Should Republicans go ahead and add Supreme Court Justices to head off Democrats

Disasters' overrated economic effect

Gary Duncan:

A CITY lies in ruins. A million people are dispossessed, homeless and out of work.

The scenes of physical devastation and human misery in New Orleans continue to shock the world. Yet despite the appalling toll shown daily on our television screens, little is said about the economic repercussions of the havoc wrought by Hurricane Katrina.

The reason for this odd omission from the media blitz over Katrina is straightforward: incalculable though the cost to victims’ lives may be, the wider economic costs of this disaster will, like those of most other natural catastrophes, be relatively limited in scale.

For many who have seen the television images of New Orleans and of disasters such as the Indian Ocean tsunami last year, this must seem implausible. Surely, the economic cost of such traumas must parallel their physical scale? In reality, this is not the case. The economic consequences of almost all natural disasters, whether hurricanes, earthquakes, volcanoes or tsunamis, tend to follow a simple pattern. The catastrophe inflicts massive and appalling physical and human damage, but, in most cases, the devastated area accounts for only a relatively small fraction of the affected country’s economy. Then massive rescue and rebuilding efforts in the disaster zone deliver a big, offsetting boost to economic activity — one that often can leave the overall output of a national economy largely unaltered compared with what it would have been had the disaster not occurred.

This is broadly the pattern seen in Indonesia, the nation worst-hit by the Boxing Day tsunami. It’s economy saw a strong expansion even in the first quarter of this year and remains on course to grow by about 5.5 per cent over this year — slightly faster than the 5.1 per cent pace recorded last year.

In assessing the economic costs from New Orleans, the destruction inflicted by Katrina needs to be weighed against the size of the American economy as a whole.

Taken together, Louisiana and Mississippi, the two states primarily affected, account for 2 per cent of US GDP. So if, on a worst-case scenario, a quarter of their output were lost for an entire year, the knock to US growth would be half of a percentage point. The massive rebuilding effort about to get under way ought to offset at least half of that loss. On this rough and ready calculation, we can see that a resulting quarter-point reduction in US annual growth would be a significant effect, but a manageable one given an expected US expansion of more than 3 per cent this year.