William J. Polley

I am not sure of the magnitude of the short-run impact either, but it will be negative I think. With the Mississippi shut down (though alternative modes do exist they will work better for exports than imports I believe) there will be supply disruptions and of course oil is impacted, etc. One set of analysts out there I read theis morning, can't remember who, lowered their estimate of growth from 4.6% to 4.4%, not a large change. I underestimated the aftermath of 911 and I'm hesitant to do that again so, in the short-run, I might even be tempted to go further than that. In the short-run Tim thought they would face the classic supply shock problem for this and the oil price shock reason, etc. We all agree I think, though the severity of the supply shock and the SR effects may be viewed differently amongst us.

Tim's write-up that he gave me had years in caps on the demand section, I changed it to italics, so I think he was trying to emphasize looking down the road further than a quarter or two given the lags in monetary policy when thinking ahead to the next sets of rate increases, exactly as the quote talks about. By the time a rate hike in, say, September is fully felt we will be in the next hurricane season. So the assessment needs to look at resource demands far down the road and that is where there are countervailing forces to think about. Once the short-run impediments – roads, bridges, terminals, oil platforms are reconstructed that is where it is hard for me to judge demand.

On the ‘this is just money that would have been spent somewhere else’ issue I'm not sure I agree fully, but I may have misread you. Some of it, yes, but there may also be substantial wealth liquidation during rebuilding to cover contingencies not covered by insurance, etc., the old precautionary demand for money if you will. But I don’t know historically if this is a large effect or not. Here’s how I’m thinking about it, shooting from the hip again tonight, so maybe I have it wrong. I’m sure I’ll hear about it if I do.

Someone has a house worth $200,000 and furniture of $25,000 and the insurance company pays off $210,000. That is not at all unusual to get less than full value (and when prices are rising many people do not update their insurance). So the person gets $210,000. Suppose $50,000 of the $200,000 house value is equity. The person could (a) liquidate other saving to make up some or all of the $15,000, or, (b) build a, say, $190,000 house and buy $20,000 in furniture and split the loss in both areas ($10,000 less in house, $5,000 less in other stuff).

In the first case, $15,000 in wealth was liquidated, in the second $10,000 in equity is liquidated. It is these kinds of wealth effects I had in mind in the long-run, but again, I don’t now how large those typically are, and I may have missed something. But it seems like new spending.

I attach a high variance to most forecasts right now. I don't know how fast the Army core can get shipping restarted, build bridges, etc. - they are good at that sort of thing - I don't know how long the transitional phase will last until the rebuilding phase will begin. Getting all the insurance contracts, etc., in place will take time, but then again they have experience with this in that area. It's amazing how fast a new housing development can go up once the building starts.

Anyway, I don’t think the three of us disagree all that much about the short-run. I see positive potential demand effects in the long-run, but as I noted in the other comment, I also see countervailing negative effects. I wasn’t willing to go in print with this because I wasn’t certain enough and had been working on other stuff all day nd hadn't thought enough about it all, it seemed far too easy to be wrong to say anything at all, and here I find myself out on a limb, albeit a somewhat hedged limb. We’ll know more with time.

I know it's Army Corps, etc., dang typos...

It's late, I'm tired, and I shouldn't have started this. The numbers aren't quite right, just ignore them please. The second case doesn't work right for sure and I haven't rethought the first. All I did was replace $10,000 in house that would have been built with furniture, still only $210,000 in spending. Grrr...that was dumb. Not sure what I was thinking. You can't liquidate the house because the replacement value is $200,000. I shouldn't shoot from the hip apparently. I was just trying to say what the quote said.

Sorry. Let me make it very simple for myself. The insurnce pays $210,000, I need $225,000 to restore everything. I have $15,000 in a cookie jar from before the flood, a contingency account, and use that to make up the difference (or sell a car?). Wealth is liquidated and there's new spending. I hope that works cause my brain is not being very cooperative this evening, so either way I'm stopping before this hole gets any deeper.

This view of the economic consequences is pretty typical of the analysis I'm reading today. Here's Ben Bernanke:

The wider US economy should see only a "modest" impact from Hurricane Katrina although the hardest-hit regions will suffer, a White House official said "Clearly it's going to affect the Gulf Coast economy quite a bit. You've had a lot of property damage. Basic services are down," Ben Bernanke, chairman of the Council of Economic Advisers, told the CNBC network "And so economic activity in that area is going to be, really reduced and that will be enough to have a noticeable or at least some impact on the aggregate data," he said … Bernanke acknowledged a "tough situation" on gasoline but said the effects should wear off. "My guess is though that as long as we find that the energy impact is only temporary, and there is no permanent damage to the infrastructure ... the effects in the overall economy will be fairly modest," he said "As long as there is not some kind of fundamental long-lasting impact on the infrastructure, which so far I don't see much indication of, I expect it will be absorbed relatively easily the way we absorbed previous natural disasters like Hurricane Ivan (last year)."

Even the worst-affected states like Louisiana and Mississippi should see some benefits in time, Bernanke added. "Reconstruction will add jobs and growth to the economy," he said.