Katrina's world

HONG KONG For those of us living far from New Orleans, after the initial shock and sympathy comes the question: What does Hurricane Katrina's devastation mean for the world? As 9/11 has taught us, surprising events can have equally surprising consequences. At first, America's response to 9/11 seemed sober and correct, and reflected well on the nation. Yet it was to become the excuse for the Iraq war, Guantánamo and similar episodes that turned global sympathy to widespread distaste for America. Modern economies can recover quickly from physical destruction, with immediate losses in output soon offset by reconstruction efforts. Thus it is widely assumed - at least judging by the reaction of the financial markets so far - that the impact of Katrina on the giant U.S. economy will be moderate and short-lived. It could even bring some benefits in terms of a delay in interest rate hikes. Sentiment and psychology matter, too, however, so it is worth recalling the Kobe earthquake 10 years ago, which killed more than 6,000 people and whose impact, relative to Japan's economic size, was roughly equivalent to Katrina's. The destruction to homes, ports and highways was quickly made good. But the negative impact on sentiment was to linger long. Admittedly it merely exacerbated an existing malaise caused by the collapse of asset prices from their 1990 peak. As of 10 days ago, by contrast, home prices in the United States were still rising. But anyone looking for a tipping point in America's home price boom, which has underpinned lending and consumption, could easily find it in the hurricane, a reminder, if ever there was one, of the fragility of wealth and comfort even in the richest societies. Maybe American home buyers will ride out this blow, and consumers ride out the oil price hike. But maybe they won't, whatever Alan Greenspan does with interest rates. The last thing the world thinks it needs - particularly Asia, which meets so much of U.S. consumer demand - is a sharp fall in U.S. sentiment and consumption. Could the engine of global growth now be in the process of stalling? Such an outcome sounds like bad news, but is it really? Would not a return to thrift, to strongly positive household savings, to an end to the accumulation of U.S. debt to the rest of the world, be a good thing for America? Painful, yes. But desirable both for the United States and also for a world that has become too reliant on the crutch of the American consumer and unsustainable imbalances. Could more American savings, and a focus on future needs rather than immediate gratification, be the silver lining of this disaster? Another silver lining, a win-win for the world and the United States, would be a storm-driven conversion of U.S. political leaders to the interrelated goals of reducing both oil dependence and greenhouse gas emissions. Imagine the beneficial catalytic impact the United States would have if it was the leader, not the laggard, in the push for cleaner energy. While there could be some positive outcomes for the rest of the world, some less desirable ones may emerge. Katrina has exposed the deep divide between America's haves and have-nots. Bridging that gap is important for the United States, but doing so may carry with it the danger of a surge of protectionism on the grounds that low-skilled, low-paid workers have suffered from trade liberalization, despite its overall economic benefits. A second danger is that a Bush administration badly wounded by its failure to respond swiftly to Katrina, as well as by ongoing failure in Iraq, will turn to economic nationalism, and China-bashing in particular, to recoup political ground or avoid being outflanked by the Democrats. Could the unilateralism evident in U.S. foreign policy after 9/11 be repeated in the economic sphere in Katrina's wake? Alternatively, the hurricane may bring about a reorientation of U.S. priorities away from global concerns - and spending - toward fixing infrastructure and other problems on the home front. That need not necessarily be negative for a world that has grown weary of perceived U.S. arrogance and overstretch. But at the very least it will require an adjustment by America's allies and could lead to destabilization in parts of the world that implicitly rely on the U.S. presence for peace. The view of all this from Main Street America may be very different. But from across the Pacific, it seems likely that Katrina could be much more than a passing tragedy. Its effects on the world as well as America may be profound and may present as many opportunities as problems for the future. The world needs to be prepared.