Saturday, October 27, 2012

Did the U.S Drought of 2012 Reduce Economic Growth by .4 Percentage Points?

This article claims that if the recent nasty U.S drought hadn't taken place that the U.S economy would have grown by 2.4% rather than by the reported 2%.  Is this "what if" correct?

I see that the U.S GDP in 2011 was roughly $15.2 Trillion.   If I multiply .004*15,200 this yields an estimated drought impact of  $60.8 billion on our GDP.  There are roughly 300 million people in the U.S.  If I take 60,800/300 =     $202 dollars worth of damage to every American citizen.   Is that possible?

To quote the article:

"The drought hit hardest in July, a critical time for corn and other crops. Corn production is expected to drop more than 13 percent in the 2012-2013 growing season. Soybean production will likely fall 8 percent. "

According to this website, total U.S corn production in 2011 was 313,918,000 metric tons and this fell 13% to 272,488,000 in 2012.

According to this website, the value of a ton of corn is roughly $280.  So, let's multiply price times quantity.

(272488000-313918000)*$280 =    -$11.6 billion.  

So, if the biggest impact (assuming no behavioral change) is the corn sector at $11.6 billion, I'm confused how these numbers will add up to $60.8 billion.    Perhaps, the story is that corn fields have been severely damaged and this means that future production will also be lower.  In this case, we need to think about the opportunity cost of this land.  What else could it be used for?

In the medium term, this shock could accelerate GDP growth as the farming sector has learned that it must invest in adaptation efforts.

So, the price of corn increased from $274 per metric ton in October 2011 to 321 in September 2012.

Assuming the price and quantity dynamics are generated by the drought creating a supply shock that shifts the supply curve while the demand curve is constant; and assuming U.S exports of corn = imports of corn = 0, then we can calculate the elasticity of demand for corn =   13%/17% = -.76.  That's a huge short run elasticity of demand.  This suggests that consumers had many substitutes for corn.  In such a case, can shocks to corn have large GDP impacts?

The consumers spent their $ on something else so the drought stimulated the demand for substitutes for corn.  A serious GNP accountant should add this as a positive effect of the drought.

UPDATE:  As I think about it, this headline of loss of ".4% growth" is a great data point for optimists about climate change adaptation.  Our urban economy suffers a horrible drought and GDP only falls by .4%.  This is a macro piece of evidence of how the diversification of our economy across sectors protects us from climate shocks.   Keep in mind that future droughts will cause even less GDP "damage" as make investments to be more resilient to shocks.  That's the rational expectations vision for how we will adapt to climate change.