Natural Disasters & GDP

Marginal Revolution has a point / counterpoint regarding whether measured real GDP increases or decreases in response to natural disasters.

My summary answer: with high confidence, we know that real measured GDP decreases in the disaster area in the immediate quarter. With less confidence, huge government borrowing to aid victims in the next several quarters does increase local and national measured real GDP, but disruptions in local markets cause increases in national prices that will have a negative impact more than offsetting the short-term gains from borrowing; llocal gains in the quarters following a disaster are paid at large national expense. Even the gains are transitory, since they are spent largely on non-investment goods, and repayment will lower measured GDP. GDP growth will be low in the disaster area for several years. National growth will be largely unaffected.

There are several ways to go about measuring the impact of an event on a metric. Since this is a lunchtime analysis, why not look at the aggregate data of Katrina's impact? Hurricaine Katrina hit Louisiana (and Mississippi) during the middle of 2005Q3, so we should see some effects in the 2005 advance annual estimates. And we do. In 2005, Louisiana was the ONLY STATE in the nation to have negative GDP growth, -1.6% year over year, compared to 2004.

So in the short term, in the area of disaster, measured GDP decreases. Still unanswered: did the rest of US have higher GDP growth because of this? I don't know. (We do know that energy prices and other materials went up, lowering real measured GDP elsewhere, but that some manufacturing production shifted quickly, while Wal-Mart re-opened pretty quickly).

What happens after the short term? We can look inside Louisiana, quarter by quarter in 2005 and 2006 using personal income estimates, not GDP. According to these data, Louisiana personal income decreased by (a seasonally adjusted annual rate of) -49.5% in 2005Q3 and increased by 106.7% in 2005Q4, with tepid increases of 0.2% and 0.8% in 2006Q1 and 2006Q6 -- the worst 2006 performances of any state in the country for both quarters. But that's income (including transfers), NOT production.

So the only hard evidence we have is that, in one disaster area, measured GDP halved in the immediate short term, and doubled in the following quarter. What happens elsewhere, we'll leave to theory. After the initial hit, personal income in the disaster area increases in response to outside aid and rebuilding efforts. Given the personal income reported, it is likely that Louisiana's measured GDP growth will be very low in the medium term -- even with aid. Now, do we expect outside aid to increase measured GDP outside of Louisiana? No.

Another way of thinking about this is where the aid is coming from. Basically, the U.S. Federal government has and will borrow around $100-$200 Billion, mostly from overseas, to give to Katrina's victims and to rebuild. The average maturity of governement debt is what, five years? So this borrowing, tranferred to consumers, ups income and product sides of NIPA right away, and lowers it when the government repays -- or so says Joe Stiglitz.

Well, time's up.

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This page contains a single entry by Kevin published on October 25, 2006 12:40 PM.

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