Edward Lotterman's Real World Economics

St. Paul economist and writer Edward Lotterman writes the "Real World Economics" column for the Pioneer Press. In his article “In theory, disasters can have silver linings”, he is discussing that Natural disasters like floods, tornados and earthquakes destroy wealth but may spur economic production. He states that the destruction of wealth is a constant, but the degree to which production is spurred varies with size.
According to Lotterman, millions of households along the Texas Gulf coast are poorer than they were two weeks ago. In some cases, their net worth has been wiped out. But over the next months and years, a tremendous amount productive resources will go to replacing what Hurricane Harvey destroyed. These effects are indisputable.
Lotterman gave a brief summary about the effects of the F5 Tornado 1992, the flooding of the RED River OF THE North 1997, and Hurricane Katrina 2005. In all three cases, wealth was destroyed. Useful houses, businesses and other property providing service on one day was gone or useless a day or two later. The net worth of households fell.
For society as a whole, these were losses regardless of whether owners got any payments from insurance companies or government. Such indemnities transfer money from one person or entity to another, but don’t change the total income or net worth of society

overall. They do, however, play a big role in how the specific localities damaged come through in the long run.
Katrina, though about 50 times bigger, followed a similar pattern nevertheless.

Although in this case, the scale was large enough that some observers saw national effects on some categories of goods. The pace of recovery was much slower. The scale overwhelmed FEMA, the federal government’s disaster management program. Louisiana’s state and local governments did not shine. Louisiana generally and New Orleans in particular have lower average incomes than Minnesota or North Dakota. So there was less available cash for immediate recovery spending. Much property was uninsured against flooding. And the bureaucracy took time to get money

out.
Insurance claims were high enough that financial market observers noted increased bond selling by insurance companies as they converted reserves to cash to pay claims. Insurer’s profits took a hit that year. So in that sense, Bastiat again was right — the net loss of Katrina rippled beyond the increased economic activity of the recovery.
But U.S. and global financial markets are broad, deep and diversified.
Looterman is wondering if Harvey may well get into the same range as Katrina. When one gets to $100 billion dollars, can’t that affect the national economy?
So expect relief and recovery for Harvey to go on the national tab. Yet there is not a lot of slack in the national economy, at least by traditional measures.