Irene takes a toll

Opinion: August 31, 2011 at 12:00a.m.

By Peter Morici

McClatchy-Tribune

Although, initially a Category 1 hurricane and eventually only a tropical storm, Irene is testing flood-level records in New York City and in much of the Northeast, raising casualty loss estimates to $20 billion. Two days of lost economic activity, over a period of a week, is almost certain; that and other factors bring an estimate of the losses imposed by Irene to about $40 billion to $45 billion. However, longer term, rebuilding and postponed business activity will make up much of the near-term impact on the economy.

Rebuilding after Irene, especially in an economy with high unemployment and underused resources in the construction and building materials industries, will unleash at least $20 billion in new private spending — likely more, as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.

Consider a restaurant with inadequate patronage — its owner invests the insurance settlement in a new business.

On the shore, older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season. The Outer Banks of North Carolina saw such gains several decades ago.

Direct costs

All of this is not to discount the direct costs to individuals by temporary and, in some cases, permanent displacements; however, when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before.

Factoring in the multiplier effect of $20 billion spent rebuilding yields an economic benefit from reconstruction of about $36 billion. Add to that the gains from a more modern and productive capital stock — likely in the range of $10 billion — and consumer and business spending that is only delayed but not permanently lost, and the total effects of natural disasters of the scale of Irene are not large two years down the road.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former economist at the U.S. International Trade Commission. Distributed by MCT Information Services.