Quake shows GDP doesn’t equal wealth

Written By: - Date published: 9:46 am, September 14th, 2010 - 14 comments
Categories: Economy - Tags:

Treasury has released its preliminary report on the economic impact of the Christchurch earthquake. It’s basically guesswork but says that GDP will be 0.2% to 0.8% down this quarter as a result of the quake, followed by a positive impulse from the rebuilding that ends up with net GDP for the next two years being 0.8% higher.

Great! We’ve discovered the solution to economic problems is destruction. Let’s go knock down Hamilton and get a GDP boost!

Two points:

GDP isn’t wealth. A friend the other day compared it to how fast the hamster is running on the wheel. We ought to be more interested in the nation’s net wealth – how nice the hamster’s cage is, not how hard it works (OK, that analogy is breaking down). Ideally, we should be measuring not just economic wealth but environmental and social wealth too as our measure of progress. If we were to measure wealth, rather than how fast the hamster is running, it would be undeniable that the earthquake will be bad thing. We already now that’s true, so it’s good to have an economic measure that shows the same thing.

Commenting on the quake, ABC’s Michael Janda writes:

My point is not to argue that Christchurch’s earthquake is in some way good but, rather, that the way we measure economic growth is grossly deficient.

Gross lives up to its colloquial definition in many cases when describing gross domestic product – the typical measure of economic expansion.

Not only does GDP often benefit from earthquakes, car crashes and wars, it also generally fails to take into account the damage to the environment or use of non-renewable resources that’s underpinned much of humankind’s economic ‘progress’ over the past century.

That’s not to say that GDP is totally useless: on average, countries with a higher GDP per capita do have a higher standard of living, longer life expectancies and better education, amongst other benefits.

But they don’t always have higher levels of happiness, and realising that social ills as well as social gains can contribute to GDP goes a long way to explaining why.

The second point is that this increased level of economic activity isn’t going to be sustained. If we were talking about a permanent increase in GDP, that would be something. We would be lifting to a consistently higher level of production that would bring with it long-term greater wealth. But that’s not what we’re talking about. The Treasury report has the GDP impulse from the rebuilding trailing off and then disappearing. As that happens, total GDP may actually decline and cause a technical recession if the rebuilding impetus tails off faster than underlying economic growth.

14 comments on “Quake shows GDP doesn’t equal wealth ”

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  1. rich 1
    14 September 2010 at 11:17 am

    Yes, but the report was about GDP which is a purely financial matter.

    The country has money banked for the quake and can borrow more if needed. It also has an underemployed workforce.

    So the banked money gets withdrawn and spent employing the workers. They can in turn buy stuff.

    People may not be happier, net-net, but they will be richer.

    As a comparison, do you think that cleaning up a polluted river is an economically positive activity?

    • ZB 1.1
      14 September 2010 at 12:09 pm

      Its the same. EQC and EPA, Environment protection. When you put an insurance value on a home, and regulate building codes, all costs, all job creation in the private assessors and public council officers, then you get a positive benefit
      in a crisis like an Earthquake. How is that from big industry or big farming dumping polluates that seep into ground water and give kids cancer, or put tourist off, or make farming hard when they have to invest in better filtering because the upstream farm keeps dumping their waste on them. Sustainability means keeping it like it was, because we know what works now.

    • Blighty 1.2
      14 September 2010 at 12:51 pm

      “The country has money banked for the quake”

      do you think that money was just sitting in a vault somewhere?

      It was investment capital. Now that capital is not available

  2. MikeG 2
    14 September 2010 at 12:59 pm

    I don’t disagree with your post, but no one seems to be considering that the replacement infrastructure / houses may well have a greater value than what was replaced. E.g. the sewer pipes that are being replaced would have needed to be replaced at some point in the future – the earthquake has brought that expenditure forward (I guess in some cases by decades). So PART of the expenditure is simply spending that would have occurred in the future.

    • Lanthanide 2.1
      14 September 2010 at 5:14 pm

      Yes, that’s an attractive theory but it still doesn’t make the spending a Good Thing.

      Now we have to spend $$ to fix some sewer pipes. Sure, these sewer pipes would’ve been replaced in the future anyway, but from the time value of money, money available now is worth more than money in the future. If we didn’t have to spend money to fix the sewer pipes now, we could spend that same money on something else now, so it’s still a net loss. You really only come out break-even if the things that were destroyed were in imminent need of replacement anyway.

  3. tsmithfield 3
    14 September 2010 at 1:23 pm

    A few points Marty.

    You can betcha that lots of people will be looking for any damage that might have been caused by the earthquake. Hence there may be more income coming in than what is justified by the earthquake itself.

    Secondly, the quake came at the best time possible. Local industry is very quiet. Hence there is lots of capacity to rebuild the city. If the earthquake had occurred when the enconomy was booming there might have been very little capacity available for the rebuilding.

    • Loota 3.1
      15 September 2010 at 12:24 am

      You can betcha that lots of people will be looking for any damage that might have been caused by the earthquake. Hence there may be more income coming in than what is justified by the earthquake itself. (1)

      Secondly, the quake came at the best time possible. Local industry is very quiet. Hence there is lots of capacity to rebuild the city. If the earthquake had occurred when the enconomy was booming there might have been very little capacity available for the rebuilding. (2)

      (1) Huh? How much more? Because people decide to take a look at their houses for once, they’ll decide those rotten weatherboards need to be replaced right now, out of spare money they happen to have in their pocket, instead of deciding “hey I better keep that cash because I don’t know if I’ll still be employed by work next week”?

      (2) This is such a bizarre rationale. I could argue that in a boom time local industry would have had more capability and capacity built up than at the trough of a recession, and had more reserve capital on hand, and hence that was the best time for a quake to hit because we would have been at maximum capacity ready to be retasked and businesses/individuals would have had more cash cushions to ride things through. Also people would be more resilient. But basically it makes zero sense to say that a recession is the best time for a quake to hit or vice versa.

  4. ropata 4
    15 September 2010 at 12:02 am

    Maybe the quake was God’s way of forcing the govt to spend more on infrastructure… as per FDR

  5. luva 5
    15 September 2010 at 6:02 am

    Marty

    I realise you are being sarcastic but no one is in anyway suggesting that “We’ve discovered the solution to economic problems is destruction.”

    So why have you said it? It amuses me that you go to the effort of writing these kinds of post.

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