Storm will bring benefits as well as costs

By Peter Morici

Estimated losses in the Northeast as a result of Hurricane Irene range into the tens of billions. Lost economic activity is almost certain to compound that figure. Over the long term, however, rebuilding and postponed business activity will make up much of the storm's near-term impact on the economy.

The latest estimates of the direct damage caused by Hurricane Irene are around $20 billion. Add to that the loss of about two days of economic activity over the course of a week, and across 25 percent of the economy, and total losses caused by Irene would be about $40 billion to $45 billion.

But 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 - and likely more, as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.

Consider a restaurant with inadequate patronage. Its owner may invest his or her insurance settlement from the storm in a new, more attractive business.

On the coast, older, smaller houses on large plots tend to be 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 as a result of rebuilding after a storm that was similar to Irene in scale.

This is not to discount the direct costs to individuals of temporary and in some cases permanent displacement. However, when government authorities facilitate rebuilding quickly and effectively, 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 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 $10 billion to $12 billion - and the total effects of natural disasters like Irene are not large two years down the road.