Sandy will have a devastating impact on life and property.However, gauging its ultimate impact on an economy ” still struggling toovercome the Great Recession but with substantial resources to overcomeadversity ” is far more complex than merely adding up insurance payouts anduninsured losses.
Disasters can give the ailing construction sector a boost,and unleash smart reinvestment that actually improves stricken areas and thelives of those that survive intact. Ultimately, Americans, as they always seemto do, will emerge stronger in the wake of disaster and rebuild better ” makinga brighter future in the face of tragedy.
Sandy is unusual storm and complex to gauge. Coming late inthe season and combining with cold fronts to the west and north, it is really apost-tropical cyclone and has the potential to deliver epic destruction.However, coming so soon after Irene in August 2011, the level of anticipationand preparedness demonstrated by federal and state officials is commendable andshould mitigate some losses-especially loss of life.
Early estimates of the direct damage caused by HurricaneIrene were in the range of $7 billion but ultimately it inflicted $15 to 20billion in damage.
It seems likely that Sandy will impose greater destructionof property, and add to that the loss of about two days commercial activity,spread over a week across 25 percent of the economy, an initial estimate of theeconomic losses imposed by Sandy is about $35 to 45 billion.
However, rebuilding after Sandy, especially in an economywith high unemployment and underused resources in the construction industry,will unleash at least $15-20 billion in new direct private spending ” likelymore as many folks rebuild larger than before, and the capital stock thatemerges will prove more economically useful and productive.
Regarding the latter, consider a restaurant with inadequatepatronage ” its owner invests the insurance settlement in a new more attractivebusiness. On the shore, older smaller homes on large plots are replaced bylarger dwellings that can accommodate more families during the summer touristseason. The outer banks of North Carolina saw such gains several decades agoafter rebuilding from a storm of similar scale.
All of this is not to discount the direct costs toindividuals by temporary, and in some cases permanent, disruption to lives andcommunities, much of which cannot be quantified. However, when governmentauthorities facilitate rebuilding quickly and effectively, the process ofeconomic renewal, in many tangible ways, can leave communities better off thanbefore.
Factoring in the multiplier effect of $15-20 billion spentrebuilding yields an economic benefit from reconstruction of about $27-36billion. Add to that the gains from more a more modern and productive capitalstock ” likely in the range of $10 billion ” and consumer and business spendingthat is only delayed but not permanently lost ” likely in the range of $12billion ” and the total effects of natural disasters of the scale of Sandy arenot as devastating two years down the road.
