Last week third quarter results were released regarding the growth of GDP. Many news reports indicated GDP growth was high despite concerns about gas prices and the devastation of Hurricane Katrina. Is this a positive development? What is the reality behind the economic growth numbers?
No one with extensive economic background should be surprised by these growth numbers. Why? It is more likely that Hurricane Katrina would spur GDP growth than inhibit it. Let me explain.
When GDP growth is calculated it includes consumption, government purchases, investments, and exports minus imports. The current trade deficit will naturally be a drag on GDP since imports far exceed exports in the US. But how do the other factors contribute to GDP and where does Katrina enter the debate?
Hurricane Katrina blows through the Gulf Coast and leaves destruction in its wake. What has been the response? Have people in Mississippi and Louisiana chosen not to rebuild? Of course not!? In fact millions of dollars of money is flowing there now from government coffers (let's sidestep for now whether the money is being spent wisely fairly or equitably), private investment and such NGOs as the Red Cross and Catholic Relief but also from smaller organizations and Individual donations.
Regardless of who is spending the money or how it is being spent, the destruction of a region causes money to flow into these areas to rebuild. These expenditures show up as investment, government purchases and consumption.
We must remind ourselves that GDP does not measure human achievement, ethical fairness or even positive human change. It's a number that captures how much money flows through specific sectors of the economy. It has nothing to do with absolute human progress. Let me give a few more pertinent examples:
Positive: A family buys a new house with money obtained from a raise the mother received at her job. You buy a toy for your child at Christmas using your Christmas bonus. Your brother buys a new car to celebrate getting a new job. A new company expanding operations for a new product line invests in building a new plant outside Peoria. The government increases you grandmothers Medicare benefits.
Negative (?): A relative discovers they have cancer and must undergo chemotherapy treatments. The government must purchase more Humvees to replace the ones destroyed in recent attacks against American soldiers. A family holds a funeral service for a recently killed relative on duty in Iraq. One white family relies on the government subsidies and insurance payments to rebuild their house after Hurricane Katrina. Another black family moves to Colorado to start over again. Relying on government assistance and the efforts of local communities they rent an apartment buy a used car, etc.
The items in the negative column may be perceived as either, the point is GDP does not distinguish between positive economic growth and growth motivated by the environmental, social, or physical destruction of humanity. Though the relative may survive cancer, which is positive, the expense of doing so, which is negative, is counted as positive GDP growth in a way similar to someone buying a new car after a raise or new job.
Death and destruction increase GDP, since we inevitably rebuild, replace, or celebrate the family member lost to tragedy (i.e. funerals). GDP is blind to the human suffering left behind. All of those servicemen seeking psychological help after they return from Iraq will spend money on mental health services that will be recorded as GDP growth. Any increased debt incurred by the US to fund any of the above activities will also be counted as growth--though just as inevitably, interest payments and paying back the debt will create a drag on GDP.
With this in mind it is not surprising that GDP advanced after Katrina. So when your Republican friend points to GDP to illustrate how much the economy is booming and indicates that Bush's policies are working, remind yourself--and them--what actually constitutes GDP economic growth. As for me, what is surprising is not that GDP growth expanded, but that it wasn't higher than it was. So was this development really positive or actually really negative?