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.