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News : US Economy Last Updated: Aug 29, 2011 - 6:37 AM


US economy is becoming more vulnerable to hurricanes
By Michael Hennigan, Founder and Editor of Finfacts
Aug 29, 2011 - 4:29 AM

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Hurricane Irene turned out to be less of a force on the US East Coast over the weekend than expected, leaving about 20 people dead. However, research suggests that the US economy is becoming more vulnerable to hurricanes. 

The hurricane, which had a wingspan from its centre of 500 miles wide, was downgraded by The National Hurricane Center to a tropical storm overnight Saturday and Irene's winds had dropped to 65 mph by 9am Eastern Standard Time (EST), Sunday morning. At 11 pm EST Sunday, the winds had fallen to 50 mph near the US-Canadian border.

The Wall Street Journal reports that society has become better at coping with floods, fires and other disasters, yet the damage from hurricanes is generally worse now than in previous generations, according to an oft-cited 2005 paper that has been updated with new data on the economic effects of hurricanes by William Nordhaus, a Yale economics professor.

“We appear to have become more vulnerable to hurricanes, all other things being equal,” said Prof. Nordhaus in an interview.

Nordhaus’s paper uses data from 233 hurricanes that have made landfall in the US from 1900 to 2008 and creates gauges for measuring how economic losses increase in proportion to the intensity of a given storm. One surprising finding was that hurricane damage grows substantially with even modest increases in wind-speed beyond hurricane velocity (above 74 mph).

The Journal says, for example, according to Nordhaus’s calculations, a hurricane with sustained winds of 108 mph would do roughly twice the damage as a hurricane with sustained winds of 100 mph. This finding had been originally doubted when Nordhaus published his paper, as other work on hurricanes had assumed that higher winds increased damages by a much smaller factor. “There is a tremendous amplifier effect in these kinds of storms,” he said.

The major conclusions from Nordhaus’s paper are: First, there are substantial vulnerabilities to intense hurricanes in the Atlantic coastal United States. Damages appear to rise with the ninth power of maximum wind speed. Second, greenhouse warming is likely to lead to stronger hurricanes, but the evidence on hurricane frequency is unclear.

Prof. Peter Morici of the University of Maryland, commented on Sunday: "Although, initially a Category 1 hurricane and now only a tropical storm, Irene is testing flood-level records in New York City and in much of the Northeast, raising casualty loss estimates to $20bn. Two days of lost economic activity, over a period of a week, is almost certain, and adds another $20bn. Longer term, rebuilding and postponed business activity will make up much of the near term impact on the economy.

Revised estimates of the direct damage caused by Hurricane Irene are in the range of $20bn. Add to those the loss of about two days economic activity, spread over a week, across 25 percent of the economy, and an estimated of the losses imposed by Irene is about $40 to 45bn.
 
However, rebuilding after Irene, especially in an economy with high unemployment and underused resources in the construction and building materials industries, will unleash at least $20bn in new direct private spending-likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.
 
Regarding the latter, consider a restaurant with inadequate patronage-its owner invests the insurance settlement in a new more attractive business. On the shore, older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season. The outer banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.
 
All of this is not to discount the direct costs to individuals by temporary and in some cases permanent displacements; however, when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before.
 
Factoring in the multiplier effect of $20bn spent rebuilding yields an economic benefit from reconstruction of about $36bn. Add to that the gains from more a more modern and productive capital stock-likely in the range of $10bn-and consumer and business spending that is only delayed but not permanently lost-likely in the range of $10 to $12bn-and the total effects of natural disasters of the scale of Irene are not large two years down the road."

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