Macroeconomic effects of Hurricane Katrina

What can you say about the macroeconomic effects of Hurricane Katrina armed only with Intermediate Macroeconomics-level theory and no specific knowledge of the Louisiana/Mississippi economy? You can use a couple of different models as the basis of back-of-the-envelope computations. For starters:

Louisiana is one of 50 U.S. states; the average state has 1/50 (2%) of the economy's capital stock; Louisiana is a small state, so say it has 1% of the economy's capital stock; say half of that capital was destroyed or incapacitated by Katrina, so the U.S. has lost 1/2 of 1% of its capital. One million people were displaced by Katrina. Let's say 60% were workers, and 2/3 of those will be out of work for awhile; that's 400,000 people out of work. Total U.S. employment is 140 million, so Katrina left about 1/3 of a percent of the workforce unemployed. Capital earns about 1/3 of U.S. national income, labor earns about 2/3, so total GDP should fall by (1/3)*.005+(2/3)*.003 = .00366 or 37/100 of one percent. GDP is $12 trillion, so that's $44 billion.

Or how about this: GDP is $12 trillion. There are 140 million workers. So output per worker is about $86,000. About 400,000 workers lost their jobs, so that's about $34 billion in lost output.

So a good guess is that Hurricane Katrina will cost about $40 billion. Without Katrina, GDP should grow by about 3.5% or $420 billion over the next year; with Katrina, it will only be $380 billion or 3.2%. Katrina shaves 0.3 percentage points off next year's growth. Suppose all of the impact of Katrina is felt in the next six months; without Katrina, growth would have been $210 billion; with Katrina it's $170 billion, or 2.8% at an annual rate; Katrina shaves 0.7 percentage points (annual rate) off of growth for the next six months.

The Congressional Budget Office produced a report detailing all of the specific ways that Katrina would affect the economy: loss of oil refining capacity, effect on government's budget, etc. Their conclusion:

"there is the potential to reduce growth by between one-half and one percentage point at an annual rate in the second half of 2005. (On a year-to-year basis, the impact may be as small as a few tenths of a percent of GDP)."

Not bad, huh?