Sandy, losses, and GDP

From a story in the New York Times, 31 October 2012:
“Even as businesses struggled on Monday to gauge and contain the damage from Hurricane Sandy’s slow move up the East Coast, economists played down the likely long-term effects. The recovery after the storm, they said, could actually pump up growth temporarily in a few sectors, like construction and retail sales, when cleanup begins in earnest in a few days.”

The last sentence of the story:
“It’s a problematic aspect of how we account for economic output,” said Mr. Carroll. “Of course, it’s terrible when something is destroyed. That doesn’t show up in the calculation of gross domestic product. However, the rebuilt house does.”

The above illustrates the craziness of economic “theory” these days. There’s no reason that the loss of the house should not be included in the GDP calculation: just include the cost of rebuilding it as a debit. This would show the loss of the house as net decrease in GDP, which it surely is. That is if we want to think of GDP as a measure of wealth-creation, as most people seem to do.

In fact, as shown by the above comments, GDP is the aggregate value of money transactions. It tells us nothing about the net increase in wealth. The $20 billion or more in storm damage will be shown as a $20 billion increase in GDP, but I don’t think wealth will increase by 20 billion dollars. Most people I think would see those losses as exactly what they are: a reduction wealth. We can reasonably expect to replace those losses. If we are cunning, politically savvy, and lucky, we may be able to replace those losses with more wealth at the same or even less cost: technology does offer that possibility.

Some transactions obviously increase wealth, such as building a house or educating a child. Others just as obviously decrease wealth, such as tearing down a block of derelict buildings, or shutting down a research project. If the buildings are replaced, there may be a net increase in wealth, but that doesn’t always happen. Some transactions are iffy: does a loan to a business build wealth, or not? Depends on how well the business does, I suppose. Some do both: a fighter plane is a waste of resources, thus a reduction in wealth; but the people who build it spend their wages on wealth that other people produce. There may or may not be a net increase in wealth.
           
In short, many transactions that the GDP calculation shows as increasing the GDP ought to show as debits. In general, it’s obvious what the debits are. When it’s not obvious, more careful analysis is needed, beginning with a clear definition of wealth. Too many people think of money as wealth. It’s not. What you get in exchange for money is wealth. But not everything you can buy is wealth: cigarettes destroy your health, so they are a debit.

All that being said, there’s a lot more to wealth-creation and sharing than is captured by GDP. Last night, one of the CBC reporters in Atlantic City told how they had helped rescue a few people, because their SUV had high enough ground clearance to get through the flood at that time. This will not show in the costs of the storm. But that CBC crew may have saved those people’s lives. Great wealth, given in exchange for nothing at all