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Forget most of what you may have heard or read in the financial press about the post-Katrina recovery. This is an unprecedented U.S. disaster that will be felt most acutely by the domestic U.S. economy, but it will have far-reaching global repercussions also.
Chicago Fed President Michael H. Moskow
CBO Director Douglas Holtz-Eakin
make clear, the macroeconomic impact of this storm will be far greater than any prior hurricane on record.
To put the destruction into context, consider that the costs for rebuilding New Orleans and the surrounding areas will likely exceed those of rebuilding Chicago after the great fire; San Francisco after the 1906 earthquake; and New York and Washington D.C. after the Sept. 11 attacks -- combined. The economic costs are greater than the four worst metropolitan disasters in U.S. history, added together, and that's after adjusting for inflation.
I must admit I do not understand the thought process of those who downplay the significance of the loss of a major American city. Even worse from an economic standpoint, New Orleans is not only the nation's largest port -- it exports more than 52 million tons a year, while importing nearly 57 million tons -- but it is also
its most important
Several misinformed persons have even mentioned the disaster as a net economic positive. Despite what these bullish pundits are saying, the stimulus of rebuilding New Orleans will not outweigh the overall loss to the economy. As the
parable of the broken window
makes clear, any dollars spent rebuilding after Katrina are monies that would have otherwise been spent elsewhere. If not, we would simply level a different city each year and rebuild it from the ground up, all shiny and new. But it doesn't, and so we don't.
The repercussions of the Gulf tragedy will have effects beyond the economic damage: It will affect the markets, trade, national security, and the country's political agenda as well.
Katrina's Timing Mixed Blessing
The Gulf catastrophe came at a time when the consumer was already starting to look haggard: Pressured by high energy prices, squeezed by inflation and no gains in real wages for five years, and increasingly less able to convert home equity into spending cash, the consumer was beginning to look shopped out. (For an extensive look at the state of the consumer, see
last week's discussion
between Andrew Samwick, the former Chief Economist of the President's Council of Economic Advisors and myself).