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The Economics of Harvey and Irma

September 14, 2017

The economically formidable reverberations that have ensued after the recent earthquakes are by no means surprising, but they are immensely important. Not only for the sake of the domestic economy, but for the markets abroad as well.

The number one priority at this point in time should be restoring what has been lost — both in terms of property and personal damage. People have lost their lives, and others have lost their friends and family. The economics of the disaster are intriguing, but they’re by no means as crucial as the safety and well-being of everyone in the affected areas.

 

Photo via The Atlantic 

 

The explicit damage inflicted is relatively easy to see. Buildings have been destroyed, schools have been closed, hospitals have shut their doors, and islands have virtually vanished. But the underlying implicit effects are just as, if not more, alarming.

 

In Texas, huge damage means that our country’s number one producer of oil and gas is out of commission, which brings down our GDP, and destabilizes foreign investment in that sector for the foreseeable future. The effects within real estate are both good and bad. Texas has seen a massive influx of residents in the last decade, which has led to a shortage of property and an inflation of prices. The hurricane won’t help the number of houses on the market, but it will eventually stimulate activity through rebuilding. Insurance companies are the one’s panicking in Texas. Contractors don’t build for free. They get paid with the money that’s reimbursed to those affected. For those who were smart enough to get insurance that covers hurricanes (which I hope most were), the damage caused will be backed externally, and although hugely devastating, the residents won’t be completely SoL. But there is a caveat. Most insurance companies don’t actually offer flood insurance. And since the majority of the damage came from floods, the National Flood Insurance Program is really the only thing set in place to back up something like this. And with the damage expected to reach up to $50B, the federal government will have to step in with financial injections to prop up rebuilding efforts.

 

Another concern is whether or not those affected had the value of their home updated in the past few years to reflect increased prices and decreased supply. With the way that the home market has exploded, the value of a home 20 years ago is only a fraction of what it truly is today.

 

In Florida, the outcome is too early to tell. The Keys have been hit the hardest, leaving millions without power, shelter, or even potable water in some places. Tourism will surely be hindered as a state frequented by vacationers. And similar to Texas, the downturn in their economy will be felt globally. The extent of the damage is not entirely known, but a huge concern is for the ports. Florida relies on 90% of its gasoline to come through their port infrastructure, but with many inactive, prices will likely surge and supply will be scant. As far as insurance goes, the effects will be similar, but not as devastating. Damage is expected to land around $30B, which is actually much lower than originally expected. Stocks soared earlier this week when Irma died down faster than most predictions had accounted for. Meaning, people will actually end up profiting from Irma when Insurance stocks rise again. The sickening part of that is to think that the system can still provide financial benefits in a time of such destruction. The comforting part is that the reinvestment into insurance is still, in some sense, like an investment into the rebuilding process if the money is ultimately being redistributed into the hands of those affected. 

 

The most important thing to concentrate on now is the rebuilding efforts. At this point the totality of effects is mostly unknown, but one thing is for sure – the damage from both Harvey and Irma will stay with us for many years to come.

 

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