At Forbes, Tim Worstall patiently explains that the damage from Hurricane Sandy (or any major storm) will appear to boost GDP, because it only measures money spent to repair damage, not the costs incurred or the opportunities foregone because of the damage:
We know very well that Hurricane (or Frankenstorm as some are calling it) Sandy will leave a trail of destruction across parts of the US today. There will almost certainly be deaths, as there have been in the hurricane’s passage across the Caribbean. And there will also be a boost to the US economy. Which is really evidence of quite how wrong we are in the way that we measure the economy.
[. . .]
The problem with this is that it is only true because of the way that we calculate GDP. In our working of the numbers we assume that it’s final consumption at market prices: that is, the value that consumers put on everything. However, this is not true of government spending. It’s very difficult indeed to work out what government spending is actually worth: for as we’ve not a choice in it then there’s no market price nor accurate valuation from the people who actually get whatever is produced. Some government spending is most certainly worth more than the actual amount spent. The court system say: a pre-requisite of our having a complex society at all. Other parts not so much: what is the true value of a diversity adviser for example? So what we actually do is value all government spending, for GDP purposes, at the cost of that actual spending. Government spends $100, GDP goes up by $100. That’s just how we define it. This can cause amusement in measuring the success of welfare programs for example. Even Census admits that some of the people who receive Medicaid, or food stamps, value what they receive at less than the cost of providing it.
[. . .]
Now imagine that Hurricane Sandy does $10 billion of damage to that wealth (for our purposes it doesn’t matter whether it’s $100 billion or $1 trillion. Although this obviously matters to everyone except for the purposes of this example). The US is now worth $99.990 Trillion. GDP might rise to $15.1 trillion as we repair that damage. But we’re not in fact any richer at all: despite the fact that GDP has gone up. What has actually happened is that some of our stock of wealth has been destroyed and we’re having to do more work in order to rebuild it. This is exactly the same as our pollution example. We’re measuring what we produce but not the capital stock of what we have (or had).
Yes, the rebound from Sandy may well provide a boost to the economy. But that’s a function of the way that we measure that economy, not a real boost in our general wealth.
