Ask the experts: Hurricane Katrina

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Martin Wolf and Michael Lind answer your questions on the political and economic impact of Hurricane Katrina.

Martin Wolf, the FT’s chief economics commentator, in How oil adds to the economy’s fragility, analysed the effect on oil prices.

Michael Lind, Whitehead Senior Fellow at the New America Foundation, believes the loss of life in New Orleans has been one of the costs of Bush’s policy on Iraq - Tragic costs of Bush’s Iraq obsession

Could Katrina become a positive “disruptive” factor in terms of US/global energy policy? More specifically, do you foresee a significant behavioural change in mass consumption that would influence policy-making in favour of developing alternative sources of energy?

Al Rojas

Martin Wolf: US resistance to a fundamental change in energy policy seems to be deep-seated. It is also very far from clear that the hurricane had anything to do with global warming. It is not even clear they are more frequent than they used to be. For these two reasons, I cannot believe this will cause any fundamental change in policy. What could make a difference, however, is market forces: if oil prices were to remain at current levels, for many years, I would expect another big downward shift in the energy-intensity of production and consumption. But for this to happen, prices need to stay high for some years. That may happen, but it is not a ‘sure thing’.

Michael Lind: I think it is unlikely that the Katrina disaster will affect US energy policy. The reasons are both political and technical. It is politically impossible for one party in the US Congress to propose a tax on imported oil without being attacked by partisan rivals. For example, when the Clinton administration proposed a small gasoline tax, Senator Robert Dole, then Senate Majority Leader, and the Republican party savaged the idea, and nothing happened. The technical problem involves transportation. Most US electrical power comes from coal, supplemented by nuclear energy and hydroelectric power. Oil and gas are used for transportation and heating in the Northern states. Alternatives to gasoline in transportation - hydrogen fuel cells, batteries, hybrid motors, methanol, even “gasified” coal - are still experimental and expensive. And some, like fuel cells or batteries, require energy to be generated from other sources, which are more likely to be familiar, like coal or nuclear power. Most studies suggest that alternative sources of energy, like solar power and wind power, cannot supply more than a fraction of the energy needs of the US and other industrial societies, even if energy were used more efficiently. Rather than a change in mass consumption patterns, a gradual shift from oil and gas to coal and nuclear as the ultimate source even of transportation energy, via electricity, is the most likely scenario in the foreseeable future.

We hear about all the negative economic consequences but what do you think will be the positive economic consequences for those cities and regions in which survivors of the hurricane have sought shelter? I expect that many of those who have left will find new lives in places like Baton Rouge, Houston and beyond and that could be positive for them in terms of new opportunities and for those cities.

Graham Moores, Abu Dhabi

MW: Overall, the effect must be negative, since there is a loss of output, as well as destruction of the capital stock. The new investment is a cost, not a benefit, since it replaces what is lost. But some places may well benefit, at the expense of New Orleans.

ML: If many of the evacuees decide to make new homes in the communities to which they have fled, this might indeed cause local economic growth. However, many evacuees are poor blacks and poor whites who are stigmatized in American society. In some cases, they are moving into metro areas in which a poor, crumbling inner city is surrounded by class-stratified suburbs. The failure of cities outside of the South successfully to assimilate many poor black and white Southerners during the Great Migration out of the South in the early twentieth century has to make us cautious in our predictions about the social and political consequences of this migration.

What repercussions will Hurricane Katrina have on the US enterprise IT sector? Do you expect that the aftermath will look at which disaster recovery systems performed - and which did not? And will this issue have a bearing on the disaster recovery solutions providers’ stock prices?

James Hayes, UK

MW: This is an interesting question, but I am not competent to answer it. What you suggest seems very plausible. Fema’s disaster recovery system didn’t work too well. That won’t affect its share price, but it will surely have a political impact. This has clearly weakened the president, George W. Bush.

ML: I am not qualified to speculate about which industries or companies in the IT sector might prosper in the aftermath of the disaster.

There is an issue about economics no-one has discussed, that is the lack of police and social services in a city classed as poor. Why was there not enough money to pay for enough police even in the best of times? Why were the poor so lawless? Does this have anything to do with the American system of having local communities pay for their own social services? What is the difference in the percentage of social services funded locally, statewide, and nationally for New Orleans? What, if any, federal funds pay for social services including prisons?

Constance Blackwell

MW: I will leave Michael to answer your statistical questions about the funding of city services. But your general point is correct. In the US, places where poor people live often have fewer resources at their disposal. The better off leave for lower taxed jurisdictions, while the poor stay behind. This is a natural consequence of a relatively decentralised federal system, with a very limited nationwide welfare state.

You also ask why the poor were so lawless. The contrast with the much poorer people affected by the Asian tsunami is striking. Race remains a profound feature of US life. Poor blacks seem to suffer from a particularly atomised family structure. The so-called ‘war on drugs’ is also a disaster, since it has created a profitable, but intensely violence-prone illegal industry: drug dealing.

ML: The lack of police and social services in New Orleans and the poor inner cities of other American metro areas is the result of two factors: America’s geographic segregation by class and the lack of federal and state funding for local public services. Most working-class, middle-class and affluent Americans of all races live in suburbs and exurbs today. Inner cities tend to have concentrations of the very poor along with the very rich, in fashionable downtown neighborhoods. Unable to tax the suburbs, in many cases, and receiving little state or federal money, inner cities in the US tend to raise money by trying to invite tourist-oriented businesses and convention centers to locate themselves downtown by granting these enterprises tax abatements. The theory is that the revenue that downtown businesses will generate will exceed the revenue shortfall caused by the tax breaks for those businesses. However, cities that try to lure businesses downtown with tax breaks are often forced to raise taxes on the urban middle class. This results in the flight of yet more middle-class citizens to the low-tax suburbs, greater urban revenue shortfalls, and even more desperate attempts at downtown redevelopment.

The alternative would be state and federal grants to cities to pay for public services. However, the suburban majority (which is transracial, not just white) is unwilling to pay higher state or federal taxes to subsidize inner cities in which fewer and fewer Americans live or work. As a result, I think it is likely that American downtowns will continue to lose population to the suburbs and exurbs, as they have done since World War II.

Do you think such scenes of domestic suffering will put an end to the drive to dismantle social security?

Chris Zappone

MW: What has happened in New Orleans may have large domestic political consequences. But there is no obvious connection with the debate on social security. Social security provides pensions to the elderly and time-limited unemployment benefits. It provides nothing, as I understand it, for the able-bodied working poor, the long-term unemployed, the children of either of these groups or, of course, those who live off crime. Social security was designed for what we in the UK used to call the “respectable” working class. What is revealed in New Orleans is a far more depressing (and depressed) stratum of society.

ML: President Bush’s campaign to privatise social security was effectively dead by the beginning of the summer, months before the hurricane. The cause of death was public anxiety about the stockmarket in the aftermath of the stockmarket crash that followed the tech bubble of the late 1990s.

Re: Katrina and the oil issue: The post-war reconstruction of Iraq has been contracted out mainly to American corporations like Halliburton by using Iraqi oil revenues. Presumably those oil revenues are used to finance the current occupation of Iraq. The question is how much Iraqi oil is being sold on the open markets and how much Iraqi oil is being reduced by the current insurgency?

Richard Bond

MW: Most of the oil revenues will be needed to cover the operating costs of the Iraqi government, though there may be a modest surplus for reconstruction. According to a now somewhat dated analysis by the US congressional budget office (produced in early 2004), the Iraqi government would receive $71.5bn in oil revenues between 2004 and 2007. (This would probably now be somewhat greater, given today’s high oil prices.) $51.3bn would go on operating expenses, $4.1bn on debt service and $16.7bn on reconstruction. But the total cost of reconstruction was estimated at between $50bn and $100bn. So the US will end up paying the cost of the war, its own subsequent military persence and a substantial part of the reconstruction, unless (as is very unlikely) other allies chip in. Whatever the Iraq war was, it was not (and was never likely to be) a profitable investment for the US.

ML: A very good question, to which I do not know the answer.

With Katrina’s damage to refineries in the Gulf Coast area, and lack of an end to hostilities in the Middle East and Iraq any time soon, can one expect that the US will finally tap into other global oil markets, thereby reducing its dependence on current suppliers? Is it possible that countries like Ecuador, Hungary, Norway and Croatia may then become members of Opec in the very near future, and that more trade deals may be signed between the US and commodities rich countries (i.e. Canada, Chile, Russia)?

Bojidar Dobrilovic, Montréal, Canada

MW: Oil is a global market. So it doesn’t matter which suppliers supply particular markets. The flows will adjust and the prices will be set at the global level. For this reason, I see no reason for trade deals with particular oil suppliers. I also think it is quite unlikely that other suppliers will join Opec. It is more rational to be a free rider on Opec supply control, which delivers higher prices at no cost to the non-members.

ML: The US would probably be worse off in terms of national security if it became dependent on other suppliers. At present the US gets a relatively small amount of oil from the Persian Gulf; most of America’s oil needs are met by production in the US, Mexico, Canada, Central America (particularly Venezuela), the Gulf of Mexico and the North Sea. The purpose of US military forces in the Persian Gulf and Central Asia since the Gulf War has been to protect the oil supplies of other industrial and industrializing nations more than to protect American oil imports.

The expansion of Opec would probably weaken it, because all international organizations tend to be weakened as their membership expands, thanks to the inherent problems of collective action among sovereign states. In general, commodity-exporting countries may be in for a golden age in the twenty-first century. In the nineteenth and twentieth centuries, when industrial nations were few and agrarian nations were many, the terms of trade favoured industrial exports while gluts in commodities drove down commodity prices. Today, however, the number of nations seeking to export manufactured goods is growing, at the same time that rising industrial powers like China and India need energy, raw materials, and food. Countries favoured by nature with certain commodities for which there is global demand can be expected to do quite well.

How can the existing organisations be called into action: what is really feasible? What are the main faux pas to be avoided? I am afraid that the current diatribes on hind- versus foresight, while unavoidable, cannot make the search for the way-out easier. Nor the exact finger pointing to the current men in the wrong position. A new sense of fraternity and common responsibility is needed. What can be done here and now?

Giorgio Bolognesi

MW: This is not my area of expertise. I am happy to leave the question to Michael.

ML: As I see it, there are two problems. The US consistently underfunds disaster prevention and national infrastructure, while federalism tends to produce confusion in disaster relief. The admittedly somewhat utopian solutions, in my opinion, are to allow federal agencies in charge of building infrastructure like the Army Corps of Engineers to issue bonds to pay for public projects, the way that states and cities do, and to federalise all disaster relief efforts from the beginning of an emergency, so that local and state police and first responders are integrated into a single federal chain of command.

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