11/02/2012 09:28 pm ET Updated Jan 01, 2013

Hurricane Sandy and the Failure of GDP

The economic analysis of the impact of Hurricane Sandy is a perfect example of the flaws of GDP and our over-reliance on it as a metric of progress. Just like with Hurricane Irene, there will be some GDP growth from Sandy -- spikes in consumption as people stock up on batteries, food supplies, water, etc., and spikes in construction work after the hurricane. This growth will be countered by the loss in productivity and output. Overall, analysts are predicting that the positives and negatives will largely cancel each other out and there will be little impact on GDP.

Looking deeper, though, it becomes clear that the positives and negatives of a hurricane don't cancel each other out. For one, GDP counts the growth from rebuilding efforts but does not count the negative of physical destruction. So, the economic activity generated by rebuilding your house will count but the negative impact of losing your house is not counted. Analysts also see rapid recovery for New York City because much of the city's economy is knowledge based but what about the areas of the economy that are not knowledge-based?

If fact, the impact of the hurricane on the city exposes another flaw of GPD -- the inability to account for inequality. The wealth divide in the city is the highest it's been in a decade. The wealthiest 20 percent of Manhattan residents made an average of more than $390,000 last year. The poorest 20 percent made $9,681. During the hurricane, those with a car could leave the city and those without were stuck.

The forced evacuation of some parts of the city further highlights the wealth gap. Residents forced to evacuate went either to shelters or other homes. Those that could afford to do so moved into hotels -- the same hotels that are staffed by individuals on the other end of the wealth spectrum that came to work despite the weather conditions. The workforce that keeps the city's hotels, restaurants, and bars open also came to work because they have far less access to paid time off and are often the least able to afford missing a paycheck, even if it means working during a hurricane.

None of this inequality will be reflected in the GDP numbers. None of the discussion around the economic impact will focus on the impact to low-wage, economically insecure workers. Are we making progress if positive economic growth is comprised of people buying more batteries and more construction work is done to rebuild houses, while we do not reflect the impact of losing a home or living in an economy where workers risk losing their job or paycheck unless they find a way to get to work in a hurricane?

Catastrophic events like Hurricane Sandy show us that we need to start measuring what matters -- quality of life, not just the narrow focus of GDP.

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