Let's look more closely at this, Ludwig.

>>It really is very simple: Bushfires etc increase economic activity, all else being equal.<<

Economic activity does not increase as the result of bushfires, it simply moves from one place to another. Here's how it actually works.

In a previous small business, I employed a volunteer fireman. Whenever he was called upon to fight a fire, he took off to do his bit, with my blessing. My company was therefore deprived of his services for that period of time, so instead of paying him to do his job, I was paying the same amount of money to fight the fire. Many other businesses were in exactly the same boat. Net result, no increase in GDP.

The permanent firies are paid whether the countryside is burning or not, so no change there either.

Let's say the fire destroyed some houses, which were rebuilt, creating jobs for builders. The payment for these houses came from either the insurance company, or from individual savings. The insurance money came from premiums that had been measured previously under "consumption of services", so caused no change in GDP when they were spent. Similarly, personal savings would need to be withdrawn from their hiding place - effectively taken out of the pool of money available for business investment - so again, the net effect on GDP will be "no change".

This might help understand that last bit:

http://www.ssag.sk/SSAG%20study/EKO/RELATIONSHIP%20BETWEEN%20GDP.pdf

(You will find reams of more complex economy-talk on the subject of the role of savings in GDP measurement on the internet. All of it absolutely fascinating.)

So far, no impact on GDP - certainly, not the positive impact that you are suggesting.

Now consider the impact if the fires continued for a long time. My business output would decrease. Insurance premiums would increase, reducing the household's net disposable income. And savings would eventually be exhausted, reducing the investment capacity of the economy. All of which would serve to depress GDP calculations, not boost them.

Hope this helps. Feel free to question the logic if it still doesn't make sense to you.

Thanks Pericles for your detailed response.

But I’ve got to say that your argument just completely leaves me bewildered.

I mean, it is just so obvious that various things get added to GDP that just simply shouldn’t. They should be subtracted from GDP instead! That’s the bottom line.

Let’s start right at the top of your linked document:

< GROSS DOMESTIC PRODUCT (GDP) – is the total value of final goods and services produced within a country over a period of time. >

So, right there in the definition we can see that there is no differentiation between goods and services that are genuinely progressing the economy and our quality of life and those that aren’t.

It is all just lumped in together, regardless of whys or wherefores.

You wrote:

<< Economic activity does not increase as the result of bushfires, it simply moves from one place to another. >>

You can’t assume that. It is reasonable to assume that the recovery effort from bushfires, floods, cyclones, etc, does indeed result in considerably increased government expenditure and private-enterprise economic activity. It DOES lead to increased value of final goods and service.

<< Net result, no increase in GDP. >>

But your example is not universally applicable. Just because you experienced the situation which you describe does not mean that there is no net increase in GDP as the result of a fire across the whole fire-affected area, or the state or country.

Sure, a fire can result in some reduction of GDP if people can’t work as a result of injuries, or damage to their workplaces or the need to attend to their domestic issues with urgency. So this may detract from the increased economic activity that the fire leads to. But it unlikely to completely cancel it out.

continued

<< …so again, the net effect on GDP will be "no change". >>

Again, no. You can’t assume that. Money that is sitting there, either in insurance company coffers or peoples’ private accounts was not necessarily going to be used for business investment or other economic activity in Australia. So you cannot say that it would have contributed to GDP anyway.

And even if these funds were to be used 100% for economic activity at some point down the track, you still have the issue of them being spent now rather than later as result of the fire, which means that they are spent as a direct consequence of a negative factor, and it is therefore surely quite absurd that they should contribute to GDP.

GDP measures that economic activity now. It doesn’t take into account what might happen down the track if that money hadn’t been spent now.

Quite apart from any factor that you think might balance out this sort of expenditure, it is still absurd that this sort of thing should appear as a positive in our primary economic indicator.

I asked you last time:

Could you…

>> specifically point out to me where in this summary there is anything that supports your assertion that things like this don’t result in a ‘positive’ contribution to GDP. <<

You didn’t do this, which seems to me to be directly because there is indeed nothing there to support your assertion.

So can I ask you the same in relation to your latest linked document.

Yes Alan, agree with most of what you say.
Clearly, Govts own considerable parcels of Government land, and have the power to resume as much as they can justify.
Mrs Bligh found considerable acres to start a building boom near Brisbane?
However, there is absolutely nothing that prevents a government from building brand new cities on previously rural land, which for starters, would have kept down resumption costs. One thing we have plenty of, is land!
These same cities or towns, could be constructed as self contained, replete with their own CBD and industrial parks.
In fact, building a power station right beside said parks would limit energy costs, half of which can be lost in transmission lines, which we still nonetheless have to pay for, along with the price gouging practices of foreign investors. I'm in favor of cheaper than coal thorium power stations, for industrial purposes!
I have no problem borrowing for most of this, or financing it with self terminating thirty year bonds.
In comparative terms, any borrowing for these and any other projects that return a tidy profit, is worth borrowing for, given the returns cover all capital raising and servicing.
If anyone proposed a Snowy mountains scheme today, they would be howled down by all and sundry, or by people incapable of seeing the big picture or eventual goal.
We should crack on and build rapid rail, simply because the price to us for this or any other infrastructure doubles every decade.
The fact we may have to borrow to build these and other infrastructure project, is just small change, compared with what we will eventually pay for essential, but endlessly deferred projects.
Rhrosty.

If we were to crack on with rapid rail, we could pay for most of it, with the later sale of resumed and rezoned land, to new home buyers.
People who currently live in the boondocks and face a four-six hour daily commute, and an endlessly rising fuel bill, would gladly pay a premium for a service, that transported them to their places of work in half an hour or less!
Even then, it would likely be significantly less costly, than the fuel bill and parking fees!
Moreover, if those links were whisper quiet magnetrons, the time used for travel, could easily become productive time, using a laptop to study of perform work related tasks.
Because one wouldn't be held up on a regular basis by ever present and growing gridlock, one would arrive at work or school/college, far less stressed, and a good deal more productive, with a lot less time consumed in simply winding down.
There will also be considerable economic productive upside benefits!
And emergency response times would come way down, thanks to the quite dramatic winding back of gridlock.
These things, if built right from the get go, with the most advanced available options, will serve our needs, well into the next century and beyond.
[I mean, Melbourne trams still perform stirling and very cost effective service!]
And the quality of family life would greatly improve, given we could devote much more time to it, and our familial relationships?
Rhrosty.

"Curious about their [Legatum] ‘economy’ rankings. Not explained, unfortunately."

The Technical and Methodolody Appendix might offer a bit more by way of explanation, Alan...

http://media.prosperity.com/2013/pdf/publications/Methodology_2013_FinalWEB.pdf

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