Why the hurricane may hurt the economy more than 9/11

The Katrina Premium
Why the hurricane may hurt the economy more than 9/11.
By Daniel Gross
Posted Thursday, Sept. 1, 2005, at 12:42 PM PT


New Orleans' devastation
Economically speaking, Katrina is no 9/11. It may be much worse. In the months after 9/11, stocks rallied. The Federal Reserve slashed interest rates, unleashing a wave of liquidity and paving the way for economy-boosting gimmicks like zero-percent financing. The airlines suffered a grievous blow. But prices didn't jump; there were no shortages of anything. Looking back, the catastrophe of 9/11 had a relatively minor impact on the broad economy.

And the consensus thus far seems to be that Katrina will be much the same. "As long as we find that the energy impact is only temporary, and there is no permanent damage to the infrastructure," Ben Bernanke, chairman of the White House Council of Economic Advisers, said yesterday, "the effects in the overall economy will be fairly modest." Traders are already having the 9/11 reaction, bidding up stocks and buying long-term bonds.

But because of the nature of the damage, the industries it affected, the role the Gulf Coast plays in the national economy, and the place we're at in the business cycle, Katrina could prove to be inflationary. And as a result, the damage it causes could ripple far beyond the Mississippi Delta.

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The 9/11 attacks struck at the heart of the New Economy. But the businesses affected—newspapers like the Wall Street Journal, investment banks, stock traders, insurance companies, accountants, and the New York Stock Exchange—were able swiftly to reorganize and get back on track in short order. The physical infrastructure they lost was not essential to their businesses—Merrill Lynch could trade stocks in midtown; the Wall Street Journal could publish from New Jersey. As a result, the businesses and consumers all over the country who relied on these services didn't face major dislocations.

But things are different with Katrina....