Will Hurricane Cleanup Stimulate The Economy?

Hurricane Irene is likely to cost billions of dollars. The storm did damage but not as much as some had feared. Will the sales of batteries and flashlights – and then repair costs – give the economy a needed boost?

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STEVE INSKEEP, host:

Plenty of news stories have said that Hurricane Irene is likely to cost billions of dollars. The storm certainly did damage, though less than some feared. At the same time, my local hardware store did just fine, selling out its stock of flashlights the day before the storm arrived. And no doubt some construction workers already have jobs they didn't before. A giant tree smashed a house near me, just destroyed it, and somebody is going to have to clean that up.

We're going to try to sort out the economic effects of a disaster with Adam Davidson of NPR's Planet Money Team.

Adam, good morning.

ADAM DAVIDSON: Good morning, Steve.

INSKEEP: Okay, let's start by granting that destruction is awful and hurts a lot of people's lives. But some people do make money from this, quite legitimately. So is there a case to be made that storms aren't as bad economically as they seem?

DAVIDSON: I have to say that with all the destruction, one clear silver lining, one clear winner is us economics nerds, cause we've been able to trot out the phrase: broken window fallacy.

INSKEEP: Okay.

DAVIDSON: Thats an idea that comes from this awesome mid-19th century French writer, Frederic Bastiat. And he pointed out that whenever a shopkeeper's window is broken, all the neighbors say, oh, this is actually good cause just think. You're going to send money to a glazier who's going to install a new window, and the economic process will continue.

But Bastiat pointed out that the person who had to replace the window probably would have spent the money on something else. And thats very much what we're thinking of today. If you have to repair your windows or your porch or a boat landing, but you would have done something else with it - bought an SUV, bought a TV - it doesnt really have a net benefit to the economy.

INSKEEP: Okay, so granting that Hurricane Irene could not have been a net benefit, probably, to the economy, I wonder if there's a more subtle effect here. There are people who have insurance, presumably, and hopefully, at least in some cases it covers the cost of the damage and they'll take that insurance money and go out and hire construction workers. Lots of whom need work right now. Is there a transfer of who wins and who loses here? A bunch of insurance company investors lose a little money, but certain numbers of construction workers get jobs.

DAVIDSON: Yes, and that could have a stimulative effect, like the fiscal stimulus the government had. I mean, insurance companies, you know, they issue a lot of bonds, for example, just like the U.S. government does and that money goes to investors. So when they spend money today, based on money they borrowed from others, that is exactly what you said. That's transferring money from long-term investors and spending it today.

The thing is, insurance companies are really good at estimating how much they're going to spend in a year, so I hate to say it this way, but you'd really need far more destruction that anyone was prepared for, for there to be truly that stimulative effect.

INSKEEP: I want to ask about micro effects not national effects, but effects on specific communities. I'm thinking of two examples. One is the great Chicago fire in the 19th century, which - it was a total disaster for that city, but it seemed to clear the way for even more explosive growth. It certainly didn't hurt the city's growth. The other example though, I'm thinking of, is the small town that I've spent a lot of time in in upstate New York that suffered a flood like lots of New York and New England towns are suffering this week. And it was a small town, the economy was weak, and the town has not even, today, seemed to really have recovered from the devastation.

DAVIDSON: Right. I mean, what happened in Chicago is the Chicago fire came when there was a very bad economic downturn. So what you had is all these smart, ambitious people from all over the country moving to Chicago and away from New York and Boston and Philadelphia, and the other more established cities, and that affect was felt for decades as Chicago is just kind of filled with this kind of ambitious entrepreneurial class.

I don't know that that helped the nation overall. It might have just transferred all of that from the coast to Chicago. But yes, in many other cases, of course, especially places that are past their prime, you know, small New England towns would be a classic example. In those kinds of towns it can be a disastrous event with absolutely no upside. The Chicago fire could not have happened I hate to say this at a better time for Chicago. It was exactly when the United States needed a lynch pin, a connecting point between the East and the new world of the prairies to the west, and Chicago was right there at the right time.

INSKEEP: So Hurricane Irene is not likely to have much effect, either way, on the broad U.S. economy, although we may see some people who win as well as some people who lose.

DAVIDSON: Exactly. I think that's a way to really think about it. It reallocates the winners and losers, just like, you know, in New Orleans after Katrina, it was certainly a great place to be a glazier or to be a construction worker. It was not such a great place to be someone in a business that required, you know, lots of consumer spending - I don't know, an art gallery, a bookstore, that sort of thing.

But there is a dead weight loss that's not measured in GDP statistics, but there is just this loss of wealth. The country as a whole is poorer when things are destroyed. And just because the economic statistics might show a flurry of growth, that really doesn't mean we're better off.

INSKEEP: NPR's Adam Davidson of our Planet Money team. Thanks very much.

DAVIDSON: Thank you, Steve.

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