Hurricane Irene's Aftermath: An Economic Stimulus or a Washington Battlefield?

Hurricane Irene flooding in New Jersey
Hurricane Irene flooding in New Jersey

For most of the past week, Hurricane Irene has cast a blustery shadow across the news spectrum, unleashing a deluge of stories about bottled water sales, media hype and the best songs for a hurricane playlist. However, now that the storm has passed, it's time to get back to discussing the country's most damaging unnatural disaster: the economy. Yet, even in this seemingly talked-out topic, Irene is making her impact felt, as economists and pundits across the country are debating whether the hurricane will help America's bottom line or drive it further into the red.

On the surface, the answer seems fairly clear: Irene hadn't even hit South Carolina on Friday when The New York Times' Nate Silver began estimating the billions of dollars in damage that a hurricane could do if it directly hit, nearly hit, kinda hit, or simply blew kisses at New York City.

(As a side note, if a Category 5 hurricane slammed into the Big Apple, Silver estimates that the costs would total more than $16 trillion -- roughly $2 trillion more than the current U.S. deficit and over eleven times the city's yearly GDP. Granted, this has never happened, and was certainly not going to happen last week, but -- as Silver noted -- it could happen, particularly in movies directed by Roland Emmerich and starring Jake Gyllenhaal.)

As it happened, Irene's damage -- while considerable -- was far less than the worst-case scenarios that Silver and other alarmists had predicted. The full costs of the storm are still unknown, but most analysts estimate that insured losses will range between $3 billion and $7 billion, a fraction of the $45 billion in damage that Hurricane Katrina wreaked upon the Gulf Coast and far less than the $14 billion that many were expecting. Part of this comes from the nature of the damage: Homeowners' insurance doesn't cover flooding, and the fact that Irene was initially categorized as a hurricane means that -- in some states -- insurers can charge policyholders higher deductibles.

In response to the better-than-expected news, the share price of several major insurers -- including Allstate (ALL) and Travelers (TRV) -- rose on Monday.

A Silver Lining?

When it comes to the larger economy, Irene could provide a hefty stimulus. Analysts are already predicting a big jump in construction and home-furnishings spending as beleaguered homeowners rush to repair and replace property that was destroyed in the storm. Economist Peter Morici estimates that this short-term consumer spending boost will total roughly $20 billion, and suggests that it may have some long-term positive effects. To begin with, he predicts a multiplier effect of about $16 billion as post-disaster spending works its way through the economy. What's more, as business owners replace destroyed property, Morici estimates that there may be a long-term economic improvement of more than $10 billion.

Other analysts agree; David Kotok, chairman of money management firm Cumberland Advisors, notes that his company is now predicting that fourth-quarter GDP growth may go as high as 3%, fueled by "Billions [that] will be spent on rebuilding and recovery."

Unfortunately, much of this growth will be dependent upon the political climate. Cumberland assumes that, among other things, "Washington may set aside the usual destructive and divisive partisan political wrangling and act in the interest of the nation." If this is the case, Kotok emphasizes, federal financial assistance will rush to troubled areas, quickly stimulating rebuilding efforts.

However, if the recent debt ceiling debate demonstrated anything, it's that "neither snow nor rain" nor the best interests of the country can slow down Washington's partisan wrangling. When it comes to post-Irene rebuilding, the battle lines have already been drawn: House Majority Leader Eric Cantor (R-Va.) is demanding other federal budget cuts to offset disaster assistance spending, and FEMA is in the middle of a funding crisis that -- barring quick action -- will undoubtedly delay some rebuilding efforts. Meanwhile, GOP presidential candidate and U.S. Rep. Ron Paul (R-Texas) reiterated his argument for killing FEMA altogether.

For voters still reeling from this summer's destructive debt ceiling debate, it's clear that the storms are far from over.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at, or follow him on Twitter at @bruce1971.

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