Although, initially a Category 1 hurricane and now only a tropical storm, Irene is testing flood-level records in New York City and in much of the Northeast, raising casualty loss estimates to $20 billion. Two days of lost economic activity, over a period of a week, is almost certain, and adds another $20 billion. Longer term, rebuilding and postponed business activity will make up much of the near term impact on the economy.
Revised estimates of the direct damage caused by Hurricane Irene are in the range of $20 billion. Add to those the loss of about two days economic activity, spread over a week, across 25% of the economy, and an estimated of the losses imposed by Irene is about $40 to 45 billion.
However, rebuilding after Irene, especially in an economy with high unemployment and underused resources in the construction and building materials industries, will unleash at least $20 billion in new direct private spending-likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.
Regarding the latter, consider a restaurant with inadequate patronage-its owner invests the insurance settlement in a new more attractive business. On the shore, older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season. The outer banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.
All of this is not to discount the direct costs to individuals by temporary and in some cases permanent displacements; however, when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before.
Factoring in the multiplier effect of $20 billion spent rebuilding yields an economic benefit from reconstruction of about $36 billion. Add to that the gains from more a more modern and productive capital stock-likely in the range of $10 billion-and consumer and business spending that is only delayed but not permanently lost-likely in the range of $15 billion-and the total effects of natural disasters of the scale of Irene are not large two years down the road.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.