Devastating hurricanes have a few beneficial side effects
NEW YORK – Sept. 21, 2018 – Hurricanes impose huge losses of wealth and initially slow regional economies, but over time they can be a tonic that creates more prosperous communities. After Florence, resort areas along the coast and thriving commercial areas inland are likely to rebuild quickly, but poorer, rural inland communities may be left to languish.
Initial estimates of the destruction from the storm range of $17 billion to $22 billion but may go much higher. The sums paid out to homeowners will only be a fraction of losses because many homeowners' policies do not include flood coverage and often contain high deductibles for hurricane damage.
As hurricanes go, Florence could be among the 10 most costly to hit the United States but won't be near the top of the list. When Katrina hit New Orleans in 2005, the figure was $161 billion, and last year, Maria hit Puerto Rico and Harvey trounced Texas with losses of $90 billion and $125 billion.
Florence's path includes valuable beach homes, hotels and attractions, and inland activities vital to the national economy – Boeing, Daimler and Volvo factories halted production ahead of the storm.
Hurricanes hitting those areas provide opportunities to start over and replace with larger and more modern facilities. After Hugo (1989) and more recent storms hit the Outer Banks, smaller beach homes on large plots were replaced by structures with more bedrooms, baths and attractive kitchens that could more comfortably accommodate large families and command higher rents. Insurance settlements permitted owners of aging restaurants and amusements to reinvest in more attractive businesses.
This increased the value of the shoreline and nearby shopping malls and other businesses. It permitted owners who were inadequately insured to more easily borrow to rebuild or recoup some of their losses by selling land at better prices.
Seventy percent of the flood damage imposed by Harvey, which hit Texas last year, was not insured. Many homeowners took their chances with the weather and got burned, or were not aware that ordinary homeowners' policies often don't cover flooding. Many moderate-income families and smaller businesses are struggling and may never find the money to rebuild.
In some rural areas, far from coveted beachfront and big employers, the values of property and homes were well below the regional and national averages before the storm. Those communities may never adequately recover – land values, if anything, will lag further and permanently.
It seems homeowners and businesses buy insurance immediately after a hurricane, become complacent as storm memories fade and then get caught when disaster strikes again. Communities hit by Florence are ripe for a repeat of such tragic situations.
The National Flood Insurance program has about 134,000 policies in place in North Carolina – less than 15 percent of residences and down 3.6 percent from 2013.
Economic impact less than thought
Storms temporarily depress regional economies but not as much as folks think – a lot of activity gets shifted around. Folks evacuated, factories closed and movie theaters lost a lot of patronage ahead of Florence, but inland shelters hired staff, fleeing evacuees purchased gas and groceries, hardware stores did a robust business in sandbags, emergency pumps and the like, and livestock producers piled up on feed and fuel to keep their animals safe in barns.
When the storm passes, lost production at aircraft and auto factories will be made up and the rebuilding of homes and commercial establishments will have profound multiplier effects for the local economy.
On net, storms tend to subtract from GDP in the early months and add to it in later months – leaving the economy, on balance, with few overall effects after a year.
We are poorer – property and wealth are destroyed. Payouts from insurance companies reduce shareholder value. Uninsured property owners in more attractive locations may get a lift in land values, but those gains do not fully compensate for ruined residential and commercial structures.
Those who plan ahead – buy enough of the right insurance and don't build on the shore or flood plains unless their business interests absolutely require – generally recover. Investors from outside the region get opportunities to bring in new capital to improve local economies.
Those that take their chances with the weather lose. They get saddled with bigger mortgages or too little money to rebuild and broken lives.
Copyright © 2018 News World Communications, Inc.; Peter Morici is a professor at the Smith School of Business, University of Maryland, and former chief economist at the U.S. International Trade Commission.