Katrina and the economy

People are already wondering what effect Hurricane Katrina will have on the US economy. So far, most of the discussion I’ve seen has focused on very simplified Keynesian or GDP-based views of the economy, in which the resources that go into rebuilding New Orleans and the surrounding regions count as a net addition to economic activity.

As far as the national accounts go, this may be right. As the name says, GDP is a gross measure, which means it takes no account of depreciation, including the massive destruction caused by events like hurricanes. Depending on how things like insurance payouts are counted, there could easily be an increase in measured GDP. The main lesson from this is that, if you’re interested in economic welfare, don’t look at GDP.

But I don’t think the old-style Keynesian story, in which a reconstruction effort brings unused resources into use and thereby stimulates more economic activity, is likely to be applicable. I assume any injection of funds will come primarily from the national government, which is already running massive deficits, to the point where its capacity for fiscal stimulus is pretty much exhausted. The impact of any further expenditure will almost certainly offset, in part by cuts to other areas, but even more by tighter monetary policy and upward market pressure on interest rates.

The immediate reaction of oil prices shows how tightly stretched the entire market has become, but I don’t think the effect on supplies will be great enough to have much effect in the medium term (say in six months time). However, that’s just a guess.

The real problem I haven’t seen discussed much so far is what will happen if, as is now predicted, it takes three to six months to pump all the water out of the city of New Orleans. In the absence of well-designed and large-scale intervention, that would imply bankruptcy for the vast majority of private businesses based in the city. This in turn would imply unemployment for many people who might otherwise return, and a whole lot of second-round effects working through supply chains. It’s unclear what kind of economic activity will survive, beyond a tourist market centred on the French Quarter (apparently relatively undamaged).

Even in the best of all possible worlds it would be hard to design a policy response to a disaster of this magnitude and duration. In practice, based on recent past experience, I think we’re likely to see some impressive rhetoric, a lot of gigantic boondoggles as favoured interests cash in on the reconstruction program, but not much effective alleviation of hardship or coherent thinking about sustainable economic recovery.

34 thoughts on “Katrina and the economy

  1. Whilst no single weather incident can be said to be “caused” by climate change, one of the consequences of global warming will be to increase the likelihood of extreme weather events such as Katrina, and their severity when they occur. It is worth mentioning that Katrina hit the US south coast on the same day that Sydney officially recorded its warmest winter on record, and Victoria was hit by storms bringing the strongest winds ever recorded in that state. The Bureau of Meteorology web site also makes for disturbing reading, at

    http://www.bom.gov.au/announcements/index.shtml

    Extreme weather events and changing climate patterns have economic consequences, and a rational debate about the costs and benefits of the Kyoto Protocol and other greenhouse response strategies must factor in an actuarial estimate of the economic costs of more frequent extreme weather events, to be set against the claimed costs of emissions reduction policies.

  2. While what you say may be correct, Paul Norton, still it is hard to link the greater prevalence of hurricanes in the North Atlantic over the last decade with global warming. The frequency of hurricanes in the Atlantic is correlated with surface water temperatures; a period of cooler surface temperatures (leading to more hurricanes, somewhat counter-intuitively, due to the interaction between water and air masses) began in 1995 after the previous 25 years had been a time of low hurricane activity. Since 1995, the only unusual thing has been that unusually few of the North Atlantic hurricanes have struck the continental United States. That luck ran out in Florida last year and in Lousiana and Mississippi this year. As I write this in an apartment in Houston, I guess I should count myself lucky so far…

    I have seen it mentioned that the energy dissipated by North Atlantic hurricanes has risen substantially over the last few years (one source I can’t find now quoted a 70-80% increase, although it was not clear what this was based on), so it is possible that the severity of extreme hurricanes may increase, even if the number of hurricanes does not.

    On the original economic point, one could argue that despite the short- to medium-term losses, it would be efficient to reduce New Orleans to a mere tourist destination rather than a serious economic center. Apart from some necessary port functions due to its location at the mouth of the Mississippi, together with some oil and gas installations appropriate due to its location on the Gulf coast, it cannot be efficient to have a large city located where it is prone to these kinds of problems. Siting a major metropolitan area six feet below sea level, surrounded by water on all sides and in an area prone to hurricanes, does not seem to be a particularly wise idea, and now might be an appropriate time to move some economic activity away rather than rebuilding.

  3. On the topic of oil prices, I just wish the media would stop announcing that oil has reached “new record highs”……

  4. “I think we’re likely to see some impressive rhetoric, a lot of gigantic boondoggles as favoured interests cash in on the reconstruction program”

    As the old Cajun saying goes, “lessez le bon temps roulez”.

  5. To invoke global warming as the cause of this storm is to embrace crack pot science and dogma

    Insurance companies WILL pump in tens of billions of dollars … more reason and less gllom and doom is a more objective vantage point

    The inference that current shortanges of oil and gas is proof of the “tight” market is sheer foolishness. We just shutdown a major percentage of US capacity. Given the super efficient supply chain this is a natural result. Even if the US were a net oil exporter we would have this problem (Hint the same would happen in Saudi Arabia)

  6. If ‘sustainable’ means not making the same mistake twice then maybe insurers will say some areas shouldn’t be rebuilt, not unlike the Asian tsunami reconstruction. When it seems like governments won’t listen to scientists at least the insurance industry has clout.

  7. The US website “Cursor” has reported today, that the Gov. of Mississippi State , Haley Barbour ,has been a key opponent to US ratification of the Kyoto Protocol,and is linked to the oil interests in his state.(also amember of a “Confederacy” group with racist motives)Bush gave him a key place in Republican policy committees,opposiing all discussions of the Global Warning problem!! Almost make one believe in a God!!

  8. I’m being very serious about Katrina now

    OK. My nostalgia for the New Orleans we have probably lost is contained here, but I think it’s probably time to have a little, tiny think about the real impact of this hurricane.
    Firstly, millions of people have been displaced and many of them…

  9. simon – “To invoke global warming as the cause of this storm is to embrace crack pot science and dogma”

    True enough however most of the computer models do predict increased hurricane activity with increased warming.

    “The inference that current shortanges of oil and gas is proof of the “tightâ€? market is sheer foolishness. We just shutdown a major percentage of US capacity. Given the super efficient supply chain this is a natural result. Even if the US were a net oil exporter we would have this problem (Hint the same would happen in Saudi Arabia)”

    I am sorry that is just not true. Saudi Arabia has been historically the swing state that can increase production by the required 1 million barrels per day at the drop of a hat. It is now looking like that SA is already at peak production and cannot supply the extra demand. There is a physical limit to how much oil can be pumped and the Saudis have been lying about their reserves for years.

    The problem is not the lost production but the fact that there is no spare capacity to make up the shortfall. Market forces cannot manufacture oil from nothing.

  10. Simon, I wrote at the start of this thread that “Whilst no single weather incident can be said to be “causedâ€? by climate change, one of the consequences of global warming will be to increase the likelihood of extreme weather events such as Katrina, and their severity when they occur.”

    *Climate* (the general meteorological conditions experienced in a region over time, as measured by things like averages and variances of temperatures, rainfall, etc.) is not the same as *weather* (e.g. what the temperature is at Southport as I write this post, whether the sun is out, whether it is raining currently, etc.). However they are related. The frequency of days of very hot (above 38 degrees C) and humid weather in Brisbane is much greater than it is in London, because the climates of the two cities are different. The frequency of such days in Brisbane is likely to increase if the climate overall becames warmer. Similarly, if the climate of the planet as a whole changes because there is more thermal energy in the global climate system, this will tend to be reflected in increasingly frequent extreme weather events such as hurricanes, in which vast quantities of energy are concentrated and expended in a short time and a relatively small area.

  11. Paul and Ender are spot on!
    Just because you can not summarise complex systems into a single one number, such as weather patterns, does not mean you are about to “embrace crack pot science and dogmaâ€?.

    At least banks and insurance companies are somewhat able to calculate margins of risks, with matching price considerations for different areas and risks profiles. Good enough to know they need to charge much more for such insurance coverage: natural disasters, war, terror risks, etc.

    There’s a very good lesson there for other complex systems (like the world economy and movements in different markets) even if they still try they damn hardest to work that single one magic number: tomorrow’s price of petrol, next year’s interest rates, etc. Hence the application of very complex computer modeling, complex systems theory, etc

    Reminds me of that old joke: how does the economist open a can of beans without a can opener?

  12. Given that the inevitable huge spending-spree may well be entirely wasted (as hinted by Prof Q), perhaps the citizens of NO could simply be offered a one year income tax holiday?

    Would also be a fascinating economic experiment.

  13. Let’s face it, beneficiaries, on previous form, of this catastrophe will be Haliburton and at a local level James Hardy. Both great companys that Steve Forbes would surely give a tick and a ‘buy’. Most happy that he enjoyed his stay and good ol’hospitality.

  14. rog, the economist says: “let’s assume we have a can opener”.
    Lame I know! It’s an economist joke, after all (from my old uni micro-economics lecturer).

    Moral: economists ignore the question, come up with a very biased and limited model, assume away any unknowns and push their unreal logic to the max to the results they want anyway.

  15. Who will pay for the rebuilding of New Orleans? Surely insurance companies aren’t so crazy as to offer affordable rates when you get 6 hurricanes each year? Can someone enlighten me?

  16. Charlie Stross has a post up (http://www.antipope.org/charlie/blog-static/2005/08/31/#katrina-1) quoting from a Stratfor bulletin about the Port of Southern Louisiana being closed for three months:

    “The Port of Southern Louisiana is the fifth-largest port in the world in terms of tonnage, and the largest port in the United States. The only global ports larger are Singapore, Rotterdam, Shanghai and Hong Kong. … The Port of Southern Louisiana stretches up and down the Mississippi River for about 50 miles, running north and south of New Orleans from St. James to St. Charles Parish. It is the key port for the export of grains to the rest of the world — corn, soybeans, wheat and animal feed. Midwestern farmers and global consumers depend on those exports. The United States imports crude oil, petrochemicals, steel, fertilizers and ores through the port. Fifteen percent of all U.S. exports by value go through the port. Nearly half of the exports go to Europe.”

    What’s the economic upshot of this going to be?

  17. Pauls reasoning is incorrect by the very logic that he uses to assert to make his point Carlos. To appeal to complex systems is to open the question to endless possibilities. Models that are sensitive to initial consitions are not particularly useful for forecasting. They are useful at suggesting dynamics within the specified system modeled.

    As for Ender’s counter, I must say that he misses the logic for a new fact that is true but not on point. Yes the Saudi’s have provided swing capacity in the past because they had slack that could be exploited in a timely basis within an operational supply chain. Here we have stock outs becasue the supply chain is broken and thus stocking out.

  18. The long tail is that insurers will pass on the costs to relevant industries such as, oh, obstetrics in Australia, or Public Liability insurance in Australia, through the interlinked web of global re-insurance.

    Then they campaign for litigation caps based on premium hikes.

    A piece of analysis I first picked up from the Economist; it’s why they hiked so much 3-4 years ago, and they did the same thing.

    And why governments should pick away at the detail before knee jerk legislation change.

  19. First, profound sympathies to all suffering the aftermath of this disaster. NO is one of my favourite cities.

    Second, Darryl Rosin provides the necessary grounding for this discussion. The dislocational costs for the most important export industries of the US will be huge.

    Third, a question. Is it true that the major reinsurance companies are European? If so, doesn’t an event like Katrina represent a major inflow of funds, analogous to a loan upon which interest has already been paid in the form of premiums?

    Is there some data on the sums of money paid to foreign insurance companies in the form of premiums compared with payouts to the US from those companies? These annual hurricane visitations are very expensive.

  20. Simon – I get what you are saying however it is not just a supply chain problem. There is a more fundamental supply problem where approx 1 million barrels per day of US oil will not be able to mined out of the Earth because the rigs are damaged. Some will take some weeks to start mining again. This shortfall will have to be obtained from somewhere else that has spare capacity. Traditionally this has been Saudi Arabia. Now the big question will be answered – do the Saudis have any spare capacity or is it true that they have peaked and have none? Most other producers are at full capacity.

    The oil has to come from somewhere so probably the price will rise as buyers try to find the oil.

  21. There is a lot of dispute amongs climate modellers as to whether global warming will increase hurricane numbers, and if so by how much. What is not in dispute (amongs serious scientists in the field) is that global warming will make those hurricanes that occur more powerful.

    Katrina was so damaging partly becuase there was an almost direct hit on a very vulnerable city, but also becuase she was one of the four most powerful (measured in barometric pressure) hurricanes in north Atlantic history, and the third most powerful at time of landfall.

    This occurred largely because the waters of the Gulf of Mexico are so warm at the moment – over Florida Katrina was not a particularly dramatic hurricane, but the exceptionally warm waters drastically revived her.

    Consequently, it would be quite unreasonable to say that Katrina was caused by global warming, but it is highly probable that she was made substantially more intense than she would have been by global warming.

    Given reports that the New Orleans levees almost survived the storm and only collapsed as it was nearly passed it seems credible, although far from certain, that if Katrina had been slightly less intense New Orleans would have avoided being flooded. There would still have been significant damage in other places, and from wind and rain, but the bulk of the disaster might may well be caused by the extra few kilometres of hour of wind speed, which almost certainly result from global warming.

  22. The United states government provides flood insurance to many residents of flood-prone areas at non-market rates.

    Oddly, Republican representatives from the Missisippi valley forget to mention that whenever they rail about the iniquities of public spending.

  23. Jeeezus

    the levees around the below-sea-level New Orleans and districts were set to withstand category 4 hurricane and Katrina was category 5.

    The discussions around was Katrina accelerated by GW are highly speculative and, in my opinion, a waste of valuable resource.

    What is apparent is that infrastructure to that region had insufficient resources to meet the demand placed on it by a known risk.

    Given the high density population existing in an at risk environment town planners, engineers et al might now need to give good reason why their ‘models’ failed.

  24. If GW makes for an increase in the power of hurricanes, then I can’t see how debating it is a waste of resources. Such a connection would mean that levees and such needs to be made stronger, as the weather grows harsher.

  25. rog:

    Jeezus yourself, sport.

    Katrina was downgraded from category 5 to category 4 well before it hit.

    Bush may or may not have been responsible for the global warming effects which may or may not have affected the hurricane.

    Bush was, however, directly responsible for de-funding the levee works around New Orleans, and was also directly responsible for dismantling the Federal Emergency Management Agency.

    It wasn’t a matter of the “models” failing at all. It was direct result of the “magic Bush” failing, in entirely predictable and indeed predicted ways.

  26. The levees around New Orleans were only rated for a Cat 3 storm.

    I posted this info at Tim Blair

    “ In fiscal year 2006, the New Orleans district of the U.S. Army Corps of Engineers is bracing for a record $71.2 million reduction in federal funding.

    It would be the largest single-year funding loss ever for the New Orleans district, Corps officials said.

    I’ve been here over 30 years and I’ve never seen this level of reduction, said Al Naomi, project manager for the New Orleans district. I think part of the problem is it’s not so much the reduction, it’s the drastic reduction in one fiscal year. It’s the immediacy of the reduction that I think is the hardest thing to adapt to.� from
    http://www.findarticles.com/p/articles/mi_qn4200/is_20050606/ai_n14657367

    and this: http://www.alternet.org/story/24871/
    “In early 2004, as the cost of the conflict in Iraq soared, President Bush proposed spending less than 20 percent of what the Corps said was needed for Lake Pontchartrain, according to this Feb. 16, 2004, article, in New Orleans CityBusiness:

    The $750 million Lake Pontchartrain and Vicinity Hurricane Protection project is another major Corps project, which remains about 20% incomplete due to lack of funds, said Al Naomi, project manager. That project consists of building up levees and protection for pumping stations on the east bank of the Mississippi River in Orleans, St. Bernard, St. Charles and Jefferson parishes.

    The Lake Pontchartrain project is slated to receive $3.9 million in the president’s 2005 budget. Naomi said about $20 million is needed.

    “The longer we wait without funding, the more we sink,� he said. “I’ve got at least six levee construction contracts that need to be done to raise the levee protection back to where it should be (because of settling). Right now I owe my contractors about $5 million. And we’re going to have to pay them interest.�

    It is not really in the interests of the AGW debate to say that Katrina was caused by or made worse by AGW. It is much better to predict that the GLOBAL tropical revolving storm frequecy and/or intensity may increase in the future as the planet warms. It is a good measurable test of AGW and it will be interesting to see what happens this summer of the coast of Western Australia.

  27. It is noteworthy perhaps that, consistent with the Bush Clique policy on Iraq, in New Orleans the US Administration “is not into body counts”.

  28. It is irresponible to blame globle warming for Katrina or any other Hurricanes for that matter. Globle warming will effect the polar caps and has no effect at all on hurricane strengh or number the decade with the most storms and highest intensity was the 1940’s a few rouge storms is not an indication of global warming and its effects on the global climate, but take take it from me listen to the experts.

    http://www.townhall.com/news/politics/200409/NAT20040915c.shtml

    Please do a little more research before we make knee jerk reactions and look for blame just to try and say this is what caused Katrina and we need to do something about it now. It is up to all of us to know facts about things and situations before we start trying to justify causes just to feel better about the situation or fuel politcal finger pointing.

  29. I don’t “listen to the experts” should ever be followed by a link to Townhall.com. To put it mildly, the “experts” listed here are not a representative group.

  30. That is a link to an article on townhall.com about a report that was given to Sen. John McCain about Global warming and hurricanes that was written by three south florida professors from three different univerities in three different departments. The are expert and they a good references sorry if you are to poltically biased to take the time to read it or look for it if it isn’t there.

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