A Natural Disaster Does Not Increased Measured GDP

It’s common to be told that a problem
with the GDP statistic is that natural disasters increase measured GDP. Sadly, even some textbooks say this but as a
general matter it’s false. The broken
windows fallacy is a fallacy for measured as well as real GDP because the money
spent on new windows would have been spent on other goods and services.

Imagine that you are your friends are going to see a jazz
concert but on your way to the concert you have a little disaster, a fender
bender. Instead of seeing the show, you
and your friends have a miserable time waiting for the tow truck to come to
have your car fixed. Spending on the tow
truck and the auto repair counts as
GDP but it does not add to GDP
because it is counter-balanced by a decrease in spending on jazz, wine and cheesecake. Nothing Tyler says (see above) about
gross substitutability changes this fact.

Consider a bigger disaster, the 9/11 attack. First, the point already mentioned, the
resources used in the cleanup count as GDP but don’t add to GDP to the extent
that they would have been employed on other projects. Now it is true that some of the workers could
work overtime which they otherwise would not – this would tend to increase
measured GDP more than real GDP since leisure is not measured in the national
income and product accounts. Even this
factor, however, must be balanced against the overwhelming fact that the
destruction of the twin towers meant that tens of thousands of the most
productive people in the United States were forced into unemployment or death. Since GDP can also be measured as the sum of wages, rents, interest etc.
the immediate effect of all the unemployed and dead was to reduce GDP. Similarly, Hurricane Katrina has destroyed
more jobs in New Orleans than it
has added (and not all the added jobs represent real additions) hence the
Hurricane reduced measured and real GDP.

Also it is not true, as some sources claim, that destroyed
resources don’t count in the NIPA statistics – firms and the government count at
least some (but not all) destroyed resources as depreciated capital and thus measured Net Domestic Product automatically decreases with a disaster.  (n.b. corrected from earlier where I had said GDP instead of NDP).

Tyler asks “if a new hotel is
built, why should the gdp consequences depend on whether the lot had always
been vacant or a previous hotel on that lot was destroyed by a storm?” Answer: it doesn’t. In neither case can you assume that GDP goes
up. GDP is analogous to an individual’s
expenditures on goods and services. If Tyler buys a new CD does that raise Tyler’s
expenditures? Not if it doesn’t raise
his income. If all you did to measure
GDP was to count new hotels, new shopping malls, new spending then you would
far over-estimate GDP. GDP is a net
concept you have to count all expenditures precisely because some of the new
spending is offset by reduced spending elsewhere in the economy. It’s only after you have totaled that you can
calculate the increase in GDP.  (Note also Tyler’s error, if the new CD doesn’t represent a net increase in expenditures it can’t increase income on net either.)

If you follow through on the false logic you will
find yourself saying crazy things like crime increases GDP because of the money that people spend on locks. Of course, locks count as GDP but if people
weren’t buying locks they would be buying other goods so locks don’t add to GDP. GDP measures production it doesn’t measure
how production contributes to happiness.

There are plenty of problems with the GDP statistic and Tyler and I agree
that it’s conceivable that through a Keynesian effect or intertemporal substitutability
of labor that GDP could rise from a natural disaster but for this to work is
has to outweigh all the effects that I have listed and this is unlikely. Thus what we should teach our undergrads is
that measured and real GDP falls with a natural disaster.


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