No, that's incorrect. Replacing damaged capital is not an economic stimulus, it is simply replacing damaged capital. The $7 billion would be more productive if spent on new projects rather than replacing stuff.

Rebuilding re-allocates money that is held in trust by insurance companies, as well as personal and business money that would have otherwise gone to dividends or reinvestment (probably the former, since US business rarely reinvest any more). This creates a momentary boost in employment for construction, transportation and US manufacturing (lumber, plumbing, wiring etc.). While in the long run it doesn't boost the overall economy, in the short run it puts very real money in our lowest echelon of workers, where unemployment is currently hitting hard.

This illogical argument always irritates me because those who parrot it always do so as if it is completely true. Ok, people will have to spend $7B on reconstruction. But storms such as Irene are destructive rather than productive. They didn't create $7B in value, they destroyed $7B in value, so that $7B that will no be spent on reconstruction would have been spent on...?

Yep, in economics this is referred to as “the broken window fallacy”: A vandal breaks a store window, and the shopkeeper has to pay $500 to replace it, supposedly adding $500 worth of spending to the economy. But he could have spent that $500 on something else, and still had a good window.

Insured losses aren't automatically destroyed value because they represent losses that have already been paid for. If the economy were humming along, a storm might be an overall loss because the money paid out by the insurance companies could have been taken away from a productive investment.

But right now the insurance companies aren't able to do squat with their cash, so we ought to be better off if they pay out to people who will actually spend the money, than if they continue to sit on the premiums.

Thom,

$7B in reconstruction does not mean there was $7B in destroyed value. It is not a zero sum game.

For example, an old porch may be worth $5K, rebuilding it may cost $10K, the value of the improved home may go up $5K in the short term and $15K in the long term (assuming the housing market eventually recovers).

Insurance money churning in the investment market increases competition for stocks and bonds, creating artificial prices (and artificial value). Cashing in to pay for claims depresses stock prices but increases value and puts that money into working people's hands, where it circulates in the economy several times before being isolated back into investments again.

It is fine to debate whether all this means a long term net positive for the economy, but I can tell you one fact, it is a temporary net positive for a lot of working class people who don't have money in Wall Street.

Ken Marsh,

If the owner of the house was going to spend the money on something other than a new porch, then the cost of the damage is not $5K, it's $10K. Opportunity costs.

You continue to overlook the most basic thing here: all the money that will be spent would have been used somewhere else.

That somewhere else may have been something as boring as being invested in US Treasuries (which is the most basic way that insurance companies can "horde cash") to finance government spending, or it may have been invested in something even more interesting. Instead it will be used to rebuild from destruction. Of course, there will be winners and losers. In the broken windows fallacy this is made very clear, but destruction is never good economically.

JFCanton's remarks seem to have a lot to them. If the money isn't going to be used for anything else and, as he says, it is already there for the purpose of rebuilding, then it can only be helpful to the economy to use it for that. From what I can understand (and economics is even tougher to figure out than weather!), one of the big drags on our economic growth now is that money is simply sitting around instead of being invested into the economy. So I think Professor Morici has a point.