Quick Note on Sandy Economics

October 30th, 2012 at 11:11 pm

Putting aside all the anxiety and serious harm to life and limb for a moment, let’s just consider the cold bean counting economics involved with a disruptive storm of this magnitude.

A quick list of economic negatives: 16,000 flights cancelled; Amtrak service disrupted; stock markets closed; retailers shut down; days of missed work and paycheck losses; physical damage to homes, businesses, cars, and even a few shut downs of NJ gas refineries that could show up as higher gas prices if the supply can’t be quickly replaced.

However, a few things to consider that push the other way.  I’ve seen rough loss estimates of around $20 billion, of which some (half?) will be replaced by insurance payouts.  Though retail, as noted, will take a hit, demand for storm-preparedness goods spiked big time before Sandy hit.  And many–not all–trips and activities that were cancelled before the storm will now take place afterwards.

And then there’s the difference between gross domestic product and net domestic product.  When stuff gets destroyed in a storm, that subtracts from the economy’s net product, but if it’s replaced, it actually adds to gross product.  One economist, Diane Swonk, estimates that Sandy will actually “add from two-tenths to half a percentage point to economic growth this quarter.”

I know–if you’re sitting there without power (as I am) with the stir-crazy kids driving you nuts, this is cold, wet comfort.  But there it is.

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6 comments in reply to "Quick Note on Sandy Economics"

  1. Michael says:

    So what if we went to some other state not affected by Sandy and replaced stuff there, say out of date power grids, old bridges, etc. without having to suffer from closed businesses, cancelled flights and trains, etc.?

  2. Andrew says:

    This should point out how screwed-up our analysis of a good economy actually is.

    If the GDP goes up because we’re spending money, we cheer. But in this case, there is no question that the resources we will expend to rebuild need not have been used at all should Sandy have not arrived. We should lament the necessity of rebuilding after a hurricane, but we won’t. We’ll be happy that people have jobs clearing the muck, fixing the infrastructure, and rebuilding homes.

    Jobs are about production. We shouldn’t cheer production. We should cheer when we don’t need to produce. That is the point of automation and gains in efficiency, isn’t it? It shouldn’t take a hurricane to make this point clear.

  3. Chris G says:

    Fair to call Net Domestic Product a measure of ‘wealth’?

    Thinking out loud:
    Massive destruction may cause GDP to go up but GDP doesn’t capture the loss of wealth resulting from the destruction. In contrast, NDP should capture that.

    • Jared Bernstein says:

      Correct–‘net’ is what’s around to actually be consumed, invested, etc.

      • Chris G says:

        Got it. Another general question: What’s the timescale on which disasters like this are a drag on NDP? I have no feel for that. Half-life of six months? A year? Multiple years? For example, any quantitative estimates of how long the effects of Katrina were felt? Thanks.

        • Jared Bernstein says:

          Very much a function of the magnitude of storm damage and underlying conditions of infrastructure/housing before the storm–Katrina classic eg of a huge storm smashing a poor area so took years. Sandy hit hard but in places with relatively stronger infrastructure, though NYC was really devastated and I suspect it will be many months before fully recovered. Institutional differences matter too…we’ll fix the financial markets before Ward 8. Not saying it’s right, but that’s how it will work.