The Upside Of Hurricommerce

As this article is being written, Hurricane Matthew is wreaking havoc along the Florida coastline.

As the storm remains ongoing, its costs are not yet known, but there is little in the way of argument that, when all is settled and the waters have receded, there is going to be a very, very significant and very expensive pile of damage left in its wake.

Forgetting for a moment the cost to human life and happiness — which will certainly be as incalculable for this storm as it has been for every other natural disaster in human history — the simpler cost in dollars and cents will very calculable and likely horrifying.

Hurricane Irene in 2011 did between $7 billion and $13 billion in damage during its 10-state rampage up the East Coast. Hurricane/Superstorm Sandy didn’t quite have Irene’s range, but it more than made up for it in cost. At $65 billion, it was the second most economically costly storm in U.S. history.

And then, of course, there is the “winner” and granddaddy of them all — 2005’s Hurricane Katrina, which did a whopping $125 billion in economic damages. To put that in some perspective, if one took the 10 smallest annual state budgets, combined them and doubled them, there still would not be enough there to pay for Katrina’s damages. The damage from Katrina was so severe that now — 11 years later — the affected neighborhoods are still not quite done rebuilding from it.

Hurricanes, blizzards and all make and manner of supercharged storms are, almost unfailingly, bad, bad news economically speaking. Money is lost, businesses are destroyed and property, literally, goes right out to sea.

But we at PYMNTS are eternal optimists and believe every cloud has a silver lining — even if said cloud happens to be a pitch-black thunderhead that is currently swirling about as part of a terrifying cyclonic storm. For example, Hurricane Matthew will be an economic catastrophe to be certain, but at this point, there is almost universal agreement that it will be far less a catastrophe than it might have been if the storm had come in an additional 20 miles inland and made landfall as a Category 4 hurricane. Florida will be badly damaged as a result of what happened this weekend. The worst-case scenario would have looked a good deal more like completely destroyed.

And even for all the economic destruction that comes out of a storm, there are also moments of ingenuity and creativity. Now, don’t get us wrong, hurricanes are mostly bad — almost entirely bad. But every once and a while, the really bad weather coughs up a really good idea for payments or commerce.

For example…

Natural Disasters May Be Good For Economic Growth

It’s counterintuitive to think it, given the amount of damage they do, but an increasing body of research seems to indicate that natural disasters, over the long term, aren’t the worst thing that can happen to a place, because they actually are positively correlated with economic productivity over time.

There is a reasonably large grain of salt to be taken here. The economics of disasters remains a small field of study, with few major papers published, and there are a load of skeptics about the field. But studies done over the last 10–20 years have found that earthquakes in California and Alaska helped spur economic activity there and that countries with more hurricanes and storms tend to see higher rates of growth.

Part of that is common sense: Something blows down, burns down or washes out to sea, one will have to rebuild it, which creates economic activity. But the studies indicate the effects aren’t just limited to the activity spent fixing what was there before. On Good Friday, 1964, Alaska suffered the worst earthquake in U.S. history (and the second worst in modern history), but Douglas Dacy and Howard Kunreuther’s case study on the 1964 quake strongly indicated that the money that rushed into the Alaskan economy after the disaster and the generous government loans and grants for rebuilding meant that many Alaskans were actually better off afterward.

“We got a lot of hate mail for that finding,” noted Kunreuther, who went on to become professor of business and public policy at the Wharton School.

But it isn’t a unique finding. Economist Gus Faucher, director of macroeconomics at Moody’s Economy.com, found similar data when studying the effect of Hurricane Andrew on Florida’s economy — complete disaster in the short term, good news in the long term.

But there is a big caveat: It only works if the area is rebuilt, and the destruction is the result of a one-off act of God. If the decimation is too complete or happens too frequently, the effect doesn’t take hold.

Hurricane Katrina is an exception, according to Faucher, because so many residents left the area and never came back because government aid was slow. Similarly, war zones are almost never benefitted by being war zones.

“Over any reasonably relevant period of time, society is not made wealthier by destroying resources,” Donald Boudreaux, an economics professor at George Mason University, noted. “By that logic, Beirut should be one of the wealthiest places in the world.”

OK, so disaster is not necessarily great for the economy except for in specific instances, but even those instances themselves provide an opportunity.

For innovation.

A Flood Is An Excellent Time To Think Outside The Box

“When something is destroyed, you don’t necessarily rebuild the same thing that you had,” said Mark Skidmore, an economics professor at Michigan State University. “You might use updated technology; you might do things more efficiently.”

The same studies that demonstrated that destruction — from time to time — isn’t the worst thing for economies also found that limited destruction is also tied to creative thinking and, at times, innovative solutions.

In some sense, that isn’t all that shocking. If the wind blows a house down, in the future, they will likely work to improve the design.

But the innovations that swim to the surface aren’t all engineering-related. In fact, one of the most beloved financial services innovations ever came as the result of a natural disaster.

The Blizzard of ‘78 to be specific, when the Eastern seaboard found itself buried and its banks closed down.

Problematic in the era before debit and credit cards were a common feature of an American wallet. In fact, in 1978, most consumers didn’t use ATM cards. The ATM was invented in the mid-1960s but was initially something of a flop with consumers, who didn’t trust them.

That changed when the banks were shut down for three days and customers needed access to cash to buy food in rapidly emptying grocery stores. In the course of a weekend, ATM cards went from something Americans weren’t sure how they felt about to something several million New Yorkers were willing to swear by.

The rest, as they say, is history.