Jaison R. Abel, Jason Bram, Richard Deitz, and James A. Orr
Superstorm Sandy has had widespread effects in the tri-state region. Early estimates of the total national costs have been in the range of $30 billion to $50 billion. More recently, the New York State governor’s office has estimated state costs to be $32.8 billion, while the New Jersey governor’s office has calculated state costs to be $29.5 billion; these figures exclude mitigation costs—money spent to protect against future storms. It is important to remember that such figures incorporate two distinct types of costs: first, direct costs related to the destruction of physical assets, such as buildings, automobiles, bridges, and roads; and second, indirect costs related to the loss of economic activity resulting from the disruption. This post outlines the differences between these two types of costs, and also discusses what these cost measures typically neglect to include.
Direct Costs: Physical Damage
Direct costs measure the physical damage to the region in the immediate aftermath of the storm. We can think of this damage as falling into one of three segments of the economy:
- Households: damage to homes and personal property, such as furniture, automobiles, and boats
- Businesses: damage to commercial property, including facilities, equipment, and lost inventories
- Infrastructure: damage to the electricity grid, communications networks, subway and train systems, coastal roads and boardwalks, bridges and tunnels, water and sewer systems, and so forth.
As one might expect, determining direct costs is a difficult task and it is still somewhat early to get accurate measures. One estimate puts this cost at $30 billion nationally, with the vast majority occurring in the tri-state region. To put this figure in context, consider that the physical damage from Hurricanes Andrew and Katrina was $43 billion and $127 billion, respectively, in today’s dollars.
Indirect Costs: Lost Economic Activity
In addition to the direct costs, the severe damage to the region’s infrastructure from superstorm Sandy led to widespread disruption of the region’s economic activity. For example, while the damage to the subway system imposed direct costs, additional indirect costs were incurred because people were not able to get to work and businesses were not able to operate.
Conceptually, identifying these indirect costs can be tricky. Some activity that may first appear to be lost, particularly from the perspective of an individual person or business, is actually not lost to the region, but rather shifted across time and space. For example, if a person had planned to go to a Broadway show but did not because the theater was shut down or transportation was unavailable, most of the money that would have been spent is likely to be spent later on either another Broadway show or another entertainment event following the disruption. While there may be a loss to a Broadway theater in this example, there would be little or no loss in aggregate regional economic activity.
It is useful to consider two types of shifting:
Time shifts. As the storm approached, many consumers made purchases in advance, such as batteries, plywood, gasoline, food, and water, which to some extent offset declines in purchases during the storm. During the storm, some retailers shut down or saw major reductions in their sales as customers were unable to get to the store, wholesalers were unable to deliver goods, and banks were unable to process credit card transactions. These losses, however, were likely made up over time as store operations returned to normal and consumers returned to make their purchases. In the immediate aftermath of the storm, there was a widespread decline in activity at offices and other firms as workers, particularly in lower Manhattan, were unable to get to their jobs. These losses, however, were likely fully made up after workers returned to their jobs, though clearly in some cases making up the work required a greater application of effort and longer working hours than normal. A similar offset likely occurred for manufacturing plants that ceased operations during the storm but ramped up production once workers were able to return.
Geographic shifts. Some business activity was shifted from disrupted areas to areas where things were back up and running quickly. For example, in the aftermath of the storm, restaurants in upper Manhattan may have picked up business that would otherwise have occurred in lower Manhattan. Many hotels in midtown Manhattan were reportedly full during the days after Sandy, and it can be assumed that taxi and car services and some retail outlets (for example, those selling water, batteries, or generators) experienced strong business. Even in the more devastated seaside areas where effects were far more lingering, some activity loss was likely partially offset by increased economic activity in nearby areas. Still, that may be little consolation for the hard-hit areas’ restaurants or hotels, which might have had to lay off some workers or even go out of business. And, of course, this applies even more dramatically to businesses in hard-hit places like the Rockaways, Coney Island, Red Hook, Long Beach, and towns up and down the New Jersey shore.
So what should be counted as indirect costs? The answer is lost activity that was not completely made up as a result of these shifts. For example, some electricity was not generated because parts of the power grid were inoperable. Subway lines were down, airports were closed, flights were canceled, and many roads were unnavigable, all of which led to a decline in activity from the transportation industry. Other indirect costs stemmed from the shutdown of the stock exchange and other financial markets for two days, which led to some losses in the form of trading and other financial activity that would not be made up; similarly, services supporting financial activities may have lost some business during this time. In general, service firms find it difficult to make up for these losses, whereas manufacturing firms are better able to compensate for lost time by increasing production after returning to normal.
What Cost Estimates Miss
The costs of the storm do not include any surge in economic activity in the period following the storm when the area rebuilds much of the damaged or destroyed capital and infrastructure, a process already under way. Past experience with disasters suggests that this surge in activity over time ultimately can be as large as, if not larger than, the initial decline in activity.
Nevertheless, beyond the disruptions to economic activity, the storm imposed a variety of losses directly on residents of the region that are likely to go unmeasured and unaccounted for. First, roughly 130 people in the United States lost their lives. In addition, people in the region endured pain and suffering associated with the loss of homes and loved ones, and with the many other disruptions to everyday life, such as time spent waiting in line for gasoline, longer and more arduous commutes to work, and discarded perishable food. Because economic loss accounting typically ignores such costs, the true indirect costs arising from natural disasters are difficult to capture and may be understated.
In a series of upcoming blog posts, we will explore the economic consequences of superstorm Sandy in more detail.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Jaison R. Abel is a senior economist in the New York Fed’s Research and Statistics Group.
Jason Bram is a senior economist in the Research and Statistics Group.
Richard Deitz is an assistant vice president in the Research and Statistics Group.
James A. Orr is an assistant vice president in the Research and Statistics Group.