Necessarily, we have all been focused on the almost unimaginable tragedy that unfolded in New Orleans and our Gulf Region. Soon, however, each and every one of us will begin to feel the indirect effects of Katrina. Initially, they will be largely economic. Although the media has so far concentrated on potentially rising fuel costs, there is much, much more to the story.
When the markets closed on Friday, September 2, the Dow was up 50 points for the week, and oil futures, which had peaked at over $70 dollars a barrel on Wednesday, closed thee points lower. It seemed that the markets' collective judgment echoed that of the White House, that Katrina would be at most a minor setback in a robust economy.
There were some ominous signs, however. Coffee futures were up 10 percent and the price of sugar rose, while farmers' prices for corn and soybeans fell, according to the Financial Times. Most discussions of Katrina's economic effects highlighted oil issues. Others made comparisons to the bounceback after 9/11, concluding that we would experience only a short, sharp shock. But commodity price fluctuations point the way to the real story. We are all about to find out what Thomas Jefferson and Andrew Jackson knew almost instinctively: New Orleans may be the most important city in America--and it is now largely under water.
As George Friedman at Stratfor observed, what Jefferson and the new nation acquired in the Louisiana Purchase was not just land, but land that came with its own built-in transportation system, the mighty Mississippi and its many tributaries from the Alleghenies to the Rockies. New Orleans is where it is, and where it must be again, because this is where the Mississippi empties into the Gulf of Mexico, where cargoes that come down from America's heartland can be loaded onto ocean-going vessels for export to Latin America, Europe and all over the world. And imports from Latin America, Africa and many other areas arrive at New Orleans for shipment up river. It is an unparalleled system for moving heavy and bulky cargo, such as steel, lumber and building materials, and agricultural products like wheat, corn and soybeans.
Although New Orleans' economy is but a small fraction of the total US economy, because of its location the Port of South Louisiana, including the Port of New Orleans is the largest port in the United States and the fourth largest in the world. Over half the grains and soybeans exported from the US pass through those ports, and the harvest will begin to peak in about six weeks.
It is unclear at this point how much damage the Port of South Louisiana has suffered. What is clear is that because of new Orleans' role in the economy, like the human tragedy, the economic consequences of Katrina will far exceed those of 9/11. First, per the Washington Post, over 1,000,000 people have lost their jobs, about 600,000 of which were in New Orleans. This is almost three times the job losses estimated from the World Trade Center attacks. But these people have lost not only their jobs but their homes and their communities, and the infrastructure that supported them. The local tax base of large parts of three states has been virtually obliterated at a time when the area needs services on a massive scale.
Second, as noted by Daniel Gross at Slate, the industries most affected by 9/11 were mostly part of the "new economy", chiefly in the financial services sector. They could be relocated or restarted relatively easily. But New Orleans sits at the intersection of the "new" and the "old" economies. It deals in agricultural and other "old" economy commodities, and relies on a complex physical structure of barges and ships, docks and storage and transfer facilities. But it is also, as he points out, a vital link in the "new" economy of dispersed supply lines, "just-in-time" inventories and the infrastructure for the movement of goods over vast distances they entail. And it requires a trained workforce to operate the Port, a workforce which is now dispersed and whose homes and communities are largely under water.
It is uncertain how long the Port will be out of commission, but the director of public policy for the National Corn Growers Association was quoted as saying that "It doesn't look like ocean freight will ship out of that area for some time." Removing wrecked barges and debris is only part of the problem. Restoring the workforce is the other part. Workers need homes and communities, schools and shops. All of that is gone. In such difficult conditions workers can justifiably command a premium, and that adds to costs.
It is likely that imports will be affected less than exports, because ocean traffic can go to other ports like Houston or Atlantic seaboard ports. But even these cannot pick up all of the slack, given the volume of goods that moved through New Orleans. And costs of imported goods will rise. Among the products affected are tropical fruits and coffee, as well as rubber, lumber and building materials. Locally there has also been damage to poultry, cotton and sugar, in addition to oil production and refining. And many components of the now widely dispersed manufacturing process also come through New Orleans. The one thing we can predict is that given the behavior of modern corporations, there will be an effort to find new suppliers and new customers if bottlenecks occur.
Exports are likely to be affected more, because there are no good alternatives to the Mississippi for moving crops like corn and soybeans. One soybean expert said that if the Port remains inoperable for an extended period, "Its going to hurt us. I hope our leaders are thinking about this. It has far-reaching effects." It is entirely possible they are not even aware of this possibility, let alone planning for it.
They should. If the cost of imports rises and our exports decline, the already huge trade deficit will widen. This, in turn, will cause the dollar to weaken further. Consumers already reeling from high oil prices will find imported goods harder to afford. This has caused some observers to recalculate the chances of a recession. Many effects will be generally inflationary, but the Fed will be reluctant to raise interest rates during the rebuilding process. And the massive cost of rebuilding the Gulf Coast and New Orleans portends difficult times down the road since our national debt is already fast approaching $8 trillion.
On the positive side, rebuilding after natural disasters has generally had a stimulative effect, as would grants to displaced citizens for relocation and rebuilding. But the problems facing the New Orleans area are such that rebuilding will not begin for many months, assuming we can reach some agreement on how to rebuild and how to fund rebuilding.
The prevailing politico-economic philosophy in recent years has told us that we should leave problems to the ever-rational markets to resolve. But Katrina has exposed the fallacy in this thinking. The dispersal of manufacturing has created supply chains and infrastructure that belong to eveyone and no one, what Barry Lynn in "The End of the Line" "our global industrial commons." We failed to understand the importance of New Orleans, and so we failed as a nation to protect it. It is the tragedy of the commons all over again, this time with incalculable human suffering. Katrina has shown us that our economy is more interdependent than it has ever been, and so more vulnerable to shocks.
As the economic consequences of Katrina ripple through the economy, there may be political changes as well. As we decide how to rebuild, we must remember that "the market" will not take care of us because the market really does not care; it has no goals other than those that society creates and enforces through the web of laws and regulations that contain it. We need a society that. through democratic means, using the energy and intelligence of our people, and with respect for science and nature, provides for and protects the common good, our communities, and each and every one of us. Creating that society is now our challenge, and it is the most fitting memorial we could construct to the victims of Hurricane Katrina.