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September 1, 2005
In the wake of Katrina
Alan Greenspan is fond of proclaiming that "flexibility" is a key strength of the American economy. In the wake of Katrina, that intangible of flexibility will be put to the test over the coming months. The storm was a personal tragedy for thousands. It will also be a major test of our economic resilience.
Energy prices are the most obvious example. For an economy that is sputtering alone on consumer (over?)spending, the sharp rise in energy prices will be a retardant. More critical will be possible shortages (actual or perceived) due to the supply line disruptions. Long gas lines and closed gas stations may do more psychological than economic damage. But as Keynes remarked, the markets (and economy) are ruled by the "animal spirits".
But energy is only one commodity in play. The ports along the Gulf Coast, especially New Orleans, are major links in our supply chain. New Orleans is also a major freight depot for both rail and trucking. Navigation on the Mississippi is disrupted. Already coffee and other commodity prices are rising due to concerns over supply disruptions. Rising prices may trigger inflationary pressures and prompt a stronger response on interest rates from the Fed.
The rebuilding effort will also have disruptive effects. Lumber prices are rising due to the anticipated demand. If lumber prices rise too much, it will put a damper on the home building industry nationwide - with consequences for the overheated real estate market. Insurance companies will take a major hit - with the potential drain of investment capital. And the Federal deficit will again balloon as disaster relief spending soars.
In the short term, the spending on the rebuilding will likely boost standard macro-economic statistics, such as GDP. But the growth will be both mostly illusionary (not really new investment) and short lived. Whether this is a short-term blip or a longer-term drag on the economy remains to be seen. On the optimistic side, there may be an opportunity to leverage the rebuilding into positive growth by updating the area's infrastructure.
Keynes was right about the "animal spirits" - which he described as "a spontaneous urge to action rather than inaction." In the end, Greenspan's touted flexibility - and the courage and ingenuity of the millions of people affected by Katrina - will be our most important intangible assets as we face this tragedy.
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Posted by Ken Jarboe at September 1, 2005 8:15 AM
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