The article discusses the impact of the recent hurricanes Katrina and Rita on the American economy.
The impact of these hurricanes on the US economy is very large seeing that it is quite possible it will lead to stagflation. Stagflation is a very serious economic problem because it combines inflation and unemployment which according to the Phillips Curve are mutually exclusive (figure 1). The inflation of a country reflects the increase its prices experience. It is anticipated that there will be some inflation in the economy however this mustn’t exceed 1-1.5%. Unemployment reflects the amount of people in the labor force that don’t have a job, like inflation, it is anticipated that there will be a small rate of unemployment but it mustn’t go to high. The problem with stagflation is that most economic theory and economic policies is based on the Philips curve which means that there is no exact policy aimed at combating stagflation.
This stagflation was the result of a series of problems occurring due to the hurricane
The hurricanes have created a great deal of business destruction seeing that most businesses in the Gulf coast have been destroyed either because their factories were destroyed or because the workforce has been reduced due to deaths or the disease. Indeed we see that refineries and oil platforms along the Gulf coast shut down after the recent event. The unemployment that has occurred can be seen in the following diagram.
This as a result will lead to a reduction of aggregate supply because fewer people will be employed due to the destruction of businesses in the hurricane struck areas which will in turn lead to a reduction in GDP . Moreover there will be a reduction in GDP per capita (GDP ÷ Total Population) since so many people have lost their jobs and property which will mean there will be a fall in aggregate demand depending on marginal propensity to consume . However another problem that is likely to occur is cost push inflation, inflation caused by an increase in costs. Due to the destruction of the oil refineries energy costs have gone up as pointed out by the article. As a result the costs of the factors of production have gone up seeing that in order for the factories to operate firms have immense energy costs. In order to pay for them they will need to resort to increasing prices and since all factories need energy to function this will lead to an increase in prices spread throughout the economy, in other words inflation. These factors combined will in turn lead the economy to recession, a downwards phase in the economy due to the fact that economic and business activity will be reduced and more money will need to be allocated to giving unemployment benefits (figure 2).
From the above we have seen how inflation and unemployment due to hurricanes Katrina and Rita can co-exist thus leading to stagflation.
Critical statement:Although the article was very informative it didn’t show the impact of this sudden increase in unemployment on economic policy. For example it could have discussed which economic policy would be the best for America to combat the surging unemployment. The US government could choose between an expansionary fiscal or monetary policy in the short run. The purpose of this would be to expand aggregate demand and its elements with an emphasis on government spending which in turn will lead to need for increase in productivity which in turn will lead to an increase in the demand for labor. The expansionary monetary policy would decrease interest rates and increase money supply to increase the flow of money within the market. This will mean that consumers will have more money (depending on marginal propensity to consume) will be spent in the economy this increasing domestic consumption which will in turn lead to an increase in aggregate supply. The expansionary fiscal policy would decrease taxes and increase gover nment consumption which will lead to and increase in domestic consumption (depending on marginal propensity to consume) because consumers will have more income and an increase in investment from the government. The result of this is illustrated in figure 4.
