The Economic Impact of Katrina

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• JEFFREY BROWN:

  New Orleans and the Gulf region will see a "prolonged and substantial disruption of economic activity." The hit on the overall U.S. economy will be "significant, but not overwhelming" — that from the first snapshot of the economic impact of Katrina, released today by the non- partisan Congressional Budget Office. The director of the CBO, Douglas Holtz-Eakin, is with me now. And from Baton Rouge, we're joined by Jim Richardson, professor of economics and director of the Public Administration Institute at Louisiana State University.

  And welcome to both of you.

• JEFFREY BROWN:

  Mr. Holtz-Eakin, starting with you, to use your phrase, significant but not overwhelming, start with the significant side what makes this a major economic event for the United States?

• DOUGLAS HOLTZ-EAKIN:

  Prior to Katrina the U.S. economy was growing briskly. The unemployment rate had been falling steadily. The economy had added 150,000-200,000 jobs a month. With the effects of Katrina, concentrated in the second half of this year, we'll see noticeably slower growth; we'll see noticeably slower improvement in the jobs picture, and as a result, it will significantly affect the growth path of the U.S. economy. More overwhelming, it is unlikely to cause a recession, but it will be noticeable.

• JEFFREY BROWN:

  You used a number of up to 1 percent of GDP and 400,000 jobs. This is the forecasting business so this must be hard to do, but that sounds pretty solid to you in terms of the impact?

• DOUGLAS HOLTZ-EAKIN:

  I would say to anyone who asked, those numbers will be wrong. It will turn out that the estimates are mistaken one way or another. But they seem to be good ballpark estimates given what we know. The uncertainty is enormous. And as time elapses and we see the nature of the damages, we'll have a much better idea.

• JEFFREY BROWN:

  Professor Richardson, give us a snapshot of the key economic sectors down there that were impacted.

• JIM RICHARDSON:

  Well, in the New Orleans metropolitan area there are a number of sectors — one being the petrochemical sector, the oil industry, there is also the shipbuilding, Avondale shipbuilding grounds. And you have the Lockheed Martin space shuttle area. And then you have four private universities plus the public university. And then of course your tourist industry is a large part of the economy as well.

• JEFFREY BROWN:

  Now you mentioned of course the oil production. And a lot of attention was focused on that right from the beginning. What's happening with that?

• JIM RICHARDSON:

  That seems to be coming back. And that can come back without the city of New Orleans or that area being more inhabitable because you are dealing with pipelines. You're dealing with a small number of workers. So in that situation, the oil industry, unless there is structural damage to the pipelines or to some of the producing rigs, that will come back fairly fast. And that will also be true for the refineries and some of the other manufacturing facilities that will need only — not a large number of people working at them. And assuming there is no structural damage, they'll get back online fairly quickly.

• JEFFREY BROWN:

  What about the flow of goods on the Mississippi and through the Port of New Orleans? Probably most of us don't even know how big — how big all that is, how much economic activity flows through there. What has happened — what kind of commodities are impacted and what's happening?

• JIM RICHARDSON:

  Well, in terms of there are two ports really, the Port of New Orleans and the port of South Louisiana right together, very close together. You have a lot of agriculture products imported to other countries: Rice, chicken products, wheat and things of that nature. That will have an impact on farmers throughout the Midwest very easily. Coming into the country you have things like steel products, aluminum products, and products of that nature that will have an impact also because most of those products go up the Mississippi River, up to the Midwest and over to the East Coast.

• JEFFREY BROWN:

  So Mr. Holtz-Eakin, is that how you measure the larger impact on the economy by things like the commodity prices?

• DOUGLAS HOLTZ-EAKIN:

  I think the petrochemicals and the pace at which natural gas, oil production, the refining and distribution of gasoline, the pace at which that comes back will be the key to the national impacts. The second to look at is the degree to which shipping is restored along the Mississippi and that transportation link, a quarter of all agriculture exports going out that route. Those are things that can be monitored. If it passes relatively quickly, the impacts will be small as a result.

• JEFFREY BROWN:

  Now, what most of us have seen immediately, of course, is the price at the pump.

• DOUGLAS HOLTZ-EAKIN:

  The price at the pump went up — hardly a surprise under the circumstances. It has come down from the post-Katrina peaks. The question is how quickly can — especially the refineries and pipelines get full electric power and get the distributions systems back to the point where we have, instead of a large and prolonged increase in energy prices but a short-lived spike from what were already fairly high levels, that is a key issue here.

• JEFFREY BROWN:

  But to the extent that consumer spending has been something that has propped up the economy for so long, is there a risk to the spending that would be put forward on other items because of high gas prices? And is there a risk to consumer confidence?

• DOUGLAS HOLTZ-EAKIN:

  There is a mechanical impact in the second half — at the heart of the calculations we did was to look at the kind of spending that would be displaced in the household sector because they had to pay higher prices at the pump and for energy products. If there are further impacts in confidence, which would cause overall household spending to weaken, that then feeds back into the larger economy; that's worth keeping an eye on.

• JEFFREY BROWN:

  Mr. Richardson, Professor Richardson, what factors will go in to determining how quickly some of these key sectors will be able to turn around down there?

• JIM RICHARDSON:

  I think the factors first will be just how much structural damage was done. And I think they are already investigating that very quickly. I know the Port of New Orleans, people were there several days ago looking at the port, seeing what was wrong. In fact, it is my understanding they now have electricity at the port. So I think it's not clear that the structural damage to those industries was great; it's just a matter of getting the people back — you need to have workers.

  The refineries, the chemical facilities, they I think will come back on fairly quickly because you only have to deal with a small number of people to work there. And you can accommodate those, probably. The port, you need people, you also need some transportation modes, trucks, trains and so on. So it is not quite just as simple for the port, probably. But I think they're working on that and they are certainly making a special effort to get those elements of the economy up and running very quickly.

• JEFFREY BROWN:

  And, Mr. Holtz-Eakin, the other piece of the puzzle, of course, is the budgetary impact. Today the president asked Congress for $52 billion in emergency assistance. That is on top of $10 billion the other day. I saw some estimates today that could go from $150 up to $200 billion. Does that have an impact on the budget deficit? Does it have an impact on spending and tax considerations?

• DOUGLAS HOLTZ-EAKIN:

  The impact will largely happen in fiscal year 2006. We put out an estimate for this fiscal year of about $330 billion. Katrina happened late enough that it won't affect that number very much. Going forward, the ultimate budgetary impacts will largely be in the hands of the Congress and the president.

• JEFFREY BROWN:

  You mean what they decide to –

• DOUGLAS HOLTZ-EAKIN:

  What they choose to fund and the pace at which they fund it will determine the ultimate impacts. Most of this, it is important to recognize, is a one-time event. It's the recovery from the loss of, the tragic loss of life and the loss of property. It's the recovery and restoration of facilities. It happens once — in a $13 trillion economy, it's not an overwhelming dollar figure.

• JEFFREY BROWN:

  And Professor Richardson, finally, the budget impact on local and state governments must be great. We had a report on our program yesterday about the town — the city are you in — Baton Rouge and the influx of people.

• JIM RICHARDSON:

  Well, it is going to have an impact on the state budget because suddenly you have 600,000 people who worked in the New Orleans area, and many of them are jobless, or they have moved to other states to take up their employment. So there will be an impact on the state revenues, for sure and also on the expenditure side in terms of things the state must fund to help that part of the state.

  The other side is, cities like New Orleans, they have suddenly lost their whole tax base, or a good bit of it, and not only New Orleans but also surrounding areas, other parishes, so those local governments, that will be a special fiscal problem, which the state must be able to help them deal with.

• JEFFREY BROWN:

  All right. Jim Richardson and Douglas Holtz-Eakin, thank you both very much.