Do Natural Disasters Improve a Country’s GDP?

There has been some discussion on the internet this last week about the positive effects on the country’s GDP after a Hurricane hits a particular area. The activity that GDP measures (rebuilding, supplies, etc.) get a “boost” of spending when a site is rebuilding, but the GDP measure (which many folks use as shorthand for the economy) isn’t really built to measure this sort of thing.

The Econoproph wrote, back in 2011 (after Hurricane Irene): What will show up in GDP measures after the natural disaster is a perverse reaction in the months after the disaster.  This comes because of the re-building activity that comes after the disaster.  Repairing buildings, cleaning up, rebuilding all require paid services, building supplies, labor, etc.  These transactions will show up in GDP measures in the months/quarters after the disaster as an slight increase in total GDP.  But it’s a deceptive increase in total GDP because we aren’t really significantly better off.  We’re just getting back to the condition before the disaster.  GDP counts the fixing, but not the damage done.  This is why we sometimes hear commentators say that a “disaster is good for the economy”.  It isn’t really.  It’s good for GDP, but that’s not a perfect measure of the economy.  The mistaken idea that damage or disasters are good for the economy is what economists call the Fallacy of the Broken Window. It was first explained by Frederic Bastiat.

 All this activity is doing is getting us back to “0”, which isn’t that helpful. It would actually be more helpful if we had spent the funds on hurricane damage preventive measures in the years prior to. One just has to look at New Orleans (which saw a massive rebuilding since Katrina – but which has leveled off). It hasn’t really recovered to where it was, and it has lost a decade of potential growth while rebuilding.

One other part that will affect the GDP is the price of oil and gasoline in the country. As we work to get Houston back on-line (and potentially other areas depending on the Hurricane season this year), folks have already seen the price of gas go up 20% or more in their local area. This will have a net drag on GDP growth, and the economy, as funds are diverted to purchase gas that could have been used elsewhere.

I’ve got family in Florida, and my prayers go out to them, and to all the other folks in TX, FL and other states affected by the Hurricanes this year.

 

Mr. 39 months

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