Katrina shows U.S. economy's vulnerabilities

Even as emergency workers and others slosh through the soaked, debris-strewn streets of New Orleans and other areas torn up by Hurricane Katrina, some economists fear American policy-makers will take the wrong lesson from the storm and ignore America’s larger vulnerabilities.

Katrina’s “immediate effect will be a bump in gas prices of maybe 20-25 cents a gallon -- although that might be mitigated now the Bush administration has released some crude oil from the Strategic Petroleum Reserve. But the price of gas is going higher anyway,” said Stephen Leeb, president of Leeb Capital Management.

With gas prices already at record highs, a further jump is likely to have a negative impact on the U.S. economy.

The more serious issue, Leeb argued, is how quickly one strong storm can tip America’s energy needs at a time when global oil supplies are tight and getting tighter.

“Ten years ago we could have turned to the Saudis and asked them to pump more oil. Now, the tap is 100 percent on,” he said. “This is a different world but that has not sunk in to the minds of the policy-makers.”

Major oil producing countries like Nigeria, Iran, Venezuela and Saudi Arabia risk political upheavals that could pack a much more serious punch to America’s economic center, he added.

Reconstruction activity
Despite this, other observers note that the billions of dollars of devastation wrought by Katrina will be offset by billions in reconstruction activity.

Lynn Reaser, chief economist of Bank of America’s investment strategy group, said Katrina’s financial impact will likely follow the traditional V-pattern.

“The local effects including the loss of lives, homes and other property, businesses losses, retail sales and tourism in New Orleans and parts of Mississippi are going to be very costly,” she said, adding a lot “will depend on how quickly power is restored.”

Over time, however, there will be a huge economic boost from emergency funds and rebuilding efforts as was seen in Florida after last year’s deadly storm season.

After the Asian tsunami the affected areas came back rather quickly, she said, “but it remains to be seen how quickly the recovery is in New Orleans.”

Aside from oil, Reaser explained the storm may also have damaged regional crops like cotton and grains.

While reconstruction activity will bring some relief, Professor Rodney Green of Howard University notes reconstruction doesn’t benefit everyone. The low-lying — and worst effected — areas of New Orleans are generally the poor neighborhoods. These people can’t afford $150 a night for a hotel and the city’s Superdome — a shelter of last resort during the storm — has been damaged, he said.

So, the question is whether the various authorities will use the emergency funds to build affordable housing or if developers will buy that land to build expensive housing, he added.

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