Markets and Economy

Measuring Hurricane Harvey’s Economic Impact

There is a common belief that natural disasters can help stimulate an economy, but Hurricane Harvey illustrates, once again, why that is merely a myth.
Jim Glassman, Head Economist, Commercial Banking
September 6, 2017

As the flood waters recede from Houston’s streets, residents face the monumental task of rebuilding from Hurricane Harvey’s damage. In addition to its human toll, the hurricane did immense economic damage. The inundated Texas coastline is a vital energy hub, home to many of the nation’s largest refineries and petrochemical plants, and the Houston metro area is the country’s fourth-largest city by GDP. As businesses and plants along the coast shut down in the aftermath of the storm, the region’s lost production will be felt nationwide.

Counting the Cost

The consulting firm Macroeconomic Advisers estimates that Hurricane Harvey could ultimately shave more than a full percentage point off US GDP growth. At first glance, this may seem puzzling—shouldn’t the rebuilding process generate as much economic value as the storm destroyed?

But the myth of disaster stimulus is similar to Frederic Bastiat’s “broken window” fallacy. In this case, while repairing the storm’s damage will generate economic activity, the opportunity costs—lost time and production—can’t be recovered. Some of the country’s most productive industrial facilities may sit idle in the coming weeks as they await repairs. Millions of the area’s citizens will have to take leave from their regular jobs in order to join the rebuilding effort. The region’s economy will eventually return to full strength, but the productive capacity lost during the rebuilding process will never be regained.

A V-Shaped Effect

The economic impact of natural disasters tends to resemble a localized recession—productive activity drops sharply in the disaster’s immediate aftermath, then rebounds over the following months until eventually regaining its past level. A chart of the region’s GDP would show a steep V-shaped trough. The area within that gap represents lost productivity that can’t be recovered.

Rebuilding quickly is the best option for minimizing the damage. The sooner Houston is able to reopen for business, the less economic fallout there will be. The worst outcome would be if residents are left unable to access the resources they need to rebuild.

Houston will surely rebuild, and the affected area will soon be back to operating at full capacity. In the storm’s aftermath, emergency aid that helps speed up the recovery will be money well spent. Helping people rebuild their lives isn’t just a moral imperative; it will also yield economic dividends for the nation as Houston’s economy experiences less downtime.

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