September 27, 2017

Hurricane Doofonomics

Robert Graboyes

Senior Research Fellow

The economically illiterate hurricane-season ritual returns. Amid Houston’s suffering, a cheerful TV talking head told us reconstruction efforts following Harvey “could be good for the economy.” After Irma hit Florida, one commentator said the aftermath would likely “help the economy rebound.” No doubt, someone out there is gearing up to give us the bright side of Jose, Maria and whichever additional storms might follow.

Begging to differ, here are two statements — each true and perfectly consistent with each other: (1) rebuilding after hurricanes’ destruction will increase Gross Domestic Product; and (2) in no way is any hurricane “good for the economy,” and only a pathologically credulous doofus would believe otherwise.

Post-hurricane GDP is like your intelligent friend Jim after smoking four doobies and chugging seven beers — or my thermostat after absorbing heat from a pole lamp. In each case, circumstances convert a useful data source into a font of drivel.

Normally, Jim is conversant in history, astronomy and economics. But, infused with ethanol and tetrahydrocannabinol, he claims Woodrow Wilson was president during the War of 1812 and speculates that an oxygen atom is actually a tiny solar system with great civilizations living on the third electron. Jim also suggests that Hurricanes Harvey and Irma will be “good for the economy,” thanks to stimulative effects on the construction industry.

Jim’s delusions are easy to understand. Alcohol and THC impair his central nervous system. But no such physiological processes explain why anyone else believes Jim’s chemically induced pronouncements on history, astronomy or economics. Such a person would have to be a pathologically credulous doofus.

The thermostat by my piano controls our gas heater. If I set the thermostat at 69 degrees, the system pumps out heat whenever the device senses the indoor temperature drops below 68. The thermostat is accurate, and the heater responds promptly, so the temperature in our house is remarkably constant — except when I play the piano.

I illuminate the piano with a pole lamp whose bulb is inches away from the thermostat. Since chromatically challenged CFL and LED bulbs make the room dreary, the lamp sports a 100-watt incandescent bulb that radiates heat, tricking the thermostat into believing the house is hot. The thermostat shuts down the heater, the house drops to 63 degrees, and my wife dons a winter coat.

Being sober and of sound mind, my wife says, “The house is freezing.” She doesn’t say, “Wow! The thermostat says it’s 74 degrees, so I must be really, really warm. I’ll put on a sun dress.” That would be stupid — kind of like buying Jim’s line that, “Hurricanes Harvey and Irma will be good for the economy, thanks to stimulative effects on the construction industry.”

GDP is a useful measure of economic activity, but loaded with quirks and limitations. Depression-era economists tried frantically to explain the collapsing economy. But traditionally, measuring economic activity was akin to Justice Potter Stewart’s 1964 struggle to define pornography: “Perhaps I could never succeed in intelligibly doing so. But I know it when I see it.” Economists invented GDP as an imperfect but intelligible metric for economic activity. And it often works rather well.

Except in certain circumstances, GDP gets stupid the way Jim gets stupid on booze and weed and my thermostat gets stupid from a hot bulb. When a hurricane demolishes Houston or the Florida Keys, rebuilding sends GDP upward, seeming to imply, “There’s going to be some activity, so that’s good!” The statistical measure, however, fails to add, “But the storm destroyed 40,000 homes, countless businesses and a million cars — not to mention loss of human life. That’s bad!”

It’s easy to understand why 1930s economists created such a flawed measure. They needed a limited-purpose statistic to be used under trying circumstances. Less understandable is why other people, 80 years later, see a GDP bounce and proclaim, “Hurricanes Harvey and Irma will be good for the economy, thanks to stimulative effects on the construction industry.”

Pathological? Credulous? Doofus.