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.