Hurricanes are Great for the Economy (but Terrible for People and Places)

We’re hours away from having a better sense of where Hurricane Dorian is going to track. The nightmare scenario – a Category 4+ drive-by shooting along much of the east coast – is very much in play. As we had our own severe thunderstorm roll in here in Central Minnesota just before I started writing this, I was thinking about what it must have been like in the days before satellite weather forecasting. For the very unfortunate caught totally unaware, it was horrific, but for most of us, we would probably be better off not being aware of the meteorological Sword of Damocles during the days and days it is hanging there.

Predictably, the financial news – and even more distastefully, the political news – is already starting to speculate on the impact from the storm. Will it drive a wobbly economy, one teetering on the edge of recession, over the edge? Or, will it be a major economic stimulus, all the cleanup and rebuilding creating an economic boon?

Incidentally, we’ve been here before. I wrote about it in my upcoming book, Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity. From Chapter 5:

Going into the summer of 2005, there was general concern among economists and money managers that a recession was imminent. The yield curve was flattening as investors bought longer-term notes to lock in higher rates ahead of possible interest rate declines. The Dow Jones average was down 7% from the start of the year. The Federal Reserve was raising rates to get some wiggle room should the anticipated rate-cutting stimulus be needed.

Indicators were moving in the wrong direction, and then at the end of August came Hurricane Katrina, which destroyed large portions of New Orleans and the Mississippi Gulf Coast. A few weeks later, Hurricane Rita hit much of this destruction a second time. It was terrible, and like many Americans, I felt a sense of embarrassment over America’s seeming inability to do much to make things better.

For those of you not old enough to remember Hurricane Katrina and the devastation experienced in New Orleans, it was overwhelming. The number of people that died, and those that experienced deep despair before our eyes, was something many of us did not think possible in this country. I was able to visit many of the impacted neighborhoods in the years after and was heartbroken by the devastation. At a human level, it was a tragedy. At the community level, a strong case can be made that New Orleans has never recovered.

Yet, imagine you were a bean counter in Washington, D.C., or a Wall Street analyst, and you had no knowledge of what had taken place, just the readouts from your spreadsheets to inform you. You have no human accounts of the devastation, but just the economic data. What would your reaction have been to Hurricane Katrina?

The Congressional Budget Office has an answer. They released a report titled The Macroeconomic and Budgetary Effects of Hurricanes Katrina and Rita: An Update. Here’s what the report says happened to the economy as a result of these natural disasters.

Estimated Net Effect of Hurricanes Katrina and Rita on Real GDP

(Billions of 2005 dollars at annual rates)

2005, Second Half: –21B to –33B

2006, First Half: +24B to +36B

2006, Second Half: +35B to +48B

2007, First Half +33B to +47B

2007, Second Half +27B to +35B

The overall economy takes a hit immediately after the hurricane, but in the two years that follow, these disasters are a major stimulus. All the cleanup and rebuilding, all the recovery spending and one-time consumption, is great for economic growth.

This is the same stimulative effect anticipated by economist Paul Krugman when he (jokingly) called for the government to fake an alien invasion. If we were to mobilize people to fight off aliens, even though the work they were doing would not be productive (because there is no alien invasion), and even if it were a huge waste of resources (because there is no alien invasion), the overall effect of putting people to work –the flow of money through the economy – would be a positive for GDP.

I believe Krugman is right, if the goal is to boost federal GDP. This is the same logic that suggests World War II was a net positive and ended the Great Depression. Again, that may be true if the macroeconomy is the key metric of success, just don’t linger on the broad rationing of daily essentials, the destruction of centuries of accumulated wealth, and the death and suffering of tens of millions. If GDP is going up, then a macroeconomist like Krugman will argue that good is being done in the world.

I’m not saying anything original here. There are a lot of critics of using GDP as a metric for success (and, for those keeping score, the Modern Monetary Theorists are not among those critics). What I want to point out is how misaligned the goals and objectives for the macroeconomy are with what is good for the financial health and stability of our cities, towns, and neighborhoods.

Again, from my book:

That is the dichotomy. What is good for a national economy is not well aligned with what is good for a local economy. The national economy is focused on growth, a short-term metric that is not correlated with real wealth or broad prosperity. In contrast, a local economy depends on wealth accumulation, a long-term reality that correlates to stability.

If we worried about the national economy and didn’t care about what it meant for cities, local businesses, or families, we’d just pick a few random cities to destroy each year and reap the economic benefits of rebuilding. If we worried about our local economies, we’d obsess about real wealth creation, not growth.

It is relatively easy to optimize one or two economic variables at the national level, at least in the short-term, if we’re willing to ignore fragility or tolerate absolute failure in other realms. What our cities desperately need today is a more nuanced approach to capital investments, growth, and development, a harmonizing of objectives that can only happen effectively at the local level.

We can have a huge federal stimulus bill – we can build highways, high speed rail, and all the infrastructure an ASCE cult member can dream of – and that definitely will boost GDP, but what will it do for the balance sheets of our cities?

We can cut taxes and borrow money – we can print money and give it to banks and corporations and maybe now even indebted college students and potential homebuyers – and it will absolutely boost GDP, but will it make local communities more financially stable?

With our current development pattern, there is no reason to believe that it will. Dig a ditch and fill it back in and you’re right back where you started. Build a bridge instead and, sure, you have bridge you can drive on, but a generation from now you have a multi-million dollar liability to address and lots of friends and neighbors dependent on that happening.

Use the macroeconomic prism – the one that suggests hurricanes and wars and alien invasions are good for the economy – and you’ll go broke, and probably be scared and miserable along the way. Use a Strong Towns approach, obsess over the real wealth being created by this spending and the return-on-investment for a local community, and you’ll be stronger and more prosperous.

This is an inconvenient reality for the Krugmans of our society, those who believe in “a manageable world – [a world] manageable through the analysis of data.” Cities are not machines to be managed but complex, adaptive systems. They don’t respond to our grand plans in the simple ways our simple framing would suggest they should. Any economic accounting method that shows positive benefits from destroying people’s accumulated wealth is irrelevant to the project of humanity.

What is lost in all the centralization and efficiency is local nuance, or what most people would consider real meaning.

The bottom-up revolution we’re working on here at Strong Towns is to put us back in touch with that real meaning, to give local leaders the capacity to opt out of these systems that are grinding their places into decline. I pray that Hurricane Dorian dissipates before it causes any more destruction but, if it should not, that we all have clarity to see the humanity – and not just the economy – in the loss experienced by our neighbors.

Top image from Pierre Markuse