Readers Question: “Is it a fallacy to assume that Super-storm Sandy will promote growth and, if so, why?”
In the aftermath of a natural disaster, such as hurricane ‘Sandy’ which recently hit New York and New Jersey. there is usually a fairly minimal impact on GDP.
The devastation by the storm has cost something in the region of $30 billion to $50 billion in economic losses. This approximates to around 0.25% of nominal US GDP. These economic losses include:
- Damage to property, assets, infrastructure and factories.
- Lost output because people can’t work. If affected areas lose 25% of output for two days, this would add up to around $6billion of GDP.
- Lost tax from lower revenues.
The worst losses will not be visible in GDP statistics because much of the damage has come to wealth as opposed to output. In this case, GDP statistics are not a true reflection of living standards because of their focus on output and income – as opposed to wealth.
Another possible cost is that insurance premiums may rise as a consequence of the increased frequency of severe storms.
To what extent will Disaster Relief be an Economic Stimulus?
After a drop in GDP in the short-term, re-construction is likely to create additional output in future quarters. In a depressed economy, the impact of disaster relief spending, could create a multiplier effect which helps boost demand.
Federal emergency officials from FEMA says the US currently has about $3.6 billion which it could use to pay for the disaster relief in response to Hurricane Sandy. If all this was spent rather than sitting idly, you could argue that there would be a significant stimulus impact on the overall economy.
However, the stimulus is likely to be much smaller, and evidence from past hurricanes suggests that natural disasters have only a minimal impact on overall economic output.
Reconstruction after Japanese Tsunami
In the aftermath of the devastating Japanese Tsunami there is stronger evidence that the reconstruction efforts have had a bigger positive impact on promoting economic recovery. There was a strong bounce in manufacturing output towards the end of 2011 (NYT). Economic growth in 2012, is forecast to be 2.5% higher than in Europe. Japanese growth has been helped by the growth in construction and strong export growth. Japanese industry was able to bounce back from the March 2011 disaster. But in the affected tsunami areas consumer spending is still depressed and the number of retail outlets lower than before.
Related
Economic impact of Hurrican disaster relief at Huffington Post