Hurricane Sandy Reminds Us of the Shortfalls of GDP

By: Nina Brooks  

Hurricane Sandy caused widespread destruction with 56 deaths in the United States, 4 million people without power, public transportation shutdowns, and is poised to be the second most expensive storm in America’s history. While there has been some looting and increases in crime, overall we have seen a vastly more effective national response to Sandy compared to Hurricane Katrina. In low-income countries massive devastation from natural disasters is commonplace, but those countries have few resources to cope with the damage. On the other hand, in the United States the destruction will spark our productive and creative capacity to overcome the economic devastation. But there is something awfully perverse to that logic.

 

EQECAT, a catastrophe risk modeling firm, estimates the initial economic damage caused by Hurricane Sandy in the range of $30-50 billion. But this figure will likely grow over the next few weeks as the full impact of power outages and public transportation shutdowns are accounted for. By comparison, Hurricane Katrina caused $108 billion in damage. The New York Stock Exchange shut down for two full days due to the storm, which is the first time since 1888, and forecasters are making predictions for Sandy’s effect on 4th quarter GDP. “While natural disasters take a large initial toll on the economy, they usually generate some extra activity afterward,” said Moody’s Analytics Ryan Sweet. GDP is a flow measure—thus the existing stock of wealth is not included in that measurement nor is the destruction of that wealth, but the economic activity associated with rebuilding is included. As the nation, and particularly the Northeast, comes together and rebuilds the damage from Hurricane Sandy, the economic productivity generated could in fact offset the loss caused by the damage in the first place. This is why we often hear arguments about the “silver lining” of natural disasters.

 

This potentially pernicious aspect of GDP is exacerbated by the recession, as we are constantly looking for signs of recovery and GDP growth is still our go to indicator. GDP clearly does not capture all of the things that are crucial for producing a real economic recovery and generating lasting well being.  Rather than expending the nation’s productive capacity on creating new wealth, which is still desperately needed during this recession, we will be recouping what was lost as a result of Sandy. The problem with using GDP as a proxy for well being, when in fact it is a measure of productivity, has often been discussed and debated. But why haven’t we moved past the rhetorical debate? Hurricane Katrina was a wakeup call in this regard—but then America became complacent on this issue. Before the recession hit Europe, the Beyond GDP debate, which focused on looking for indicators that take account of environmental and social aspects that serve as better proxies for well being progress, was alive and well. This debate got to the heart of the natural disaster-GDP paradox. The aftermath of Hurricane Sandy presents an opportunity to revive that debate, which is central to thinking about economic recovery and resilience.

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