Hurricanes Increase GDP

In a prior post I took a deeper look at what the large epidemic, the Zika virus, will cost the world. Similar to Zika, category 3 storm, Hurricane Matthew, is a type natural “disaster” that will have an unstoppable effect on the economy. There are at least 200,000 homes along the coast from Florida to North Carolina at risk of damage from the storm surge alone.

Due the potential to affect such a broad geographic area, some sources are claiming that Matthew could be one of the costliest hurricanes in U.S. history estimated to cost just Florida as much as $269 billion dollars in damages, outbidding the price tag on Hurricane Katrina. In addition this hurricane can have irreversible damage on Florida’s tourism industry and the surrounding areas.

Yet Forbes opinion writer Tim Worstall claims that these damages will actually increase GDP. This claim falls on the assumption that when we rebuild a damaged area, this extra economic activity will naturally increase GDP.

But Worstall continues to argue that although GDP increases, the misconception is that we will all be richer – which is false.

GDP is the value added in a particular time period, not the actual value that one can consume in a period. So when a house is torn down, no one is able to get value from it, which is why it must be rebuilt- almost like a zero sum game. But, just like common sense would tell us, the results are actually worse than had there been no hurricane due to of the opportunity cost of the money spent to rebuild. Had that money been saved it could have been put towards adding legitimate, new value to the economy.

So if you ever see statements about how Hurricane Matthew will raise GDP, do not be fooled by thinking that we are becoming “richer”.




Leave a Reply

Your email address will not be published. Required fields are marked *