The Economic Silver Lining of Hurricane Irene's Aftermath

Courtesy of david_shankboneNow that Hurricane Irene has broken up and drifted away from the major urban centers of the East Coast, America gets a well-timed opportunity to survey the aftermath and make some adjustments for its economic future. But will policymakers actually use the opportunity? Or will they suffer from the same paralysis that plagued them during the debt ceiling debate and contributed in part to the wild volatility in the markets thereafter?

Some big economic players seem to agree on the need for more leadership out of Washington based on comments at last week's annual economic meeting in Jackson Hole, Wyoming. Hinting at the nearly empty toolbox of the US central bank, Federal Reserve Chairman Ben Bernanke indicated that the best the Fed can offer right now is near zero interest rates until 2013 and a longer discussion of the current economic problems at their next meeting. Basically, Bernanke said that Congress now needs to step up and do its part to cut some spending and tackle job creation. Echoing that sentiment even more urgently was Christine Lagarde, the recently appointed head of the International Monetary Fund. The former finance minister of France, Lagarde starkly warned that unless the West acts now to shore up European banks, the debt crisis affecting several countries in the Eurozone would spread.

So with handwringing from the Fed, warnings from the IMF, and threats from Mother Nature, what should US policymakers do to avoid another financial crisis that could permanently knock us out of our role as a world economic leader? If Hurricane Irene has taught us anything, it's that liquidity is king. The storm may not have packed as hard a punch as we thought, but her sheer volume of water gave Irene real power. The same idea is true in the geopolitical climate. The reason China and the other BRIC nations are quickly ascending in economic power is quite simply because they have mounds of cash. Or to put it in more colloquial terms, they make it rain, while the governments of America and Europe have been flushing their comparably paltry reserves down any number of drains.

Although we are looking at some pretty dark economic thunderheads, there is a silver lining, a rare opportunity to reverse the tide here in America. Bernanke is right to point out the necessity of government to act. There are at least three major prescriptions that would help revive our stunted economy. First, spending needs to be cut back to acceptable levels, so that the Chinese and other holders of US debt do not lose confidence and short sell their dollar assets. This would surely cause another calamity in Western markets. The reality is that China is in control and we need them. If the Fed buys up any more US Treasuries in another round of quantitative easing, many, even some inside the central bank, fear the result would be runaway inflation. This would mean more hard times for the already cash-strapped US consumer, and surely lead to more calls from the BRIC nations for the world to ditch the dollar as its reserve currency. Such a move would be disastrous for the US economy and mark an irreversible shift in the geopolitical order.

To prevent more debt monetization by the Federal Reserve, the US must pursue real deficit reduction, and then the President and Congress can work together to provide some job stimulus. However, this time it has to be smartly executed. Unlike the last round of stimulus under Obama which resulted in little job growth, the focus this time has to be on benefitting the American consumer. One obvious area for reform after Hurricane Irene is infrastructure. The power grid, water and sewage systems, and transportation routes are in serious need of an upgrade. Putting money towards these improvements would create immediate jobs, and reduce the financial cost of any future natural disasters. Instead of Washington giving money to big banks and multinational corporations who just sit on it, taxpayer money should actually go to benefit the taxpayer. By helping with storm damage, lowering energy costs, and creating more jobs, consumers could be in a better position to generate income and spend it back into the domestic economy.

Political stability is one other economic factor under the influence of our Congress that world markets desparately need right now. Although he received a lot of flak for it from the right, President Obama was correct in pointing out the slowing effect of the Arab Spring on the economic recovery. One recent study suggests that political instability in the Middle East and North Africa had as much to do with spikes in global food prices as it did with a yearning for democracy among Arabs. In order to protect against food shortages at home, the Congress could encourage domestic food production, halt subsidies for ethanol that eat into the corn supply, and increase regulation of the commodities market in general. Other moves that would increase the market's confidence in American political stability would be a real attempt at balancing our books with a Balanced Budget Amendment and offering businesses clear signals on what they can expect to incur in health care costs if and when ObamaCare goes into effect.

As we see millions of Americans lose power and flood water pouring into a recently evacuated Wall Street, two things are clear. There's a lot of clean up work to do, but it could have been a lot worse. With politicians home on summer recess to witness the damage, we can hope the recent close calls of the Virginia earthquake and Hurricane Irene have given them a much needed refreshment of their perspective. But will Democrats and Republicans come together after fighting with each other all through a tense partisan summer and pandering to their unsatisfied bases during campaign season? Let's hope so because the fate of America's recovery almost surely depends on it.

Comments

[James Dugan]

Great way to use a metaphor throughout. Impressive how many avenues you have to connect disasters with our economy. I really agree with your second stance on economic revival and infrastructure. I would add transportation also. But I would put a big fat tariff on foreign produced goods of anything over 51% made not in America. I truly do not think that this will lower wages or create worst working conditions for foreign workers, but to improve our own.