Who pays for Katrina?

The billions of dollars in relief coming into the hard hit southern states has a price for all Americans. Wisconsin Governor Jim Doyle wants President Bush to extend the state of emergency from southern states to northern ones, so that they too can receive federal aid for taking in thousands of people. That probably is too much to hope and ask for.

Congress has already agreed to provide $10.5 billion. Since FEMA is currently spending $500 million a day on relief and recovery, that will not last long. The White House has already asked Congress for an additional $52 billion. Together, Florida's four hurricans in 2004 cost the federal government $14 billion, while insurers paid out much more. This time, the ration will be reversed by a large margin.

The insurance industry is in shock. Loss-adjusters still cannot get close enough to assess much of the damage. Lastest estimates suggest that the damage to homes, bussinesses and infrastructure is around $100 billion, with private insurance claims as high as $35 billion. Some property owners without flood insurance (which mortgage lenders REQUIRE of most people living in flood-plains) will get relief from a federal disaster-loan programme (I stupid so I derserve others to pay for it). Only about half of property owners in New Orleans hold flood coverage, and even fewer in hard-hit patches of Mississippi and Alabama. Renters and those who own homes outright are most likely to be uncovered (albeit renters insurance is avaible cheaply).

The broader economic fall-out of Katrina remains uncertain. Traditionally, big hurricans--for all their devastation--had only a small effect on the economy. Katrina will be different. Forecasters have cut their expectations for GDP for the rest of the year--the Treasury by half a percentage point, the Congressional Budget Office (CBO) by slightly more. But some have raised them for 2006 as reconstruction efforst boost output. The CBO fears that, from now to the end of the year, 400,000 jobs may be lost. Though employment is "likely to rebound" later. The big unknown remains fuel costs (already lowering) and the risk that soaring prices for petrol, let alone physical supply shortages, will hit consumer spending hard.

The fiscal impact probably will end up being sizeable. Some politicians talked of spending more then $150 billion on recovery and relief. Capitol Hill budget boffins worry that all kinds of other requests will be attached to money for Katrina (Senator John McCain asking everyone to PROMISE not to do this), such as (paradoxically) drought relief for farmers in the mid-west. Moreover, the political aftermath of the hurricand may dampen lawmakers' already tepid enthusiasm for budget-cutting. The 2006 budget--agreed in princeple but not in detail--is supposed to include $35 billion in budget cuts over the next five years, including in Medicaid. I have no doubt that Katrina has profoundly changed not only the economic outlook, but the federal budget as well. Look for a 10% jump in the deficit or higher federal taxes in the years to come.