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A Disastrous GDP Boost

October 2, 2017

The effect of all the recent natural disasters has been huge, and I’m not talking solely about the hundreds of thousands of Americans who lost everything. The effect I’m talking about is economic.
 

Many cities will need to rebuild. And while this isn’t the best way to achieve economic growth, the rebuilding efforts are expected to create an uptick in gross domestic product (GDP).

For instance, Houston is the country’s fourth largest city. If it were a nation, it would be ranked in the top 25 countries in terms of economic size. And that doesn’t count the areas surrounding Houston that were devastated.
 

Getting all those areas productive again will be expensive. From a practical standpoint, this isn’t growth, it’s rebuilding. But from a GDP perspective, this is production. The lesson is that, while natural disasters are never good, they can help GDP. Hurricane Harvey alone is expected to cost $180 billion in damages.
 

So, if the third quarter holds up like the second quarter did at 3 percent growth, and disaster recovery adds to the fourth quarter, 2017 might be a good year economically.

That said, this isn’t the growth we desired. And it could harm us. The Federal Reserve could base policy decisions on a faulty 4 percent GDP performance.
 

While an economic uptick would feel good psychologically, in this case, it would be all smoke and mirrors. As long as we’re trying to fix things in this country, we might as well adopt a better measure of growth than GDP.

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