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Wednesday, October 31, 2012


Hurricane Sandy: Economic Implications

This post is in part a response to the other one done on Hurricane Sandy but I had planned on writing about this subject before I read the other, so it is to my good fortune that I have now have the ability to add a response to the other.  Upon reading the other I found that my initial analysis of the situation was very different from the other post.  Instead of thinking of the costs to homes and business that this storm would initially cause, I immediately thought of the growth in the construction industry that would most likely occur when these home and business owners rebuilt.  No doubt that there would be a huge initial decline in productivity in one of the United States most heavily populated areas, but shouldn't this also mean a huge rebound?  If we look at personal income levels in New Orleans after hurricane Katrina it would appear like the hurricane actually helped the economy.  In 2005 before Hurricane Katrina, the income per capita in New Orleans was 31,866$, two year after the storm the per capita income of New Orleans had risen to 46,120$.  Now in aggregate numbers this means that total Income rose from approximately 43.5 billion dollars to about 49.5 Billion dollars.  Now this may not seem worth it considering that the storm cost insurance companies, and reinsurance companies, about 38 billion dollars.  I think though that it was a decent trade off.  The insurance companies had money that was basically waiting to be paid to people in case of a loss, at least conceptually, therefore these insured losses were in a way planned for and therefor did not result in an actual drain on the economy.  When this insurance money was paid out it had a similar effect on the economy as increased investment, causing growth.  In the case of Hurricane Katrina, it was such an extreme natural disaster that several businesses chose to not use their insurance money to rebuild, but to relocate.  This did cause some long term economic pitfalls for New Orleans, however if they had chose to return it would have further boosted the New Orleans economy.
In response to the other article on this recent storm I think that the biggest losers, in financial terms, are the insurance companies.  They do not gain anything from a huge natural disaster like this. While insurance companies do have an expect of loss, they do not plan on having such a heavy loss at once.  In the aftermath of Hurricane Katrina Allstate chose to no longer provide insurance in this area, State Farm has significantly reduced the number of policies.  I do not think that these companies would have reduced or eliminated their presence in the area had they benefited from the massive storms.  I believe that this also shows that the insurance companies who will be making payments as a result of Hurricane Sandy will also not benefit from it in any way, in fact I believe the opposite is true.

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