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Nov 14
2012
Steve Marr

Hurricane Sandy: Creator or Destroyer of Economic Growth?

Posted by: Steve Marr

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As Hurricane Sandy created massive damage across North Carolina, Delaware, Maryland, New Jersey, New York, Connecticut, and Rode Island; some pundits were touting how this would be good for the economy. Repairing infrastructure and homes would put many people back to work and boost the economy. Wouldn’t it?

 

Granted, the first result included electrical repair crews restoring service.  However, they were all on extensive overtime.  While it is true that they made significant money that will be spent in the economy, it is also true that utility companies ultimately bill customers for all costs involved in generating power.  That means that these expenses will show up later as an electricity price increase.  

Infrastructure repair is another example of why there is no economic gain from this disaster.  Many roads, beaches, sewer lines, subways, and government buildings were damaged or destroyed. As workers begin the rebuilding process, it provides the illusion of economic growth. Suppose an area required $100 million to fix every road. After the workers and material providers are paid the $100 million, you still have the same basic roads that existed earlier.  There is no net gain. If the roads had remained intact, the $100 million could have been used to create new roads or improve old ones to create new value. Now, the community has $100 million less with no net asset gain.

Look at home repairs. Many homes damaged by storm surge or river flooding had no flood insurance requiring the owner to bear the loss. Banks who lent money for mortgages will likely experience default as owners walk away from ruined properties. Other homeowners, who have coverage, will face high deductibles, often thousands of dollars per home.  In addition to property loss, there is the loss of contents, even when insured. These losses destroy wealth.

The key economic principle here is that government and private money funneled into hurricane damage repair will divert dollars from other activities instead of used to create new wealth. Those who earn money repairing infrastructure and homes, as well as those who sell replacement furnishings will gain economic activity. This new business will replace economic activity that will never occur.   

If destruction were a path to prosperity we could simply turn hoodlums loose in a town with bricks and baseball bats. When someone destroys store windows or car windows, we could cheer at the economic growth it would create.

An example of a more subtle loss of value may be in home values. The housing market is still under enormous pressure. People looking to buy homes may pass on coastal locations because they see them as high risk while other buyers may shy away from locations like recently hammered Stanton Island.   All of this causes values to decline.

King Solomon wrote, “What is wrong cannot be made right. What is missing cannot be recovered.” (Ecclesiastes 1:15, NLT) We cannot recover the money and value lost in the storm; we can only shift it from one hand to another. Tragically, as a country, we are poorer as a result of the storm. 


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