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The Political, Economic, and Social Aspects of Katrina

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In this paper, we examine the resiliency of community recovery after a natural disaster. We argue that a resilient recovery requires robust economic/financial institutions, political/legal institutions, and social/cultural institutions. We explore how politically and privately created disaster preconditions and responses have contributed to or undermined institutional robustness in the context of the Gulf Coast'srecoveryafter Hurricane Katrina. We find that wherepostdisaster resiliency has been observed, private-sector responses contributing to the health of these institutional arenas are largely responsible. Where post disaster fragility and slowness has been observed, public-sector responses contributing to the frailty of these institutional arenas are largely the cause. In other words, we engage in a comparative institutional analysis of civil society, entrepreneurial commercial society, and government agencies and political actors in the wake of a natural disaster.
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Southern Economic Journal 2007, 74(2), 363–376
Symposium
The Political, Economic, and Social Aspects
of Katrina
Peter Boettke,* Emily Chamlee-Wright,{ Peter Gordon,{ Sanford Ikeda,1 Peter T. Leeson,I
and Russell Sobel#
In this paper, we examine the resiliency of community recovery after a natural disaster. We
argue that a resilient recovery requires robust economic/financial institutions, political/legal
institutions, and social/cultural institutions. We explore how politically and privately created
disaster preconditions and responses have contributed to or undermined institutional
robustness in the context of the Gulf Coast’s recovery after Hurricane Katrina. We find that
where postdisaster resiliency has been observed, private-sector responses contributing to the
health of these institutional arenas are largely responsible. Where postdisaster fragility and
slowness has been observed, public-sector responses contributing to the frailty of these
institutional arenas are largely the cause. In other words, we engage in a comparative
institutional analysis of civil society, entrepreneurial commercial society, and government
agencies and political actors in the wake of a natural disaster.
JEL Classification: P16, P17, H11
1. Introduction
Disasters, whether man-made or natural, represent a ‘‘natural experiment’’ for social
scientists. As one business leader put it to us on one of our first research trips in February 2006
to New Orleans after the storm, ‘‘Heck, I understand it is not every day that you can flood a city
of half a million people and see what happens.’’ The tragic dimensions of the event in terms of
lives lost and lives disrupted must never be forgotten, but the opportunity to learn about the
resiliency of social systems also must not be lost.1 Natural disasters are the social scientist’s
* Department of Economics, George Mason University, MSN 3G4 Fairfax, VA 22030, USA; E-mail
pboettke@gmu.edu; corresponding author.
{ Department of Economics, Beloit College, Campbell Hall, 700 College Street, Beloit, WI 53511, USA.
{ School of Public Policy, Planning, and Development, University of Southern California, Los Angeles, CA
90089-0626, USA.
1 Department of Economics, Purchase College, State University of New York, 735 Anderson Hill Road,
Purchase, NY 10577, USA.
I Department of Economics, West Virginia University, Morgantown, WV 26506-6025, USA.
# Department of Economics, West Virginia University, Morgantown, WV 26506-6025, USA.
Daniel Rothschild at the Mercatus Center has been an invaluable project manager and partner in the coordination
of research since the inception of our five-year project.
1 Robustness and resiliency as welfare criterion in assessing political-economic systems moves the discussion from ideal
allocative efficiency within a clearly defined institutional structure to a focus on the character of the institutional
structure itself. For a discussion of the implications for political economy of moving the analytical focus from ideal
efficiency to the robustness of institutions and the strategy for doing so, see Levy (2002) and Boettke and Leeson
(2004).
363

364
Boettke et al.
equivalent to tests done by engineers to learn about the strength of materials and machines.
Much can be learned about the political economy of everyday life when we examine behavior
under conditions of great stress.
John Stuart Mill, in fact, argued in his Principles of Political Economy that it is a surprising
fact of life how robust free economies are in the wake of devastation.
This perpetual consumption and reproduction of capital affords the explanation of what has so
often excited wonder, the great rapidity with which countries recover from a state of
devastation; the disappearance, in a short time, of all traces of the mischiefs done by
earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire
and sword, and destroys or carries away nearly all the moveable wealth existing in it; all the
inhabitants are ruined, and yet, in a few years after, everything is much as it was before (Mill
1848, pp. 74–5).
Mill argued that the possibility of rapid recovery mainly depends on whether or not the country
has suffered massive depopulation or not. But there are other issues involved as well as the
human capital embodied in the population. The free flow of labor and capital seems to be an
important aspect, as well. In addition, the ability to quickly reestablish clearly defined and
enforced property rights seems to be a characteristic in common with rapid recoveries from
disaster. Jack Hirshleifer (2002) in his essay ‘‘Disaster and Recovery’’ states clearly that:
‘‘Historical experience suggests that recovery will hinge upon the ability of government to
maintain and restore property rights together with a market system that will support the
economic division of labor.’’
Hurricane Katrina offers us some unique challenges. First is the magnitude of the storm.
Katrina was estimated early on to have caused between $100 billion and $125 billion worth of
damage (more than half of that attributed to the New Orleans flood), whereas the costliest
hurricane to that date in U.S. history was Hurricane Andrew (1993), which cost roughly
$44 billion. The massive amount of debris generated by the storm—some 100 million cubic
yards, or 35 times the rubble generated by the September 11 attacks in Manhattan—made
simply cleaning up the Gulf Coast a uniquely Herculean task.
Second, problems associated with the state of affairs before the storm could contribute
to nonresiliency. New Orleans, for example, was not a particularly good environment for
business before Katrina.2 In fact, it ranked at the bottom on various measures of economic
freedom and the costs of doing business. As a result, few major businesses were located in the
city. Only one Fortune 500 company, Entegry, is headquartered in the city. Taxes and
regulations did not attract businesses. New Orleans was instead an economy dominated by
politics and political connections. There is a reason why New Orleans was often portrayed as
the stereotypical corrupt southern city. Historically, New Orleans and Louisiana were in fact
extremely politicized environments with numerous high-profile examples of graft and
corruption.3
In addition, the population in Orleans Parish was poor and undereducated compared with
national averages (e.g., median household income was roughly $27,000, whereas the national
2 In the Pacific Research Institute’s Economic Freedom of the States Index, Louisiana ranks 40th out of 50 states in
terms of economic freedom (see Huang, McCormick, and McQuillan 2004).
3 According to one study published in 2004 ranking U.S. states by measures of corruption, Louisiana was ranked the
third most corrupt. Mississippi was ranked the most corrupt (Corporate Crime Reporter 2004).

The Political Economy of Katrina
365
average was $42,000, and roughly 28% of families in New Orleans were living below the
poverty line, whereas the national rate was 12.4%). The population was particularly vulnerable
to the effect of the storm because, in some areas of the parish, vehicle ownership was very low
and the population was old and ill.
Finally, factors involved in the devastation of Katrina highlight how the folly of man
compounds the fury of nature. Government-subsidized flood insurance led to excessive
construction in areas most vulnerable to flooding. This was not just limited to the low-income
areas, but also occurred in some of the higher income areas that were also devastated by the
storm and do not get discussed as much in the national press. Also, government responses to
the storms (and previous ones) might have impeded the commercial sector response that is
necessary to reconnect the social-economic networks that are characteristic of a vibrant social
system of exchange and production.
In the aftermath of Katrina, a research team was assembled by the Mercatus Center at
George Mason University to study the political, economic, and social aspects of Katrina and to
test Mill’s hypothesis about ‘‘rapid recovery.’’ The basic idea behind the project is that a social
system of exchange and production is analogous to a three-legged barstool. The first leg
represents the economic/financial institutions in place, the second leg represents the political/
legal institutions in place, and the third leg represents the social/cultural institutions in place.
The idea is that unless all three legs are strong and sturdy, when weight is put on the seat the
stool will tumble. The system, in other words, will not be ‘‘robust’’ and nonrobust systems are
almost by definition not particularly resilient; thus, Mill’s hypothesis of speedy recovery in the
wake of a crisis must be qualified.
We learned this lesson during our examinations of the difficult post-Communist
transitions during the 1990s and our studies of developing economies in the early
2000s.4 In short, politics, economics, and society are embedded, and social scientists studying
transition and development problems are mistaken to focus on only one of the factors to the
exclusion of others if they hope to provide a full understanding of the problems under
investigation.5 Post-Communist transition was not as simple as just getting the prices right,
and solving the problem of underdevelopment is not just about getting the right institutions.
Of course, getting the right market prices and establishing a rule of law are essential
components to addressing these problems, but simply stating that is not the same thing as
addressing that topic.6 It is our conjecture that tackling the problems of transition and
development cannot proceed as if the economy, polity, and society are disembodied from one
another and thus that the problems are technical in nature (analogous to engineering
problems). Instead, in dealing with social systems, the technical problems of economic life find
4 The Mercatus Center’s ‘‘Global Prosperity Initiative’’ conducted a series of U.S. Agency for International
Development–sponsored forums on the role of institutions in economic development analysis and sponsored field
research in political economy in countries such as Romania, the Czech Republic, Botswana, China, Costa Rica, the
Dominican Republic, and the Philippines. In addition, the Mercatus Center has for the past three years been leading
a research project titled ‘‘Enterprise Africa,’’ which examines private sector initiatives at poverty alleviation. See
www.mercatus.org for a discussion of these various projects as well as the work on Katrina.
5 Boettke and Storr (2002) developed this thesis of the ‘‘triple embeddedness’’ of economy, society, and polity and
demonstrated its intellectual roots in 19th and early 20th century writers (see also Boettke et al. 2005).
6 See Boettke (1993, 2001) for an examination of the political economy of post-communism. Boettke (1994) provides
a critique of development planning.

366
Boettke et al.
their solution within political and social ‘‘ecology’’ that cannot be ignored if progress in the
behavioral and social sciences is going to be made on the questions of social change.7
The circumstances in a postdisaster situation, we conjecture, are similar to those of the
problems of transition and underdevelopment. As Hirshleifer (2002) argues, ‘‘the subject of
disaster and recovery can be regarded as a special case within the general problem of economic
development.’’ We follow him in that regard, and our research project was designed to reflect that.
In what follows, we report some of our preliminary findings from the project. In section 2 we
look at the political/legal dimensions of Katrina and its aftermath, with a particular focus on the
Federal Emergency Management Agency (FEMA) and the difficulties of government planning
for disaster recovery and rebuilding. In section 3 we discuss the social/cultural dimensions and
focus on the social networks and the signals that are required for these social networks to reform
after devastation. In section 4 we discuss the economic/financial dimensions and focus on how
cities rebound (or not) in the wake of crises. Finally, we conclude with a discussion of what we
have learned so far and where we are going with future research on this topic.
2. The Political/Legal Dimension
As the events of August and September 2005 unfolded along the Gulf Coast, it became
evident that government failures at the local, state, and national level were compounding the
situation. In the aftermath of the storm, the extent of government failures became a topic of
newspapers and talk shows. The confusion of relief efforts was soon followed by reports of
misappropriated funds; the Government Accountability Office now reports that the cost of
fraud and abuse in rebuilding could top $2 billion. With the Hurricane Katrina debacle raising
questions about public corruption’s effect on disaster relief, corruption has once again become
an important issue in American politics.8 In our work, we attempt to address this issue not by
analyzing the effect of corruption on disaster relief, but rather by analyzing the effect of natural
disaster relief on public sector corruption (see Leeson and Sobel 2007). Consider Figure 1,
which plots the raw relationship between natural disasters and public sector corruption in the
United States
On the vertical axis, we measure average annual federal corruption convictions per
100,000 residents (1990–1999) in each of the U.S. states. On the horizontal axis, we measure the
total number of natural disasters that have struck each state (1953–2006). The relationship is
clearly positive. States that have been hit by more natural disasters are more corrupt.
This relationship points to an important potential connection between natural disasters
and public sector corruption. Although it does not seem likely that natural disasters per se
7 This was the theme of Vernon Smith’s Nobel address titled, ‘‘Constructivist and Ecological Rationality’’ (see Smith
2003). As Smith argues, even with respect to the theory of choice in economics, mistakes in analysis are inevitable when
the choice analysis fails to specify the context of choice and instead attempts to analyze decisions against some abstract
standard of efficiency and rationality. Also see Jones (2006), where he argues that culture matters to economic
outcomes, but that culture also never stops responding to market forces and is thus constantly evolving—even if
stubbornly. Pejovich (2003) refers to this as the ‘‘interaction thesis’’ and challenges economists to deal with cultural
constraints if they want to understand the transaction costs of transition.
8 For a thorough understanding of corruption and its effect on political and economic life, see Wallis (2004). In this
paper, Wallis examines the concept of ‘‘systemic corruption,’’ by which he means the political manipulation of the
economy by political actors in order to secure ‘‘economic rents’’ that they can use to gain control of the government.

The Political Economy of Katrina
367
Figure 1. Natural Disasters and Corruption
could affect corruption, it is not unreasonable to think that the FEMA-provided relief funds
that attend natural disaster could. The economic intuition here is straightforward and parallels
the reasoning in the economic development literature, which suggests that rich natural
resources (the ‘‘natural resource curse’’) and foreign aid could appreciably increase public
sector corruption in resource-rich and aid-recipient countries.
Recent research by Djankov, Montalvo, and Reynal-Querol (2005); Leite and Weidmann
(1999); and Svensson (2000) demonstrates that resource windfalls generated by natural
resources and foreign aid set in motion rent-seeking activities that can lead to poor economic
performance and increased concentration of political power. Ades and Di Tella (1999) and
Leite and Weidmann (1999) show that resource windfalls from natural resources or aid also
tend to increase public corruption. Resource windfalls increase rents to those in charge of the
new resources. This raises the value of controlling windfall resources, which in turn leads to
a flurry of rent-seeking activities that are partly manifested in the form of greater corruption.
Natural disaster relief creates resource windfalls in essentially the same way that natural
resources and foreign aid do. The president declares a natural disaster and FEMA relief flows
to the affected area to aid those in need and reconstruct what the disaster destroyed, creating
a windfall. This windfall creates new opportunities for political corruption.
FEMA relief is especially corrosive in terms of corruption because of the chaotic
atmosphere in which it is unavoidably deployed. In the case of a major disaster, the
combination of billions of dollars of relief being dumped onto one location in only a short
period of time, along with the confused and difficult-to-monitor environment in which these
windfalls are dispensed, create incredible temptation for public officials to abuse their positions
of power by corruptly appropriating relief funds. Disaster-created conditions also make it
exceedingly difficult for government, preoccupied with the havoc of the disaster itself, to
effectively oversee into whose hands relief is going and whether these hands are legitimate or

368
Boettke et al.
Figure 2. FEMA Relief and Corruption
not. These factors make disaster-related windfalls especially damaging to public sector
corruption.
Consider Figure 2, which explores our core hypothesis in the raw data.9 The vertical axis
in this figure measures average annual corruption-related convictions per 100,000 residents in
the states between 1990 and 1999. The horizontal axis measures average annual FEMA-
provided disaster relief in the states over the same period. As in Figure 1, the relationship here
is strong and positive. States that receive more FEMA-provided disaster relief are more
corrupt.
This relationship withstands the test of econometric interrogation. After controlling for
the standard determinants of public corruption used in other studies, such as Glaeser and Saks
(2006), as well as a number of other potentially important variables that might influence the
level of corruption across the United States, including geography, political institutions, and
political history, FEMA-provided disaster relief continues to produce a statistically and
economically significant increase in corruption in America.
Importantly, the effect of FEMA relief on corruption, we find, is not due to reverse
causality. One could imagine, for example, that more corrupt states are capable of attracting
more federal (disaster-related and otherwise) funding in the first place, creating a positive
relationship between corruption and FEMA relief, but one that has nothing to do with the
latter leading to the former. To address this econometrically, we instrument FEMA relief with
private insurance claims for natural disasters, which are the subject of political manipulation,
and find FEMA relief continues to be positively linked to increased corruption.
9 North Dakota did not fit on the scale and is therefore excluded from Figure 2.

The Political Economy of Katrina
369
Corruption not only hinders the effective management of disaster relief; it also has long-
term consequences for economic prosperity. More corruption is associated with lower growth
and investment, and states that receive disaster relief often suffer from these effects.
When determining the best course of action, policymakers must remember that increased
corruption is an unintended consequence of disaster relief. Increased oversight is unlikely to
solve the problem of corruption because of the circumstances surrounding disaster. The time-
sensitive nature of the disaster relief means that protocol will take a backseat when disasters
actually strike.
Policies that assume the federal government plays the primary role in disaster response are
the most susceptible to corruption. Total elimination of public corruption generated by disaster
relief will not be possible so long as FEMA relief exists. Any plan to reform disaster relief that
intends to minimize corruption should recognize the role of local actors, such as charities and
businesses, and create space for them to react in times of crisis. Policymakers should recognize
the consequences of disaster relief when dealing with urgent crises to make sure that they do not
hinder the long-term prosperity of a community.
The problem with disaster relief efforts is not just the incentive that public officials face in
the political game (see Sobel and Leeson 2006, 2007). Even if incentives were appropriately
aligned so that public officials wanted to allocate funds in the most effective way possible, they
would still need to know what the most effective way to solve the problem at hand would be.
In other words, to successfully coordinate natural disaster relief, the social system must
solve Hayek’s ‘‘knowledge problem’’ at three critical information nodes: (i) identification of
disaster, (ii) determination of what relief is needed and who needs which relief resources, and
(iii) evaluation of ongoing relief efforts. We need to know more about the comparative ability
of government and the private sector to do this. The market economy, with the incentives and
information generated by private property, relative prices, and profit and loss accounting, tends
to coordinate the actions of economic decision makers in a manner in which the gains from
trade are realized and resources are allocated to their highest valued use. The information used
in the market economy is always contextual or, as Hayek (1945, p. 521) stressed, ‘‘knowledge of
particular time and place.’’ The political process does not have access to that contextual
knowledge, and actors within the political context face different incentives than those in the
market. As a consequence, it should not be surprising that when relief resources are allocated
politically, the resulting allocation, while ‘‘politically efficient’’ in the sense of maximizing the
political goals of government actors, is economically inefficient. Thus, information problems
are as severe for the public sector’s response to natural disaster as the incentive problems
discussed above. These dual obstacles, which political agents unavoidably confront when
attempting to manage natural disaster relief, should give pause to arguments that would give
government greater power to address the crisis of natural disaster.
3. The Social/Cultural Dimensions
Since Katrina, federal, state, and local government officials have debated what form
government rebuilding assistance should take. Meanwhile, private citizens in some
communities have been successfully executing their own redevelopment plans without the
assistance of an overarching government program. Church leaders, family members, neighbors,

370
Boettke et al.
nonprofit activists, and business owners have been deploying the resources found within civil
and commercial society to address the devastation of the storm. We have examined the role
social capital has played in the post-Katrina recovery process and, in particular, how social
capital resources are being deployed to overcome the collective action problem associated with
postdisaster recovery (see Chamlee-Wright 2006a). The usual assumption is that large-scale
government response offers the only viable path toward successful recovery. In fact, luminaries
such as Thomas Schelling have argued that Katrina proves this point. Schelling has said,
There is no market solution to New Orleans. It is essentially a problem of coordinating
expectations. If we all expect each other to come back, we will. If we don’t, we won’t. But
achieving this coordination in the circumstances of New Orleans seems impossible.… There are
classes of problems that free markets simply do not deal with well. If ever there was an example,
the rebuilding of New Orleans is it (Gosselin 2005).
And yet, communities such as those that surround the Mary Queen of Vietnam (MQV)
Catholic Church in New Orleans East make problematic the bleak logic of the collective action
problem as set out by Schelling. Despite being told by city officials that his community would
not be allowed to rebuild, within weeks of the storm, Father Vien Nguyen of MQV helped to
organize crews of returning residents to assist one another, particularly the elderly, in gutting
and repairing homes. The early return of large numbers of residents and the quick progress they
made in repairing their homes played a pivotal role in securing the return of services from the
power company Entergy. Father Vien:
[I]n order to justify [and] divert power out here, we must justify that there are people here
planning to receive it.… [Entergy] needed paying customers.…I gave [them] pictures that we
took of our people in Mass, first Mass. First Mass was 300, second Mass was 800; third Mass
we invited all the people from New Orleans, and we had more than 2000. So I had those
pictures to show him. He said, ‘Those I get. But now we need a list [of people who have
returned].’ And so we went and got what he asked. We called our people to put their names
down and their addresses.… So within one week, I went back to Lafayette, we went back to his
office; I said, ‘Well, the city has 500 petitioners.’ So, the first week of November, we had power.
And we were the only people with power (pers. comm.).
The successful return of the Vietnamese-American community in New Orleans East, which
represented much of the local business community, enabled the return of non-Vietnamese
residents as well. Thus, the signaling effect generated by patterns of mutual assistance can help
to coordinate not only the expectations among people directly involved in the exchange of
services, but among unknown others as well.
Working from an extensive set of on-the-ground interviews, our research team engaged in
the qualitative analysis needed to understand how some communities are successfully executing
strategies for community rebound, even in the absence of a large-scale government
redevelopment plan. We have identified four patterns by which residents and business owners
are creating and leveraging social capital assets in their interactions with each other and other
elements within civil society. Our analysis concludes that government disaster response and
redevelopment policy should be crafted and executed in such a way that it does not unduly
inhibit civil society’s ability to respond.
Although the signals emanating from civil and commercial society are crucial to the
recovery effort, these signals can be drowned out if public policy distorts markets and the basic
rules of the social order. In another study, our social capital research team documents how
government assistance and development planning efforts can unintentionally impede long-term

The Political Economy of Katrina
371
recovery by retarding the swift return of the social and economic systems that coordinate daily
life (see Chamlee-Wright 2006b). Government provision of goods and services long after
immediate needs have passed creates what one New Orleanian referred to as a ‘‘FEMA
economy,’’ by which she means the expansive and distortion effects of federal disaster relief on
the local economy, including its effects on local labor and housing markets.
Many businesses trying to reopen have found it difficult to attract employees. Certainly
this is in part because many people simply haven’t returned to the affected region. But the
repeated extension of unemployment benefits has exacerbated this problem. Furthermore, the
premium wages government relief agencies pay low-skilled workers crowds out private
employers from the labor market, stunting the speed of recovery. For service-based companies,
the labor shortages are particularly daunting as they attempt to bring operations back on line.
As one business owner noted, ‘‘You’re competing with FEMA, you’re competing with
everybody. The contractors that are doing debris pick up and stuff, they are paying big bucks.
They are paying $12 [to $15] an hour to stand behind a truck with a little [‘stop’] sign.’’
Redevelopment planning efforts are another source of signal distortion as the basic rules
of the game continue to shift under the feet of residents and business owners hoping to return.
To take but one example, New Orleans is currently in its third discrete rebuilding planning
process since the storm. As each new planning process and the commensurate rebuilding plan
appear, residents are forced to change their decisions about how and whether to rebuild. When
a previously announced plan is scrapped in favor of a new plan with different rules for
rebuilding, time is lost, progress made under the now-obsolete plan is rendered useless, and
residents are left wondering whether the next plan will be ‘‘the one’’—or just another
aberration. These multiple and varied signals that the city has sent to its residents have left
people making decisions about rebuilding without any consistent knowledge of what and when
policymakers will allow them to rebuild. This in turn slows the rebuilding process and delays
the recovery of key commercial and civil society organizations and institutions. When
governments fail to establish the rules of the game for rebuilding, or worse yet change the
rules in mid-course, it becomes difficult for victims to make vital decisions and get on with their
lives.
Long-term relief efforts and large-scale recovery plans tend to ignore the innate abilities of
individuals, communities, and businesses to use a variety of resources and sources of
information to guide their decisions about whether and how to rebuild. These decisions are not
made in isolation but, rather, depend substantially on the signals sent by similarly situated
people.
Recovery efforts guided by the signals that emerge from action on the ground produce
faster, more robust, and more sustainable redevelopment than efforts stemming from
a politically produced and centrally executed recovery plan. Moreover, large-scale re-
development programs can overwhelm and obfuscate the signals created locally, stalling and
distorting the organic recovery that is crucial to long-term sustainable development. The focus
on the problem of signal noise in the postcrisis situation that emerged in our work on the social
and cultural dimensions of recovery dovetails nicely with the work in our political and legal
research on the ‘‘knowledge problem’’ that is confronted at each decision node in the public
sector response to crisis.
We argue that instead of top-down procedures of planning the recovery, public policy can
foster an environment that encourages sustainable, organic recovery by

372
Boettke et al.
N providing quick, clear, and credible commitments about what goods and services
governments will provide and when;
N creating in advance alternative regulatory regimes specific to postdisaster environments;
and
N avoiding policies that distort local economies and hamper civil society rebuilding.
Because policy mistakes can have serious retarding effects on postdisaster rebuilding efforts,
policymakers must understand the systemic reasons why government help so often goes awry,
why private citizens with a stake in the outcome are best situated to lead their own recovery,
and how to craft policy responses in a way that keeps ‘‘signal noise’’ to a minimum.
4. The Economic/Financial Dimensions
‘‘Living cities’’ play a crucial role in the positive link between economic freedom and
prosperity. The first work we have engaged in on the economic and financial dimensions
address how commercial life can lead a devastated city back to vibrancy (Ikeda and Gordon
2006). There is no upper bound on the size of living cities, and they appear to recover effectively
from disasters. Cities and their suburban hinterlands form in ways that accommodate
entrepreneurial activities.10 At the other end of the spectrum there are declining cities that are
less likely to recover. We follow Glaeser and Gyourko (2005) in arguing that government
programs that help to sustain poverty can establish a lower bound by transforming a declining
city into what could be termed a ‘‘welfare city.’’ New Orleans has, in fact, experienced this fate
and consequently was ill-prepared to recover quickly from a large-scale natural disaster.
Louisiana presents an ‘‘underperformance puzzle’’ because its actual economic
performance ranks below what is predicted (via cross-sectional statistical models) by its low
ranking on popular indices of economic freedom (e.g., Huang, McCormick, and McQuillan
2004) and the even lower ranking of the state’s actual entrepreneurial performance (Garrett and
Wall 2006). In other words, although the economic policy rankings already predict a low
performance, the actual economic performance is worse. We contend that this is because the
statistical methodology used in the creation of the indices does not capture all of the relevant
variables and does not pay sufficient attention to the central role that cities play in this nexus,
both as the principal hosts of economic freedom and as engines of economic growth. The
explanation of the underperformance lies in the character of Louisiana’s primary economic
engine, New Orleans, as a welfare city instead of a modern living city. It does not incite
innovation and growth. Rather, it persists in a declining state, mostly propped up by
government programs, and it holds much of the rest of the region down with it.
For instance, a common index of economic development is the historical trend in
population growth. Although we observe that at the Metropolitan Statistical Area level (New
Orleans–Metarie–Bogalusa) population growth slowed dramatically between 1980 and 2000,
averaging 1.5% per decade compared with an average growth rate per decade of 18.8% between
1900 and 1960 and 14.5% between 1960 and 1980, these data and rankings are revealing when
placed in the context of relevant comparative trends. The U.S. Commerce Department’s
10 On the relationship between the vibrancy of cities and the wealth of nations, see Jacobs (1985).

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