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!
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.