Do Hurricanes Help Local Economies in the Long Run?

Regina Perry carries wet sheetrock as she cleans out of her home that was inundated with water as she begins the process of rebuilding after Hurricane Harvey caused widespread flooding in Houston. Joe Raedle/Getty Images
Regina Perry carries wet sheetrock as she cleans out of her home that was inundated with water as she begins the process of rebuilding after Hurricane Harvey caused widespread flooding in Houston. Joe Raedle/Getty Images

Economic math doesn't always add up. The strength of an economy is gauged by its gross domestic product (GDP), which is measure of production or total economic activity. By that math, it's possible to say that a catastrophe like Hurricane Harvey could be a "good" thing. That's because the billions spent in Houston on cleanup, construction and infrastructure upgrades will invariably boost total economic activity and raise GDP.

"If that were true, then everybody would line up to have a hurricane strike them," says David Letson, an economist in the Rosenstiel School of Marine and Atmospheric Science at the University of Miami. "There's an injection of money from other areas and that can show up as local investments. It's true that you get new buildings and new technology, but those resources could have gone to other uses. So, no, it's not a good thing."

This is an example of the broken windows fallacy, first illustrated by French economist Frederic Bastiat. If a boy breaks a window, his father has to pay the windowmaker for a new one, so theoretically the windowmaker now has extra money to spend on something else and stimulate the economy. But what this also does is leave the father with less disposable income to pay the butcher or the shoemaker. So, there isn't really any economic gain.

In theory, catastrophes like hurricanes can kickstart local economies, but only if that economy exhibited certain characteristics before the storm. For example, back in 2010, the Houston economy was in a recession. As The New York Times points out, unemployment in Houston was as high as 27 percent in 2010 and that included millions of construction workers. If a hurricane like Harvey had struck in 2010, it would have brought those idle skilled workers back on line.

But the Houston economy in 2017 is very different than it was 2010. The oil sector has made a comeback and so has the housing market. Before Hurricane Harvey hit, unemployment in Houston was down to 4 percent. There wasn't an excess of skilled construction workers, but a shortage. According to an August 2017 survey by the Associated General Contractors of America, 70 percent of contractors in the South said they were having trouble finding craft workers.

"If you have slack in the economy, resources that are completely idle, then yes, you'd put them to work," says Letson. "But that's usually not the case. We're not in a depression now."

The immediate result of Harvey is that tens of thousands of Houston-area construction workers are going to be diverted from growth-related projects to demolition and rebuilding. And the boom in demand for construction projects is going to require an influx of crews from outside of Houston. So much of that federal aid and insurance money will ultimately leave the area.

The short-term economic effects of a catastrophe are clear. Massive losses to property and capital are somewhat offset by an influx of outside money. But the long-term impact of a Hurricane like Harvey or Irma is incredibly hard to predict, and it changes from location to location, economy to economy.

It's still too early to measure the damage of Hurricane Irma on Florida but even if the damage to infrastructure is relatively low, there will still be losses to the tourist and agricultural economies.

Michael Dolfman was an economist with the Bureau of Labor Statistics when Hurricane Katrina hit New Orleans, causing massive flooding that took more than 1,500 lives in Louisiana alone. Ten months after the storm, he co-authored a report tallying the economic costs of Katrina to the people of New Orleans.

During the three months directly after the hurricane and flooding, New Orleans lost 105,300 jobs -- that's more than 40 percent of the city's workforce at the time. The heaviest losses were in tourism and retail, although health care and social services also took a hit. Many of those jobs never came back.

"New Orleans was hurt bad by Katrina. Some people say it never really recovered," says Dolfman. "They lost population.Their economy was driven by tourism and local things: education, transportation, food services."

Ten years after Katrina, the Brookings Institute found that once the post-storm rebuilding boom had passed, job growth in New Orleans was sluggish, and seven out of 10 jobs that did return were low-wage, like tourism and retail.

Dolfman believes that Houston won't follow the New Orleans trajectory. The two cities suffered catastrophic flooding, but that's where the similarities end. Unlike New Orleans' highly local economy, Houston's economy has a national, even global impact. Houston is the fourth-largest metropolitan area in the country and its GDP is half a trillion dollars.

"The country and the world needs what Houston produces in terms of oil," says Dolfman. The larger economy also depends on Houston's contributions to the healthcare sector – [like] the MD Anderson Cancer Center – and on its robust manufacturing sector. Because Houston's economy was vibrant and global before the storm, Dolfman says, "those jobs are going to come back."