Wednesday, May 14, 2003

Spudonomics-Spudlets proprietor Marc Velazquez has e-mailed a few interesting questions on economics
I don't recall you tackling this subject lately, but I have been wondering about the confluence of recent events. Two weeks ago I thought that the return of our military personnel back into the workforce would help boost the economy: increased demand for goods, increase in productivity by companies not paying out for absent people, less tax dollars paid out to servicemen. I did not anticipate a big bump, since the military was bringing people back slowly, rather than all at once, but I hoped for a bump up.
First of all, any extra spending from the troops would likely to be reflected in the May and June numbers rather than in the April numbers. Not all of the troops are back, and those that have come back came back too late to affect the April numbers. Secondly, I don't think there is the pent-up demand for consumer goods that there was after WWII. A lot of consumer goods weren't being made during WWII and families were put on hold for years while the guys went off to fight WWII. The stereotypical dynamic of the late 40s and 50s was-GI gets home, marries sweetheart, moves to Levittown, starts the Baby Boom and buys cars, appliances and furnature to stock house and driveway. In the case of Iraq, the guys will have been gone for only months rather than years and their absence hasn't thrown off durable goods spending in most cases; our economy generally didn't get disrupted by the war and their won't be that after-war durable goods blitz. True, the guys in Iraq may be eating MREs rather than groceries from Publix, but both are part of GDP. For the non-reservist, there was no decrease in income. Where the economic effect might be felt is for the reservists who took a pay cut while on active duty. Their reduced income would have reduced spending, but that would likely be viewed as a one-time event and not significantly affect family spending, if the Permanent Income Hypothesis holds up. To the extent that work was put on hold while a reservist was overseas, that might negatively effect GDP, but if the reservist was replaced by an otherwise-unemployed temp, it would likely increase GDP.
With the tornado damage over the last two weeks, will we be seeing an effect similar to 9/11? Businesses out for an extended time, insurance payouts mounting and losses in productivity can inflict more damage on a weak economy. Will the two cancel each other, or do you think one will have a greater effect than another?
One of the key differences is that the tornados won't have a nationwide effect like 9/11; we didn't have the entire air transport system shut down for most of a week. Thus, any impact will be small and hard to detect on a national scale. One part to remember is that imputed rent is calculated for owner-occupied homes; for GDP purposes, you're renting your home to yourself. Thus, a lot of that imputed rent won't be there while people are staying at South Elementary gym or Aunt Betty's. Also, there will be lost hours from work as people take time off to recover, even if their workplace is still standing. If it isn't standing, they're on unemployment until they find another job or the place rebuilds. In the months following a disaster, that loss of property value and disruption caused the tornado will mean a loss of GDP. Once everyone gets into long-term temporary housing, the rebuilding process may well mean a temporary increase in GDP, as homes and businesses get rebuilt; if more people are rebuilding destroyed stuff than are dislocated, you'd see an increase of GDP for the time. The next question that follows is whether the added GDP of the rebuilding phase outweighs the disruption and damage caused by the disaster; that might well be a net plus for the GDP figures, for it measure income, not net worth. For a moment, let's assume that the destroyed property takes a year to rebuild. You will have lost the rental value of the property for the six months but gained the sale a new building. We're not any better off as an economy, but we kept a lot of construction people busy.

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