“Devastating storm may ultimately boost US GDP” read the headline on CNBC’s Market Insider. Much like the debate around price gouging (addressed here), every storm or natural disaster seems to bring with it a discussion of whether physical destruction, or at least the aftermath and reconstruction arising from it, is somehow “good for the economy.”
Now, the particular CNBC headline above may prove to be right or it may prove to be wrong for a given period, as I’ll explain below. It’s purely an empirical matter. But examining the economic impact of hurricanes such as Harvey through assessing movements in short-term GDP alone is clearly a very partial account of the legacy of such a storm.
Firstly, the obvious point. Hurricane Harvey has destroyed property and hence destroyed wealth. This is unequivocally bad for the economy. Studies from Goldman Sachs and others estimate the economic destruction at anywhere between $30–40 billion.
Yet wealth is a “stock” concept, whereas measured GDP is a flow of activity in a given period. In principle then it is less obvious what the short, medium and long-term impacts of a hurricane on measured GDP (a measure of economic value-added at market prices) would be.
The very short-term impact of such a storm on GDP is almost certain to be negative. Hurricanes destroy productive capacity, disabling factories and, in the case of Texas, curtailing the oil refining sector. This acts as a negative supply-shock to both the local and national economy, with higher gasoline prices (an input to travel and production processes) filtering through to raise input prices and hence production costs.
Of course, as the effects of the storm wade, rebuilding activity and construction will begin. This will count towards GDP, and as much of GDP relates to voluntary activity that has real value-added, so it should. People will genuinely want to replace destroyed or damage homes, cars, fences, and the like, and this is valuable economic activity. In Houston this reconstruction and redevelopment is likely to be quicker than if it occurred in many other areas, due to the less restrictive zoning laws and hence lower transaction costs associated with new building.
But will all this increase GDP overall, relative to a counter-factual in which the storm had not taken place?