Caution required when gauging economic impact of fires

When natural disasters strike, it’s only a matter of time before some worried soul begins to wring their hands and inquire about the “economic impact” it will have.

Confession: it’s usually a journalist.

As an indicator, GDP says nothing about the national stock of wealth or wellbeing.
As an indicator, GDP says nothing about the national stock of wealth or wellbeing.Credit:James Brickwood

The nation’s economists are then subjected to intense interrogation about precisely how much lower economic output will be as a result of the devastation.

Economists, being a precision-loving bunch, dutifully punch numbers into their models and concede that the disruption will probably result in lower tourism, agricultural output and consumer spending numbers.


This fits with the widespread view that the particular flood, bushfire or storm at hand is, indeed, terrible, not just for the human cost, but also for the damage to the so-called “economy” (forgetting for the moment that economies are nothing more than collections of humans).

A reduction in the value of the nation’s economic output – or gross domestic product (GDP) – can be added to the long list of destruction  caused by the disaster. That is until our precise-to-a-fault economist clears their throat and adds another element to the story.

In addition to reducing some output in the short term, the destruction wrought by natural disasters can also add to the nation’s economic output over the longer term. Depending on your timeline, natural disasters may actually boost economic output, overall.


Because after insurance claims are paid out and government assistance is received, affected communities start to spend a lot more than they would have otherwise, building new homes and places of business and furnishing them. This employs a lot of people, such as construction workers and retail staff.

The more honest economists must also confess any injuries suffered during the disaster, including physical and mental pain, can actually boost the output of the healthcare sector. An even grizzlier mind could also conclude the output of the funeral industry would expand.

If it all seems a bit callous or insensitive, let’s give the economists a break: we did ask them. And we asked them the wrong question.

Economists have always conceded their main measure of economic growth – that of the change in the level of economic output, as measured by the value of goods and services produced in a given time period – has its weaknesses.

It measures what it measures and little more than that: the total value of goods and services produced in a time period.

As an indicator, GDP says nothing about the national stock of wealth or wellbeing. Natural disasters threaten both. Indeed, a person who has lost their home to bushfire might still be able to go to work and produce income the day after – and that would show up in GDP. But their houseshold balance sheet just took an almighty blow. Depending on their level of insurance, that blow might be permanent.

Natural disasters also destroy business assets such as crops and animals, which only show up in GDP when those assets don’t produce income.

And then there’s the destruction of natural wealth, such as bushland and fauna, the value of which is not captured anywhere in our national accounts, except maybe in the way they attract tourists who spend dollars.

If it all seems a bit perverse, it is. And economists readily concede it. Economists have never said that GDP is the best measure of wellbeing – only that it’s the easiest proxy to measure.

But if GDP were the only thing that mattered, a sound government policy might be to urge citizens to engage in random acts of destruction. A person throwing bricks through windows might be cheered as a national hero, directly unleashing stimulus into the economy and creating jobs.

Which is not to say economic growth doesn’t matter at all. It clearly does. Expanding economies tend to produce more jobs and raise living standards, depending on how the fruits are distributed. And a strongly growing economy, as measured by growth in GDP, is certainly better than the alternative of a contracting economy with no job opportunities.

But that’s also not to say you want GDP growth at any cost, to human life or the environment.

Viewed through the prism of GDP growth, the current bushfires are still forecast to have a relatively minor impact on national economic growth. The areas affected are sparsely populated, accounting for only about 2 per cent of the Australian population.

Output in those regions will surely suffer. And there will be a measured impact on economic output, in the March quarter in particular, which may then be recouped in later months and years as rebuilding gets underway.

Indeed, it may yet prove that the bushfires are a net positive to the economy, unleashing stimulus at a time of moribund growth. But it would be tasteless to say it.

If what we’re really asking economists is whether the bushfires have reduced our wealth as a nation, the answer is undoubtedly yes.

Many resources must now be deployed to return communities to their previous standards of living and much of the environmental damage is irreversible.

That’s what really matters, not the short-term disruption to the path of economic growth.

Some scars, sadly, linger much longer than that.

Ross Gittins is on leave.

Most Viewed in Business

Source: Thanks