I’ve been wondering about the short and long term economic aspects of the hurricane.
Hundreds of thousands of jobs were lost in the hurricane. This means that the people cannot pay their credit cards, the mortgage payments on anything they owned that wasn’t insured for flood, etc… Insurance companies will have to pay billions and billions of dollars to repair the damage, when possible, and will need to recoup their losses somehow. The expenses of Alabama, Mississippi and Louisiana will be great as the area is rebuilt yet at the same time their tax base is majorly affected (especially Louisiana’s, New Orleans being a major source of the state’s revenue from taxes and tourism).
Could the worst case scenario be that Katrina could start a major recession? Will banks continue to loan money for homes in flood zones and how much will the government have to subsidize insurance? What steps should be taken to make sure that the long term economic effects are as painless as possible?
I suppose it’s possible, but if it does, it will more likely be due to secondary effects like price hikes of goods that would normally go through the New Orleans port, the increase in the price of gas due to the loss of refining capability, lumber shortages due to massive reconstruction of New Orleans, temporary diversion of many other resources to New Orleans causing dislocations and price hikes elsewhere, etc.
I think we have to wait and see exactly how this shakes out before we know. For example, if there are hundreds of thousands of people out of work, perhaps they will be given work in their own city helping with the reconstruction. Also, early claims of damage and the time needed to rebuild are often very pessimistic. For example, the oil fires in Kuwait after the first Gulf war were put out in a fraction of the time that the experts estimated, and the environmental damage was a lot less than was thought.
Sam is correct that it is the secondary effects that should concern us. When you damage an entrepot, you increase the costs of exporting (grain, in this case) and importing (oil).
The direct effects of natural disasters tend to be small. The loss of wealth tends to be offset by the added employment caused by subsequent reconstruction efforts. Think of it as a loss of collective savings, but not of jobs.
The Economist article makes the point that natural disasters tend to cause economic blips rather than long-term shifts. We saw that clearly with SARS here in Hong Kong - the tourism industry collapsed for a few months but economic growth for the year actually rose.
The best indicator is the stock market and other financial markets. They are very foward-looking, and if they don’t collapse, it means the cynical, unemotional, smart money doesn’t see a problem.
Sam Stone makes a correct assertion (imo). LA’s economy is one of the worst in the US. The GDP will hardly be affected, despite all that oil not being pumped. I also read that Economist article, and I remember my class also covering the same sort of analysis (for fun!) when Hugo hit. The states’ local economies will take a massive beating, but they should see some reprieve with government assistance, and private and public charity donations. One of the few fortunate events that can happen is that these states now have a chance to rebuild, sort of a forced urban renewal. Using today’s technology and knowledge base, they can rebuild something that is a lot more business friendly, and attract a larger economy. They can continue this trend by increasing education. If they do not take advantage of this opportunity, that will be the real tragedy.
Even if LA was a major economy, I doubt the storm would cause a major recession. Today’s major economies are not based on production, at least in the US, and those productions can be moved to other facilities – that is the beauty of the US economy, fungible and easily transferable. If 911 happened today, my best educated guess that while terrible, the total effect on the economy would be small (noticeable, but still small). I don’t know anything about underwriting and loan analysis, but I assume that it’s still being done. As to your last question, in simple terms, the best thing is to continue to be a capitalistic economy with freer markets and less constraints on trade and labor.
Oil is the single biggest risk to the economy right now. I heard it said that every 10 bucks more paid per barrel means 0.5% less economic growth. Considering how closely intertwined oil-prices are with the general economy, I think that may well be accurate.
I personally hope that one of the effects will be that we hurry with getting less dependent on oil.
The stock and bond markets are already betting the Fed will be slowed, if not stopped, in its rate-raising campaign by this. If that does happen, it will mitigate at least some of the secondary effects, but not all: New Orleans was a major port for all of the commodities coming out of the US’s agricultural heartland as well as oil. So there will still be some negative longer term effects on prices, not to mention the not-insignificant number of people put out of work, which I have to believe will be only partially made up by the reconstruction. But maybe I’m wrong on that.
The reconstruction itself, activity that usually gives a strong economic boost, opening opportunities and giving rise to employment will mitigate most of these effects, or so I heard one analyst say. In itself, the NO area only accounts for 1% of the U.S. economy - again, that’s what I heard.
I think the oil price remains the biggest factor, as it impacts the economy much more globally. My energy bill alone looks to go up a few hundred euros because of this years rising oil prices.
Isn’t this just the Broken Window fallacy all over again? Sure, the numbers will look higher in the short term, but at the cost of yet more debt which the US seems ill-suited to taking on.
A good chunk of the rebuild will be like a giant public works project, that is good for the economy. But where the money comes from to fund it? Well, that part is bad for the economy in the long term.
I’m not a big fan of the Broken Window fallacy. If you’re looking at just the hard numbers, then maybe, there might be a point there. However, in times like this, when human life is at stake and urban renewal was needed anyway (from what my friends’ parents, who actually live there have stated, so I don’t know first hand), then there is a lot of good that can come out of this.
IMO, the lost opportunity cost is off set from the non-economic and social benefits from a rebuild. I agree, people are losing money now and production is lower as people donate money and sacrifice their time to volunteer rather than be out and earning. But in the long run, as well as the immediate short term, the area will be rebuilt, money has been allocated already anyway (or at least should have been – I haven’t heard any reports that it hasn’t), and new opportunity has a chance to grow that was not there previously.
Just read this afternoon that the U.S. expects to dodge those expected shortfalls. Apparently, the refineries are coming back online faster than anticipated, with half of those disabled back and running within a week. That’s why the futures price has dropped back again.