9/11, Katrina and the Economy

The argument has been made that 9/11 was a major cause of the economic recession we went through a few years ago. That is, the financial and jobs impact was enough to tank the stock market for a few months. This is in opposition to the argument that it merely exacerbated the existing deficit spending and tax cuts.

It strikes me that with a natural disaster up to five times the scale of 9/11, we now have a good test of whether a disaster will tank the economy for a year or more.

What should we look for in evaluating the effects of Katrina on the economy?

Well, probably the most obvious affect that Katrina will have is on pricing. I mean, New Orleans alone was the fourth largest port, in terms of raw tonnage, in the world. It's the place where all of the goods from the Southern Hemisphere enter the US. Houston, Galveston, etc. could take up a little of the slack, but I'm not sure those ports would be able to match the sheer level of importation that New Orleans does - and unfortunately, we are not a manufacturing economy, but a service-based economy, so we depend on an astonishing amount of imported goods. I expect to see South American commodities, like coffee and fruit, skyrocket in price. Goodbye $4 latte, hello $10 latte.

Not to mention the increased gas prices. If gas prices are higher, then people will have less money to spend on entertainment like vacations, movies, amusement parks, road trips, specialty ice cream, etc. Y'know - all those extra services. People not having money to buy services in a service-based economy is bad news. I'm sure there are ways to circumvent the Next Great Depression, but I'm not sure escaping the economic bad times altogether is possible.

And then we run into the same problem that led to the magnitude of the Great Depression. America buys alot of stuff from other countries. If we go out, economically speaking, then the rest of the world does too. So I guess its possible that we might see, in the future, global economic depression.

I'm not sure though. IANAEconomist. Just offering up some thoughts as to what might occur.

If gas prices are higher, then people will have less money to spend on entertainment like vacations, movies, amusement parks, road trips, specialty ice cream, etc.

Gas has been killing the restaurants.. the 2 managers and one waitress I know estimate that their business is down about 10% from last year.

I don't think comparing 9/11 to Katrina is fair in any respect, firstly. The kinds of impact both events have will be radically different. The 9/11 impact was that of skittish stocks; Katrina caused us to lose the largest port in this hemisphere. I suspect we'll see the cost of imported goods rise, the government will try and subsidize the costs to keep people happy, the deficit will rise even more, and we'll have another large recession. However, I've said it before, and I'll say it again, my grasp on economics is pretty fragile. These are only my suspicions, so take them with a grain of salt.

There is the "broken window" theory that the destruction will lead to job creation, increased federal spending, and wages for work in the area.

What should we look for in evaluating the effects of Katrina on the economy?

We don't have enough information to evaulate what will be the net benefit/negative of the disaster. I can make a case for both good and bad and we'll see economists arguing both. My guess would be that in the short term (3-6 months) we'll see a hit to the economy as a whole, I read in an article taht 400,000 people be out of work due to Katrina. I think that in a year or so, we'll start to see major growth. I think raising taxes is a bad, very bad idea, and we're going to have to deal with the defecit increasing until the growth picks up. Then the government will need to cut spending and start paying off debt so interest rates do not skyrocket. We shouldn't be as worried with unemployment, that is of minor concern compared to the problems that inflation bring.

One benefit is that the housing boom will keep going since there will be a major need for housing and construction.

Gas has been killing the restaurants.. the 2 managers and one waitress I know estimate that their business is down about 10% from last year.

If business is down 10% from last year that doesn't seem like a big enough drop, and it isn't accross the board, to contribute it to gas. Consumers have continiued to spend and keep the economy moving even with the higher gas prices. I could see more production happening because of Katrina. I hope that we get rid of these stupid region/state formuloations and go with one gas that can be sold and used in the whole country. That would help decrease the price of gas.

One benefit is that the housing boom will keep going since there will be a major need for housing and construction.

The only way to bankroll the new housing construction for the displaced piss-poor residents in a piss-poor state is through federal subsidies, which will increase the federal spending.

Then the government will need to cut spending and start paying off debt so interest rates do not skyrocket.

What fairy tale world do you live in? They are going to cut the estate tax and raise spending if anything; this is the typical modus operandi of this Congress. Maybe if Greenspan was running Congress this would happen but not with these idiots; and next year is an election year! Here comes the pork!

If business is down 10% from last year that doesn't seem like a big enough drop, and it isn't accross the board, to contribute it to gas.

This is after most places have raised prices because of higher costs. Have you gone to a restaurant lately and seen the prices?

If business is down 10% from last year that doesn't seem like a big enough drop, and it isn't accross the board, to contribute it to gas.

Now that gas is over $3 a gallon, how about the oil companies stop bitchin about environmental regulations and build some new refineries too! Heck I want the price to stay high if it is motivation for that.

There is the "broken window" theory that the destruction will lead to job creation, increased federal spending, and wages for work in the area.

The 'broken window' theory is bad economics. Frederic Bastiat, who created the broken window theory said the difference between a bad economist and a good economist, is that a bad economist only looks at what is seen, while a good economist looks at what is seen and the effects that must be forseen.

Bastiat wrote a parable that became the broken window fallacy. The idea is that a shopkeeper's window is broken by a vandal. A crowd formed sympathizing with the man. After a while, someone in the crowd suggested that the boy wasn't guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all, fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler, and so forth.

Those are the seen effects of repairing the broken window. What's unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit. The vandal's breaking his window produced at least two unseen effects. First, it shifted unemployment from the glazier who now has a job to the tailor who doesn't. Second, it reduced the shopkeeper's wealth. Had it not been for the vandalism, the shopkeeper would have had a window and a suit; now he has just a window.

I don't foresee any vast economic impact...I'm no expert, but I think the driver for the economy is gas...the rest will end up being a blip on someone's radar.

JMJ wrote:

Had it not been for the vandalism, the shopkeeper would have had a window and a suit; now he has just a window.

I hope he's got some curtains, too.

The 'broken window' theory is bad economics.

I know it is. I was just explaining that is the theory that was talked about above. CNN has been running the theory on their news shows.