Wednesday, August 31, 2005

The Coming 'Katrina Economy'

The riveting post-Katrina pictures everyone is seeing... are not the end of some regional storm story. They are the beginning of a wider, longer lasting economic catastrophe that will affect the entire nation and the world beyond.
Almost before Katrina made landfall and well before the full extent of Gulf Coast destruction began to be appreciated, financial analysts were holding forth about the impact Katrina would likely have on the U.S. economy. Their attention, predictably, was focused largely on the certain rise in oil prices and the consequent slowdown in growth.

On Monday, for example, this was Michael Connor's lede for Reuters News Service:
Hurricane Katrina may sting U.S. economic growth by choking energy supplies even as the damages caused by the storm spur massive rebuilding and emergency government spending.

Economists, while emphasizing that few concrete damage assessments have yet been made, said the major hurricane that struck the country's key Louisiana energy gateway would help sustain high oil, gasoline and natural gas prices.
To be sure, the White House decided this time to allow oil companies to borrow from the emergency oil reserve (instead of dawdling for two weeks, as it did after Hurricane Ivan). Even so, crude oil has hit $70 a barrel, sending gasoline in many areas of the nation above $3 a gallon. Why? Because borrowing oil from the U.S. Petroleum Reserve is useless if you can't refine it or transport it.

In the U.S., "There's no question gas will hit $4 a gallon," CNN reports one analyst is saying. He adds: "The question is how high will it go and how long will it last?"

The New York Times, via the International Herald Tribune offers an equally bleak vision about how Katrina will affect air transportation:
Katrina crippled oil and gas operations in the Gulf and shut down most of the output from the region, which accounts for nearly a third of domestic oil production and a fifth of natural gas output. It also forced the closing of nearly 10 percent of U.S. refining capacity, which is concentrated in Mississippi and Louisiana.

The hurricane also shut down a major oil-import terminal in Louisiana with a daily capacity of one million barrels, about 10 percent of the United States' overall imports. Pipelines to markets in the Northeast and the Midwest also are closed. Power will have to be restored before they can resume supplying markets outside the area.

The supply crunch is already rippling through the economy. The Air Transport Association estimated that jet fuel production was cut by 13 percent because of the hurricane.
A New Zealand Newswire Service sees negative worldwide implications for food supplies (and prices) as well:
With towns flattened, Mississippi ports blocked, coastal refineries starved of crude and oil production in the Gulf of Mexico virtually at a standstill, Katrina has had a devastating effect.

* * *
...Peter Zeihan, senior analyst at Stratfor, a global economic and political consultancy in Austin, Texas... [said] "The big question is how much the rivers and ports have been silted up. It could be fixed in two days, it could be two months... ." If it's the longer end, we're going right into the grain harvest. The US is the biggest grain exporter in the world, and most of those exports go down the Mississippi. So food and feed prices could soar worldwide," he said.
In today's Los Angeles Times, James S. Granelli examines some "less obvious ways" Katrina could affect the national economy. In addition to the widely-repeated (and undoubtedly underestimated) $25 billion insured property damage price tag, he contemplates the effects of "$7 billion to $10 billion" in uninsured losses "that will wipe out some homeowners and businesses" as well as cripple ports, bulk produce transportation, commercial fishing and tourism.
New Orleans and its environs wield considerable economic clout. * * * The city's port is a key entryway for bulk commodities, such as coffee and steel, and an outlet for grain exports from the nation's heartland.

Moreover, New Orleans is a major hub in the Gulf Coast's rail and highway network, a big commercial fishing center and a key tourism and convention city.
Yet, Granelli says, "most experts predict only a modest decline — about a quarter of a percentage point — in the nation's growth."

That is hard to believe. Soon, no doubt, economists will be revising upwards their estimates of Katrina's devastating impact on the American economy.

Consider recent employment numbers for the Gulf Coast areas most deeply affected -- completely destroyed, in fact -- by the storm. 601,000 people were employed in New Orleans according to the 2001 Metropolitan statistical update by the U.S. Census Bureau. Almost 83,900 were employed in the Lake Charles area... and 78,000 in Houma. For the metro area of Biloxi-Gulfport-Pascagoula, the number was more than 148,000 employed.

What's likely to happen to the U.S. economy after nearly one million jobs were either blown away by Katrina's winds or are sinking beneath the water that now floods New Orleans? These aren't just oil industry and convenience store jobs. They include virtually every kind of job in the entire Gulf Coast economy, from flipping hamburgers to flipping stocks and from CEOs running entire corporations to cabbies running taxis.

Indeed, every single job in the Dictionary of Standard Occupational Classifications is going to be affected by Katrina. And beyond the jobs which are known to the Government, more damage will be done by the disappearance of a wide variety of quasi-legal 'shadow economy' jobs and their close cousin, the 'blackmarket' and illegal occupations.

The South may boast it is more 'religious' and 'patriotic' but it sure doesn't act much holier or law-abiding than anywhere else. As with the rest of the nation, it can be comfortably surmised that both kinds of "cash economies" -- the so-called shadow economy and the undeground economy -- were thriving equally in the playground of New Orleans, on the staid streets of Mobile, in the casinos of Biloxi, and at all points in between. As D.A. Barber has written:
This underground economy goes beyond the homeless collecting aluminum cans or clogging day labor halls. It includes the working poor getting cash for all forms of recycling: giving plasma, selling homemade tamales outside shopping plazas, holding yard sales, doing under-the-table work for friends and family, selling stuff at pawnshops, CD, book and used clothing stores, and even getting tips from restaurants and bars--to name a few.
Although no one can be certain, it's been estimated by some that in the United States the underground economy "doubled from 4 percent of GDP in 1970 to 9 percent in 2000." Barber reports the IRS "estimates the underground economy is anywhere from 3 to 40 percent of the above ground economy." All of that cash turned around quickly and was plowed back into the 'official' Gulf Coast economy. That is, it was until now.

The riveting post-Katrina pictures everyone is seeing on their television screens or in the daily newspaper are not the end of some regional storm story. They are the beginning of a wider, longer lasting economic catastrophe that will affect the entire nation and the world beyond.

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