With the floodwaters from Hurricanes Rita and Katrina receding and the cleanup and rebuilding underway, Chris in Anchorage is wondering: who's going to pay for all this?
The president is asking for more funds to help the people affected by hurricane Katrina. But where are those funds coming from?
Chris S., Anchorage, Alaska
The simplest answer: our children and grandchildren will get stuck with the bill. They're the ones who will ultimately have to pay off the debt Congress has authorized to keep spending on the war in Iraq and now the rebuilding of damage caused by back-to-back hurricanes. In the short-term, the cash is coming from the sale of Treasury bonds, which will have to be paid back decades from now.
There's also a significant chunk of money coming from churches and disaster relief agencies like the Red Cross and Salvation Army, which draw on private donations. But the bulk of the money is coming from the federal government.
So far, Congress has ponied up $63 billion, but the White House insists that's just a "down payment" on the spending package. Some of that money could come out of other spending programs, or increased taxes. But Congress doesn't seem to be in the mood for making unpopular decisions. For example, there's been some talk of scrapping a few bike paths or bridges in the $286 billion highway bill signed by the White House weeks before Katrina struck. But so far it's just talk.
Just exactly who gets all this federal money remains to be seen. In the short-term, the funds are going to pay for the rescue and relief efforts, including private contractors who are providing equipment and supplies to help people who were left homeless by the storms. Longer term, the money will also keep contractors busy for months — if not years — rebuilding bridges and highways and other public facilities wiped out by the storm.
Some private facilities, like power lines and generating stations, will be rebuilt with money from the power companies that own them. But they may eventually get that back from their customers: several power companies have already asked for permission to charge higher rates to cover their hurricane costs.
The insurance industry will pick up a major portion of the rebuilding cost, which could top $60 billion for both storms. But for many homeowners, the question of who — if anyone — will pay them to rebuild is up in the air. The issue comes down to a fairly simple question: was your home destroyed by the hurricane (which is usually covered) or from storm-surge floodwaters (which is covered by separate, government-underwritten flood insurance.) Because the storm surge caused by Katrina extended so far inland, lots of those homes didn’t have flood insurance. Now, many of them are hearing from insurance adjusters saying: "Sorry, you're not covered."
The story doesn't end there, though. Mississippi Attorney General Jim Hood says the question of whether damage was caused by flood or hurricane is a distinction without a difference. So he's sued five U.S. insurance companies, saying adjusters have been trying to trick Katrina survivors out of millions of dollars in homeowner claims by ruling that damage was caused by floods.
If the insurance companies lose that suit, and others are sure to follow, it's very possible that some smaller insurers could be so swamped with claims that they can't pay them all. If that happens, a federal bailout isn't out of the question — some big insurers have already leaned on the federal government to help them cover losses from terrorism. If the government steps in as the "insurer of last resort" that will add more to the tab picked up by our children and grandchildren.
We are thinking of building a home. Because of the Katrina disaster and the amount of building that it will take for the south to recover, it seems that building supplies should go through the roof. What is your thought on this?
Isabelle (No address)
With all that rebuilding happening at once, the question isn't whether the price of building supplies will be higher — it's "how much"?
Already, lumber prices are up 20 percent since Katrina hit, and the rebuilding is only beginning to put pressure on supplies. Supplies of cement were already tight before the hurricanes hit, thanks to a boom in housing and highway construction. Steel prices worldwide have been rising because short supplies of that commodity — in part due to strong demand from developing countries like China and India.
And then, of course, there are the building materials made from oil. Those include things like plastic PVC pipes used for plumbing and asphalt shingles used for roofing. Even before the surge in demand for hurricane rebuilding, higher oil prices had been pushing the price of those materials higher too.
But perhaps the biggest impact could be on the cost of labor. Builders bidding for construction projects have to be competitive to win the contract. But when a surge in demand for skilled trades throws more work than they can handle, they typically raise their prices. So get as many bids as you can and try to get the contractor to agree to a fixed price. Many prefer to agree only to a "cost-plus" contract — which leaves you at risk if prices go up even further.
Why doesn't someone attempt to explain the soaring price of diesel fuel when it costs less to refine from the same crude oil??
Walt H., Terrebonne, Or.
End products like gasoline and diesel are not priced according to cost. They're priced based on demand. As long as someone is willing to pay the price posted by the retailer, that's what it costs.
Same with everything you buy in a market economy. Look at housing prices: the sale price has nothing to with the cost of constructing the house. The price is set by the highest bidder.
A lot of readers think market pricing shouldn't apply to a commodity like gasoline — a product you can’t choose whether or not to buy. Some have wondered why gas prices can't be regulated like other energy sources such as electricity and natural gas.
That's a fair question. Utility regulators try to balance the needs of the energy companies to make a fair profit, while allowing rates to rise along with the underlying cost of energy. They don’t always get it right, though. If price caps are too strict, companies have no incentive to expand capacity to keep up with growth in demand. As long as we live in a market-based (rather than a state-controlled) economy, there's only so much you can do to override market forces without nasty unintended consequences.
That's what happened in the California power markets a few years ago when regulators forced utilities to buy at high spot prices — while capping the rates they could charge consumers. Only after the industry ran billions of dollars into the red did the state step in and fix the problem.
The same thing happened in the 1970s with gasoline, when supplies got tight, prices rose and then the government imposed wage and price controls to try to stop inflation. With gasoline prices fixed at below-market levels, consumers had no incentive to conserve. And producers had no incentives to produce more. (You can't force a refiner to run at a loss.) The result was outright shortages — and long gas lines at the pumps.