More on Katrina & Rita's Potential Fallout

Adapted from Roger Kubarych's recent op-ed on Hurricane Katrina.

After a disaster like a hurricane, many economists believe that it is only logical that the destruction of infrastructure and disruption of business flows would lead to the following consequences:

First, a temporary reduction of output; Second, the reduction in output would be followed by a temporary burst of activity once conditions on the ground got back to normal; Third, national employment levels might be effected.

Finally, over a reasonable period of time, normally thought to be a little less than a year, the net impact on GDP, the measure of a nationā€™s current output of goods and services, may turn out to be somewhat positive as the reconstruction effort goes forward.

The above analysis is logical and many accept it as conventional wisdom, but is it always right? Notwithstanding conventional wisdom, the available data following the last ten most costly hurricanes clearly indicates the following:

First, there is no clear pattern of falling GDP growth in the period just after the disaster, followed by a temporary burst of activity later on. Second, there was no consistent burst of private construction activity, either residential or non-residential.

Third, jobless claims do increase, locally. But that rise is rarely big enough to lead to a nationwide increase in unemployment. Fourth, the subsequent reconstruction effort does not seem to pull up total employment levels, except in a few specialty construction occupations.

Finally, previous natural disasters, be they earthquake or hurricane related, had little effect (negative or positive) on GDP.

The difference between Katrina & Rita and the previous disasters is the scope and scale of the damage. The fact that three of our top ports and our main shipping artery have in effect been taken out of existence is nothing short of potential catastrophe.

The leading consideration at the moment is: can the effected area be rebuilt in such a way that it can withstand another massive hurricane at a cost that the state and federal government can afford?

No one knows, but there is tremendous political pressure to do the job, regardless of the budgetary consequences. An economic stimulus of such magnitude may dwarf past rebuilding efforts, so this time may be different.

This time, recovering from the worst hurricane in memory may well have an impact on the overall economy and an inflationary effect that neither policymakers nor the financial markets can easily ignore.

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