Irene's Destruction Will Be Good for the Economy

A rush to rebuild will boost the GDP in the fourth quarter, at least

Everybody expected Hurricane Irene to be a multi-billion dollar disaster, and it was. On the low end of estimates, the Consumer Federation of American says that property damage caused by wind will cost about $5 billion and flooding a further $2 billion. Standard & Poors builds on that number estimating that property damage will total about $7 billion but the total economic impact of the disaster will be closer to $20 billion. "I think that it's going to be a near term hit to August. However, we think that there's going to be a lot of rebuilding after this," says S&P senior economist Beth Ann Bovino. "It's going to give a little bit of the boost to the fourth quarter."

"After a disaster, there's always a definite short-term increase," Mark Merritt, president of the crisis-management consulting firm Witt Associates, similarly told Politico. "There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding."

Nate Silver at The New York Times crunched some numbers last week and estimated that a storm of Irene's size could cost New York City alone $2.2 billion. The low end of his final estimate for damages hovers between the above two estimates at $14 billion, but he says that even if winds were just a little bit stronger, the economic impact could've been much much worse:

Imagine, for instance, if Irene had been about 20 percent stronger when it hit New York--that it had wind speeds of about 90 miles an hour instead of 75 miles an hour. That doesn’t sound like a huge difference and from a meteorological perspective, and it isn’t.

But from an economic perspective, that may have mattered quite a lot. Some of the scholarly literature suggests that the economic damage resulting from hurricanes is a function of wind speeds raised to the eighth power. I'll spare you the math: what that means is that hurricane with wind speeds of 90 miles an hour might be as much a 4 or 5 times more destructive as one with wind speeds of 75 miles per hour. So if Irene had been just a bit stronger, we might be talking about economic losses on the order of $55 billion to $70 billion, rather than a "mere" $14 billion.

By Silver's estimates, the total impact of Irene matches the hype--despite what some media critics would like to believe.