For starters, let’s acknowledge that natural disasters are no picnic — you can’t put a price tag on human life or storm surge that washes away generations of family photos. But since this is an investing site and not a human interest blog, hopefully you don’t think ill of me for asking the question of whether Hurricane Sandy was “good” or “bad” for the economy.
After all, Hurricane Sandy’s price tag is around $20 billion, according to initial estimates. But the big question for investors is whether this money is going to be sapped from other activity, or whether it’s a kind of dark stimulus that forces folks to tap into savings for repairs, using money that wouldn’t otherwise be spent right now.
Views are decidedly mixed on the matter.
Derek Thomspon at The Atlantic takes a rather logical view of things saying that “storms can stimulate” in two main ways:
First, the threat of a dangerous event pulls economic activity forward. Families stock up on extra food and supplies to prepare for a disaster. Second, and much more significantly, the aftermath of storms requires “replacement costs” that raise economic activity by forcing business and government to rebuild after a destructive event.
Over at TheStreet, Peter Morici agrees with this view but takes a much more romantic view of big-picture creative destruction, with
Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact. Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better — making a brighter future in the face of tragedy.
[R]ebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15 billion to $20 billion in new direct private spending — likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.
Not so fast, says George Mason University economist Don Boudreaux, who sat at home musing during Hurricane Sandy as the D.C. metro area ground to a halt. He writes that the fear and uncertainty tied to major storms like Sandy is akin to the same negative emotions that ultimately damaged economic growth in the wake of the financial crisis.
According to Keynesians, recessions result from people feeling pessimistic about the future — a pessimism conjured by what Keynesians regard as wary “animal spirits.” This pessimism prompts people to save too much and spend too little…. [I]s it likely that the optimism necessary to improve the economy will be sparked by destroying people’s homes and businesses? How plausible is it that people — who before being hammered by the likes of a hurricane felt that their savings were too low — will go on sustained spending binges because natural disasters oblige them to dip into the very savings that they were previously trying to increase?
Furthermore, Tim Worstall at Forbes shrewdly separates the difference between a boost in GDP and a boost in actual success and wealth for America due to lost opportunities. Here’s his take on the situation referencing another kind of disaster — an oil spill.
Cleaning up an oil spill counts as an increase in GDP. Which it is of course: we think that cleaning up an oil spill adds value so cleaning up an oil spill does add value. That’s why we clean it up and also why we count it in GDP: our measure of value being added.
The problem is that we don’t count the loss in capital value of the original spill itself: nor of any other pollution. GDP measures the flows in the economy, not the stock.
In short, we count the general uptick in spending on windows and canned goods from Hurricane Sandy, but nobody is backing out the lost money, time and goods of the individual companies and businesses. It’s naïve to think that any monetary losses don’t also come with lost opportunities and lost income potential beyond their value on an insurance statement.
It’s an interesting debate. The human factor notwithstanding, there appear to be some folks who think that Hurricane Sandy could ultimately give the economy a shot in the arm. Whether that is true — and whether a “Sandy stimulus” is enough to move the needle — remains to be seen.
- In a related but slightly odd vein, Paul Krugman says an alien invation would get us out of this slow-growth mess in a hurry! (Time)
- For further wonkery, get lost in the “broken windows” argument as an economic stimulus and the question of whether an “output gap” exists that such hardships can tap into. (Moneybox, via Slate)
- What to do (generally) as the markets open again post-Sandy. (InvestorPlace)
- Sectors to watch after the storm include insurers, retailers and refiners. (InvestorPlace)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP.