The Laceration of an American Economic Artery
The economic consequences of the calamity in Baltimore are likely to be substantial.
Baltimore is one of the largest ports on the eastern seaboard of the United States. It is the fifth largest port on the East Coast by total tons of cargo handled, according to the Bureau of Transportation Statistics, and the seventeenth largest overall in the United States.
Those numbers understate its importance to the U.S. economy. The port is the twelfth largest container port in the U.S., according to Ryan Peterson, the CEO of Flexport. It was ninth in terms of the tonnage and value of foreign cargo, according to the governor of Maryland.
Last year Baltimore processed 1.1M TEUs making it the twelfth largest container port in the United States and the most important port serving the nation’s capital. It’s also the busiest U.S. port for car shipments, with more than 750,000 vehicles handled in 2023. At least some of…
— Ryan Petersen (@typesfast) March 26, 2024
It was the first in terms of the volume of automobiles and light trucks (including 847,158 cars and light trucks), heavy farm and construction machinery, imported sugar, and imported gypsum, the governor’s office said in a statement last year.
“Around the world, about 40 ships, including 34 cargo vessels, have Baltimore listed as a destination, including 10 commercial ships with anchors dropped in nearby waters, according to MarineTraffic, which tracks ships,” the New York Times reported Tuesday.
Baltimore’s port is also the second largest terminal for coal exports, handling around 74 million tons of coal last year, according to Bloomberg.
“The collapse of a major Baltimore bridge is likely to shut down coal exports for as many as six weeks and block the transport of up to 2.5 million tons of coal, said Ernie Thrasher, chief executive officer of Xcoal Energy & Resources LLC,” Bloomberg reported.
A Costly and Lengthy Recovery
The port is completely shut down in the wake of the collision of the Dali with the Key bridge and the near-total collapse of the bridge. It is likely to take weeks or even months to get the port back in working order given the position of the bridge. Perhaps portions the channel can be cleared more quickly but that is unclear at this time.
Even if the channel is cleared, the ground traffic congestion in the area is likely to become very bad with the loss of the bridge. No one knows how long it would take to reconstruct a bridge across the Patapsco River. Given current concerns over the environmental impact of large marine construction projects and general bureaucratic hesitancy to authorize significant infrastructure projects, it is likely to take far longer than it did back in the 1970s, when the bridge was originally built. Bidding to work on that bridge began in 1970 after several years of planning. Work began in 1972 and it was not completed until 1977.
Some of the cargo shipments will be able to be absorbed by other ports on the East Coast, but they will not have capacity to take all of the cargo that would have gone through Baltimore. As we saw during the pandemic, even small expected increases in shipping volumes can result in the equivalent of traffic jams at ports.
Peterson of Flexport points out that between the ongoing Red Sea crisis and the loss of Baltimore’s port, shipping is likely to further shift toward the West Coast. That, of course, will create potential congestion problems in West Coast ports.
This will surely cause even more cargo to shift to the west coast, likely leading to congestion and delays. As we saw in Covid, even a 10 or 20% increase in volumes can lead to a compound feedback loop of congestion and delays. Most ocean freight contracts are signed between…
— Ryan Petersen (@typesfast) March 26, 2024
A Supply and Demand Shock
Economists call this a “supply shock,” and it is likely to lead to a resurgence of goods inflation and possibly temporary shortages of some goods. The rerouting of shipping and subsequent congestion at other ports will mean that even goods that were never destined to come through Baltimore may be subject to delivery delays.
“This period of deflation in goods that we’ve been in for the last six months or so — we are probably coming out of that,” Citigroup economist Andrew Hollenhorst said in a Bloomberg TV interview on Tuesday.
There’s also a “demand shock” component. Clearing the channel and rebuilding the bridge will take manpower, materials, and time that would have otherwise gone to other projects. Some of those will have to be put on hold. The additional demand will also fuel inflation, particularly in an economy already straining at full employment and near its productive capacity.
“I’ve directed my team to move heaven and earth to reopen the port and rebuild the bridge.”
President Biden responds to the Baltimore bridge collapse, saying the US government should pay to rebuild a major bridge in Baltimore that collapsed Tuesday https://t.co/iP0HNB6Il2 pic.twitter.com/GXWFweJCpn
— Bloomberg (@business) March 26, 2024
The money to rebuild the bridge and open the port is likely to come from the federal government, worsening the already swollen budget deficit and increasing inflationary pressures in the economy. President Joe Biden has already called on the federal government to shoulder all of the costs of the reconstruction of the bridge and clearing of the port.
The Raven of Baltimore Flies at Dusk
Some fiscal prudence in advance of the catastrophe would have provided more fiscal space for the U.S. to respond without straining the budget. But the Biden administration’s reckless spending has put that out of reach. The owl of Minerva, they say, only flies at dusk. Or, in this case, the raven of Baltimore’s wisdom comes late.
It’s very likely that the collapse of the bridge will also foreclose the chances that the Federal Reserve will cut interest rates this year. Although the futures markets have not shifted the odds of a cut yet—they’re still pricing in a 64 percent chance of a cut in June—we expect that will change as the costs of Baltimore become apparent.
Economists chortle when the economic laity compare government budgets to household budgets. But in this case, it would have been a good idea for the U.S. to have adopted the kitchen table fiscal policy of leaving a bit of extra room in the budget for disasters. The failure to do so has increased the likelihood that the physical disaster in Baltimore also becomes an economic disaster for the entire country.
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