Sandy Flooding

Sandy will likely have a $20 billion pricetag

By now you’ve probably heard about or seen the consequences of Frankenstorm Sandy, especially along the Jersey Shore and in the five boroughs of the New York City metropolitan area.

The evacuation of NYU Hospital. The flooding of the New York City subway system. The shutdown of the New York Stock Exchange on consecutive days due to weather for the first time since 1888. The transformer explosion on 14th Street which cut power to most of Manhattan below 39th Street. The evacuations in Bergen County after a levee broke. The alert at the nation’s oldest nuclear plant. The 16 inches of snow in West Virginia. The 7.5 million people without power. The 15 dead.

Despite all of this, and the expected $20 billion price tag, economists do not expect Sandy to drastically impact the US economy. The most populous area of the country is basically spending 3 days in October – 10% of the month – at a standstill, and nobody knows how long it will be to put everything back together. But analysts are standing firm.

“Assuming the storm simply disrupts things for a few days and it doesn’t do significant damage to infrastructure, then I don’t think it will have a significant national impact,” Mark Zandi, chief economist at Moody’s Analytics, said Monday.

The economic impact could be more severe if the storm damages a port or a major manufacturing facility such as an oil refinery, Zandi noted.

The economy expanded at an annual rate of 2 percent in the July-September quarter. Zandi said he isn’t changing his forecast for similar growth in the current October-December quarter of 1.9 percent. Economic activity in October and November might slow if factory output declines and some workers are laid off temporarily and seek unemployment benefits. But the economy could strengthen in December as companies rebound.

The MTA subway damage, described as the worst in history, could count as significant infrastructure damage. And since this hit at the end of the month, my guess is the revisions of the October data, not necessarily the first looks, could be brutal.

But there’s another way that the economy could take a major hit from Sandy. That’s if the sequester takes effect as scheduled, taking nearly $1 billion ($878 million specifically) out of FEMA’s budget. Right now, the emergency management agency says they have the means to fund all requests. But that may not be the case after January 1 if Congress fails to act.

The spending cap from the debt limit deal presents problems even if the sequester gets cancelled or delayed:

Even if the sequester doesn’t take effect, federal disaster relief already faces new funding limits. Under last year’s Budget Control Act, lawmakers agreed to $917 billion in cuts over 10 years that would occur regardless of what happened with the supercommittee and the sequester. The cuts began in October 2011, and they’re happening through new spending caps on both security and non-security spending.

Congress make an exception to these new spending limits for disaster relief funding. But there’s a hard cap on any funding increase as well. According to the Congressional Research Service, disaster relief funding “cannot exceed the average funding provided for disaster relief over the 10 previous fiscal years, excluding the highest and lowest funding years. OMB estimated this figure to be $11.3 billion for the 10 years between FY2002 and FY2011.”

So even in the advent of an unprecedented disaster, Congress would have to pass new legislation to bypass these funding limits for disaster relief after a certain point.

I would guess that Republicans in Congress can be shamed into providing disaster relief for desperate communities, but this nearly came to a head at the end of the 2011 fiscal year, until OMB “found” the money to cover FEMA for the last few days before a new funding commitment kicked in. This situation would in all likelihood not have the same dynamic.

Having a disaster relief funding mechanism based on prior history only makes sense in an era without catastrophic climate change. Otherwise we’re going to find ourselves in this situation practically every year. And that will not only lead to human costs, but economic ones as well.
mic ones as well.

Photo by myklsc under Creative Commons license