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August 31, 2005

Hurricane Katrina Had No Silver Lining!
by Paul Kasriel

Inevitably, some perky economic analyst is going to say that despite the death and destruction Hurricane Katrina visited on the poor souls who populate Gulf coasts of Alabama, Mississippi and Louisiana, it had a "silver lining" as it will stimulate economic activity via new building, clean-up, etc. Balderdash! Katrina contained no silver lining. Firstly, there is never any silver lining to the death and injury of human beings. Secondly, although there will be expenditures made to clean up the mess and rebuild damaged/destroyed structures, there will be other expenditures not made that otherwise would have. I doubt that folks will be going to the movies or on vacation as much now that they have to spend more on rebuilding. There will be a change in the composition of spending, not in its total. Government disaster aid represents a redistribution of income. So, the givers of aid spend less and the receivers spend more - net, net, a wash. Thirdly, there has been a loss of real wealth. Katrina represented accelerated depreciation. Structures and other tangible assets were destroyed. That means that the services or "income" these tangible assets produced - shelter, transportation - have disappeared. The production of capital assets entails the postponement of current consumption. So, some people are going to have to defer current consumption so that finite resources can be used to reproduce capital assets. If hurricanes or other natural disasters contained economic silver linings, we wouldn't have to wait for Mother Nature's serendipities. We could create man-made ones. Short of wars, which destroy not only physical capital but human capital, too, we could blow-up neighborhoods after giving residents a "heads up" to gather their mementos and vacate their homes. Wow! Think of all the economic activity we could generate. This concept of man-made disasters as good for the economy sounds silly, doesn't it? No sillier than the analysts who will declare that there is an economic silver lining in Hurricane Katrina.

Paul L. Kasriel, Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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