‘WE WILL BOUNCE BACK’
Human capital remains intact
BY ANN MCMURRY SPECIAL TO THE AMERICAN PRESS
Hurricane Katrina paralyzed the Gulf Coast by forcing the evacuation of more than a million residents, shutting down businesses, curtailing oil and gas operations in the region and leaving over 1 million people without power. The extent of the devastation is still unknown and the death toll is rising. From all indications, at least in the short term, there will be thousands of displaced workers as well as displaced residents with 80 percent of New Orleans under water. Most estimates indicate it will take weeks and even months to get neighborhoods ready for people to be able to move back in. But Dr. Michael Kurth, head of the Department of Accounting, Finance and Economics at McNeese State University, said if he could put an economic headline on the event, it would be, “We’ll bounce back.” “That’s not to say they weren’t dealt a severe blow, but the stuff that really matters is the human beings and what we call the human capital — their education, their skills, your institutional infrastructure, and your market system, your economic system. All that’s intact. You don’t have to touch that. So you are basically rebuilding physical structures, and that will be accomplished over time and actually very quickly.” The physical stuff Kurth said he recently read an article about how quickly Germany and Japan rebuilt after World War II. “One of the points it made was that human capital — meaning people and education and stuff — is far more important than physical capital,” he said. “You can knock down buildings and you can blow stuff up, but if your people are educated and have knowledge, and you have the social infrastructure, it doesn’t take very long to replace the physical stuff … “When you get a catastrophe like 9/11 or an earthquake in California or a hurricane in Louisiana, you are wiping out physical capital. But in a place like the United States, our physical capital really accounts for a relatively small proportion of our prosperity, and it can take surprisingly little time to actually rebuild it.” However, Kurth said, in the meantime, the economic blow to the New Orleans area as well as the state will be significant. “This is a big chunk of the whole state,” Kurth said, adding that it could have tremendous effect on the state budget of Louisiana as well as Mississippi. “It’s going to be a long time getting a lot of economic activity up. We are really going to have to see the total damage assessment, and it will probably take a week or more to see just how bad the damage is and just how long everything will be down. Too early to tell “We will rebuild; we will bounce back, but I don’t know how long that is going to take,” he said. “It’s really too early to judge the magnitude and how long it will take to recover. There will be a lot of people working to rebuild it. So there will be a lot of jobs, but in the next year or two, there won’t be the kind of jobs people used to have, but there will be a lot of jobs, and there will be a lot of money pouring in there for reconstruction.” However, he said, it may take a long time to get a lot of the normal economic activity back up. Generally, over the long term, some catastrophic events such as a hurricane may end up being an economic boon to an area — not a bust, Kurth said. “It’s a little bit of a paradox,” he said Rebuilding can take a long time, and states along the Gulf Coast are still rebuilding after hurricanes hit them a year or two ago, Kurth said. “That’s probably because of the limited resources you have,” he said. “You only have so many carpenters and so much equipment to work with, so priority things get rebuilt first, and there are a lot of things that need to wait for months or maybe even a year or so to get rebuilt.” But Kurth said, there are times when hurricanes or other disasters occur that “it can have a little bit of an economic boon effect, because a lot of the funds to finance (the rebuilding) are going to come from insurance companies. People paid premiums for it, but there will be a lot of money coming in from out-ofstate. You’ve got insurance companies that are going to be forking out billions for rebuilding, and that rebuilding is going to be done by local people. So it’s a little ironic, and a little misleading as well.” It’s misleading because while such an event can be devastating to an area, if you’re looking at economic indicators, there are some real pluses. With rebuilding will come jobs and spending, Kurth said. Tracking activity Usually, when economists track economic activity, they tend to track it in terms of current activity, Kurth said. They ignore capital and wealth, which are stocks, while investments are a flow. “Think about a bathtub, and you have a stock of water in that bathtub,” Kurth explained. “And then you have water that flows in that bathtub and water that flows out of that bathtub. If you have more water flowing in than is flowing out, then your stock rises. Wealth is really based on stock more than flow.” Buildings and infrastructure represent a stock of wealth for an area, and when a hurricane goes through and knocks out that stock of wealth, the area must replenish it, Kurth said, which means the flow of investments must exceed the normal depreciation and usage. “Because we tend to track things like employment and spending, which are flows rather than stock of wealth, often the economic data doesn’t reflect the fact that you’ve had millions of dollars worth of buildings and homes wiped out,” Kurth said. “What it is going to show is your employment numbers going up and spending going up.” But that ignores the loss of life, loss of property and loss of wealth that occurred, he said. “People have been paying insurance premiums, and some of those insurance companies are going to have to dip into their national funds, and then that money will come into a specific area,” Kurth said. For the short term, in many instances, people won’t have jobs to return to, and there are estimates that some may be without electricity for a month or more. “They are going to have a lot of hardships down there, and the economic activity — other than construction and pulling cars out of mudholes — is going to grind to a halt,” Kurth said. The cost of building materials may go up after a major hurricane, Kurth said. “What the price mechanism does is allocate the resources to their highest and best use — to those people who need it the most,” he said. Oil and gas There has been concern about the effect that Hurricane Katrina will have on oil and gas supplies, and some say that the hurricane caused a disruption in oil and gas production at the worst possible time. There are nearly 700 million barrels of oil stored in underground salt caverns along the Texas and Louisiana Gulf Coast, but the big problem is refining capacity. Refining capacity has dropped significantly — even within the past two months after fires, explosions and Hurricane Cindy resulted in unscheduled down time. Then Hurricane Katrina forced eight refineries along the coast to shut down. President Bush is expected to tap into those emergency petroleum stockpiles to help refineries that have been affected by the storm Kurth said even the oil and gas concerns that are a direct result of Hurricane Katrina may be short term. The bulk of the petrochemical industries stretch from Baton Rouge to Houston, and most of those industries are built to withstand strong storms, he said. The Gulf of Mexico — the center for offshore oil and gas production — accounts for one-fourth of the United State’s oil output. More than 950 oil rigs operate in the Gulf of Mexico, and the United States produces 5.3 million barrels of crude oil a day. Exxon Mobil, Shell, Chevron, Royal Dutch /Shell and others evacuated rigs and closed production facilities. “They will shut down during a storm like this, but most of them will weather it,” Kurth said. They shut down for precautionary reasons, but they will be up and running, he added. “I don’t know of any refineries that were wiped out,” Kurth said, acknowledging again however that the extent of the damage may be unknown. “They think there may be some rigs that have sustained damage, and I don’t know what the damage estimate is. To the extent that any rigs got damaged and it may take a year to get them back on line, you have the loss of some oil production capacity.” ASSOCIATED PRESS An oil platform ripped from its mooring in the Gulf of Mexico rests by the shore in Dauphin Island, Ala., Tuesday after Hurricane Katrina passed through the area. The potential damage to oil platforms, refineries and pipelines that remain closed along the Gulf Coast drove energy prices to new highs Tuesday, with crude futures briefly topping $70 a barrel and wholesale gasoline costs surging to levels that could lead to $3 a gallon at the pump in some markets.
