Any short-term boost provided by repairing what the storm destroyed will have a negligible impact on the bigger economic picture
As the absurdly sensationalistic news coverage of Hurricane Irene finally begins to fade this week, the media has begun to look for a silver lining. Perhaps it isn't enough that the storm wasn't nearly as bad as some had feared: what if it actually provides some much needed stimulus to the anemic U.S. economy? Initially, this might seem like a crazy idea. How could a destructive force help to hasten the nation's growth and chisel away at its high unemployment rate? It can't really, but that won't stop some from claiming that it will.
An Analogy: Didn't World War II End the Great Depression?
When we think of something harmful enhancing economic activity, one immediate example comes to mind: World War II. Until the U.S. became involved, the nation had been in a painful depression for more than a decade. But once the war ended, the nation's economy began to flourish. In this case, however, correlation does not imply causation.
World War II had an incredibly high price. Money was spent on bombs, bullets, guns, warships, medical services, and other costs of battle. All of that spending resulted in almost no investment in future U.S. growth. At most, it helped to indirectly provide the U.S. somewhat better infrastructure in manufacturing. But the return on that "investment" wasn't nearly worth its cost.
Once the war ended, a number of factors had changed. Consumers felt better about the nation and may have spent more, triumphant as the war ended. The U.S. workforce was smaller, due to all of the war's casualties, so the unemployment rate would be much lower. The G.I. bill pushed many Americans into higher education, which also helped to lower the jobless rate and to brighten the nation's growth prospects. Globally, the U.S. became the clear world superpower, as it was most responsible for ending the war, which gave it some intangible economic prowess. And of course, the war was waged in Europe and Asia, leaving the U.S. with little need for rebuilding and providing it a huge advantage over other nations as global commerce grew.
So the economic growth the U.S. experience didn't result due to the war's destruction but in spite of it. Unfortunately, no such positive economic consequences result when a natural disaster hits.
The Boost in Spending
Some claim that the hurricane will help the economy because it will force Americans to spend more money in order to repair the damage the storm caused. Josh Boak from Politico reports on economists and analysts predicting a more cheerful second half growth rate from the storm:
Cumberland Advisors Chairman David Kotok saw the storm as likely jolting employment in construction, an industry paralyzed by the bursting of the real estate bubble in 2008.
"We are now upping our estimate of fourth-quarter GDP in the U.S. economy," he said in an email Sunday. "Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily."
Here's a broader explanation of what the short-term stimulus will look like:
Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.
"After a disaster, there's always a definite short-term increase," Merritt said. "There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding."
Certainly, Americans will be forced to spend a little bit more money over the next couple of months for repairs. But saying that this spending will put the U.S. in a better position than it was in before the storm relies on a number of faulty assumptions.
Stimulating the Wrong Area
Let's, for a moment, humor the misguided notion that hurricanes really can stimulate the economy. Where did Irene do the most harm? It did damage mostly to the northeast and parts of the mid-Atlantic region. But if you look at these states, you quickly find that they are not among the hardest-hit areas by the recession.
For example, the unemployment rate in New York State last month was 8.0%. That's not great, but it's certainly better than the national rate of 9.1%. Maryland was also one of the most affected states, but its unemployment rate is just 7.2%. New Jersey is a little worst off with a 9.5% unemployment rate. But none of these states approach the condition of several of the other states with very severe joblessness. In Nevada the unemployment rate is 12.9%. In Michigan it's 12.5%. It's 12.0% in California.
In particular, the construction jobs that might result for needed repairs won't be in the housing bubble centers -- none of them were affected by the storm. While the states Irene thrashed certainly won't reject a few extra jobs here or there, they aren't the ones that need the jobs as desperately as some others.
Spending for Repairs Is Non-productive
But as alluded to before, this spending isn't the sort of spending that actually helps an economy in the long-run. Imagine you total your car. You must buy a new one. As a result, the dealership and automaker get an additional sale. That's great, right?
Well, for those who benefit from the sale it's great. For everyone else, it's terrible. The insurance company is worse off, as it had to pay for the claim. You are also worse off, as you probably have to pay an insurance deductible and your insurance premium will likely rise. And that new car isn't fulfilling a new purpose that will further economic growth; it's merely replacing a destroyed car. Moreover, the money you and the insurance company spend won't be used for other investment or spending.
So on balance, there's a net long-term loss to the economy equal to the value of the capital destroyed. And in the medium-term, the spending is probably also neutralized, since you would have needed a new car in a few years anyway.
All of this analysis applies to repair spending due to a hurricane. Any short-term boost is just that: short-term. Those new jobs are temporary and will go away once the repairs are completed. Ultimately, the insurance companies, government, and consumers will all be worse-off.
A Tiny Boost
In the 23rd of 24 paragraphs of the Politico article referred to above, University of Maryland economist Peter Morici estimates that that property damages will result in about $20 billion. He also says that spending will decline by $11 billion as a result.
So let's be optimistic and say that all that net $9 billion spending for repairs occurs in the second half of 2011. That would add 0.07% to the nation's 2011 annual growth. Of course, this also assumes that the storm doesn't also cause net exports to decline (it probably will). While welcome, this increase isn't going to suddenly revitalize the nation's economic recovery.
We also should note that the problem in the U.S. is that firms aren't using the money they've been accumulating to hire. In order to bring on more workers, they would need to sense a permanent demand increase. Storm-related spending won't cause such a shift, since it's temporary in nature. Moreover, this money firms are spending on repairs might have went to hiring more workers instead.
Is It Really New Spending?
And as the above analysis shows, a large amount of the spending that will occur will be eaten away by spending that now won't occur because consumers will pull back. Let's go back to the car analogy. In the best-case scenario, you've got insurance. If your premium increases and you're forced to pay a deductible, then you'll spend less on other goods and services. Some of that money you would have spent anyway, but now it will merely go towards your car insurance instead.
This all applies to storm-related repairs. If an American is forced to buy a new roof, then in most causes that person will spend less money in the months that follow on other goods and services. If his or her debt rises instead, then this will also cause spending to slow in the medium-term, as consumers are trying to reduce their credit balances. Any money spent by insurance companies will mean less invested in stocks or bonds that would boost growth.
Will All the Needed Repairs Be Made?
Finally, throughout this discussion we're assuming that these repairs will largely be made. Many might be ignored for as long as possible. Americans are strapped for cash. For example, if one family member remains unemployed, that family might have to put up with a leaking roof until work is found.
Although the government is largely expected to step in to provide some aid, its ability and willingness to do so should not be taken for granted. State and local governments have been struggling since the recession began. They continue to bleed jobs while the private sector began to add them again last year. If states and municipalities must spend more on repairs, then even more layoffs could result. On the federal level, do we really believe that Congress can stomach an aid bill providing tens of billions of dollars in a climate of austerity?
Will additional spending provide some stimulus to the U.S.? Perhaps, but that stimulus will be poorly targeted, fleeting, and tiny. And in the longer-run, the U.S. will incur a net cost due to the storm, not a net benefit. So let's not squint to try to see a rainbow after a storm where there isn't any and instead take comfort in the fact that it could have been much worse.
Image Credit: Edwin Martinez1/flickr