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Trying to Gauge the Potential Economic Impact of Sandy

I know this is a serious and sensitive topic to some people so I don’t mean to suggest that the hurricane is a good thing, because it is obviously not. My parents are located a good 50 feet north of the mandatory evacuation line on Long Island and there will likely be some flooding damage to my house. I only mean to think about some of the positives it may bring rather than focus only on the bad…

Many reports estimate the damage to the storm to be somewhere from 5-10 billion dollars if it is as bad as it looks. You also must consider the loss in business and production from having many people unable to get to work for a few days to a week in cities like New York when thinking about the bad.

But, if there is a great deal of damage to buildings and infrastructure, this will all need to be repaired. This could lead to a temporary uptick in employment in states across the northeast as the need for construction workers, utility workers, and contractors will likely be heavy over the next few weeks or months. I was driving back to Lexington from New York this Sunday and it seemed like a good 25% of the traffic heading north on 81 was utility workers, tree cutting workers, and ambulances coming from states in the south and west. The total value of the repairs would boost GDP for the 4th quarter since the damages would not be subtracted from GDP. At least on paper, Sandy would help GDP and unemployment temporarily.

Someone will also have to pay for the repairs. Insurance companies and governments will probably end up being hit the hardest. So even though Sandy may have a positive impact on paper, the storm will hurt the balance sheets of governments and could increase the total debt burden due in the future. On net, I think the storm is obviously not a good thing, but it could have some short term positive economic impacts if the value of repairs and increase in temporary employment outweighs the loss in production from people missing work considering that the damages from the storm will not be counted against GDP.

One Comment

  1. Assets that are damaged are a clear negative; so are wages unearned and not made up down the road through overtime, and productive facilities idled by lack of power and transport. We can think of this as supply-side issues. Since it’s not likely that damage to productive capabilities (other than housing) will be more than temporary, this represents a small blip to current GDP.
    Consumption is less of an issue, parts are postponed and the decision to eat in today leaves room in the budget to eat out tomorrow. Since we wish to smooth consumption there is a utility loss from being under the weather, but modest. Some production also responds this way. A lawyer who can’t get to the office will still have the contracts and real estate paperwork and all that to do, and it will get done. No loss of output. Surgery gets postponed temporarily. Now restaurants lose business, and while they may see some uptick, we don’t tend to fully make up for the weekly night out by doing two nights in a row. Restaurant workers aren’t likley to get extra pay to make up for what they lost. So there will be a short-term decline in income.
    As to how to pay, obviously some people with inadequate insurance take a hit to their wealth; if insurance companies are doing their actuarial homeowork correctly, they’ve already planned for such losses “on average.” If it hits profits, it is then one of timing, not the expected net present value of profits. Right now the government can borrow at 0%, so having FEMA supplement private insurance is a boon for taxpayers, better than going to the bank to borrow for repairs. So so what if debt goes up? — the increase represents a net gain to society. And, as you note, it may provide an indirect stimulus that our current Congress would not otherwise fund.
    Nevertheless damage is real; disasters are never a positive, they are just less negative than headlines suggest.
    Japan’s economy took a temporary hit from 3/11, a huge disaster, but that was mainly due to disruption, and so time shifting and reconstruction helped offset. None of that makes up for the 20,000 lives lost and the homes and keepsakes destroyed; about 100,000 people continue to live in temporary housing, and others have moved away from their hometowns in ways that represent a loss (it’s hard to track those staying with relatives in other parts of Japan relative to those who have moved into their own apartments in other parts of Japan, as opposed to those officially awaiting housing, most of whom are elderly).

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