 billion to $36 billion in total economic activity. The gains from more modern and productive housing, businesses, and other physical capital would likely be around $10 billion. And consumer and business spending that is delayed but not permanently lost will likely be around $12 billion. A few years down the road, then, natural disasters on the scale of Sandy are not as devastating as they once may have seemed.


Peter Morici is an economist and a professor at the University of Maryland's Smith School of Business. He can be followed on Twitter at @pmorici1.

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