The costs of Hurricane Sandy: Life satisfaction as an alternative to GDP

John Feddersen, Robert Metcalfe, Mark Wooden 02 November 2012

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Early forecasts suggest that Hurricane Sandy won’t influence US GDP much, positively or negatively. For example, IHS Global Insight estimates a reduction of 0.5% in the final quarter of 2012, while Capital Economics believes the rebuilding effort may actually increase GDP.

This should be good news, but for the fact that GDP, when considered in isolation, is a misleading measure of the total cost of a natural disaster. Others share this view. For example, life satisfaction expert Justin Wolfers recently tweeted:

"Asking what a hurricane does to GDP is about as pointless as asking what a war does. Tells you more about problems with GDP than anything."

The first problem is that GDP is a flow; while the increased reconstruction activity counts now, the costs of the destruction of assets are likely to be felt beyond the current reporting period (Noy 2012). For example, the estimated replacement costs for the damage caused by Hurricane Sandy are estimated as being somewhere between $10 and $30 billion.

More important than its inability to reflect asset destruction, however, is the fact that GDP does not account for a major cost of catastrophe (Frey, Luechigner and Stutzer 2007). GDP does not directly measure the welfare effects of anxiety, uncertainty and distress caused by natural disasters. These costs are among the most evident in media coverage of the catastrophe.

These effects can be captured by subjective wellbeing measures - answers to questions like: 'All things considered, how satisfied are you with your life?’. Subject measures are a useful complement to traditional means of evaluating welfare; they are flexible enough to encompass the non-market costs of catastrophes and, as in our recent working paper (Feddersen et al. 2012), to value the effect of a changing climate on life satisfaction.

What we found was that day-to-day weather variation impacts life satisfaction by a similar magnitude to acquiring a mild disability. But when it comes to long-term weather patterns – climate rather than weather – it seems there is no direct influence on life satisfaction.

How will Hurricane Sandy affect wellbeing?

What do insights from this sort of research say about Hurricane Sandy’s impact on the US?

Subjective measures come in a number of varieties and the impact of Sandy depends on the measure used. Studies of natural disasters have considered two main measures.

  • 'Life satisfaction', which measures overall satisfaction with one's life, is the most common.
  • The more transient measure of 'momentary happiness' has also been considered.

Kimball et al (2006) find that the happiness of Louisiana residents and those in surrounding states declined significantly at the time of Hurricane Katrina. Happiness returned to pre-Katrina levels very rapidly, in approximately two weeks (see Figure 1). The happiness costs therefore appear to be relatively small.

The change in life satisfaction after a catastrophe is far more persistent. In their study on floods in Europe, Luechinger and Raschky (2009) find that floods continue to influence life satisfaction up to 18 months after the event (see Figure 2).

In the case of Hurricane Sandy, the evidence we have suggests that levels of happiness should return to usual relatively quickly, but that life satisfaction will take longer. Further, while life satisfaction will substantially decline in the short-term, pre-hurricane satisfaction levels should return well before reconstruction is completed. People will adjust to the new post-hurricane state of the world.

Figure 1 Happiness Index in South Central region (grey) and USA (black). Hurricane Katrina made landfall on 29 August

Life satisfaction is sensitive to sudden and unexpected changes, but quite insensitive over time when people have a chance to adapt. Deaton (2012) finds that stock market movements on any given day are extremely important predictors of life satisfaction while, over the medium term, recessions and unemployment are not. He finds that "even very large macroeconomic shocks will cause small and hard to detect effects on subjective wellbeing".

Figure 2 Temporal pattern of the effect of flood disasters on life satisfaction. Grey shading reflects average effects 6, 12, 18 and 24 months after a catastrophe


In our recent paper (Feddersen, Metcalfe and Wooden 2012), we do not consider the effect of catastrophe, but we find that life satisfaction is very sensitive to the weather at the time of reporting but insensitive to long-run changes in climate.

Using nine waves of panel data from the Household, Income and Labour Dynamics in Australia Survey, we find that sunny days with low wind speed tend to increase life satisfaction. Day-to-day variation in weather (i.e. comparing life satisfaction on a 'sunny' day to a 'cloudy' day) has an effect equivalent to acquiring a long-term mild disability – one which does not inhibit ability to work. By considering the life satisfaction impact of people’s movements within Australia, we find that moving to a cloudy, rainy and windy climate has no influence on life satisfaction.

Our analysis suggests that if the US East Coast is becoming wetter and windier – as forecast by research group Climate Central as well as New York’s scientific panel – life satisfaction is unlikely to suffer as a result of this less hospitable long-term climate. More broadly, while anthropogenic climate change may increase the chance of catastrophic events and their significant effects on life satisfaction, in between these catastrophes the direct life satisfaction costs of a changing climate are likely to be insignificant.

Can subjective wellbeing inform policy?

Because the sudden change in weather is what matters most, future welfare may be enhanced by mitigating these types of shocks, rather than reacting to them afterwards. Where prevention and rebuilding yield similar financial payoffs, prevention is likely to yield a higher payoff in terms of life satisfaction. Compulsory catastrophe insurance presents one example of a policy that is widely deployed and reduces the immediate shock to life satisfaction after a catastrophe (Luechinger and Raschky 2009).

References

Deaton, A (2012), “The financial crisis and the wellbeing of Americans 2011 OEP Hicks Lecture.” Oxford economic papers, 64(1), 1–26.

Feddersen, J, R Metcalfe and M Wooden (2012), “Subjective Wellbeing: Weather Matters; Climate Doesn’t.” University of Oxford Department of Economics Discussion Paper 627.

Frey, B S, S Luechinger and A Stutzer (2007), “Calculating Tragedy: Assessing the Costs of Terrorism.” Journal of Economic Surveys, 21(1), 1-24.

Kimball, M, H Levy, F Ohtake and Y Tsutsui (2006), “Unhappiness after Hurricane Katrina.” National Bureau of Economic Research Working Paper 12062.

Luechinger, S and P A Raschky (2009), “Valuing Flood Disasters Using the Life Satisfaction Approach.” Journal of Public Economics, 93(3), 620–633.

Noy, I (2012), “The enduring economic aftermath of natural catastrophes”, VoxEU.org.
 

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Topics:  Environment Frontiers of economic research

Tags:  catastrophes, happiness, wellbeing, Hurricane Sandy

D.Phil. candidate in Economics, University of Oxford

Postdoctoral Research Scholar in Economics at the Becker Friedman Institute for Research in Economics, University of Chicago

Professorial Research Fellow, Melbourne Institute of Applied Economic and Social Research