Wednesday, September 14, 2005

Warm fuzzy feelings = Massive financial liability

Since I'm too lazy right now to blog about anything original, I'm just going to post something I'm working on for work, so people can read as I intended it to be read, before it gets a severe lashing with a red pen. Enjoy:

In typical politician fashion, after the devastation in New Orleans became apparent, politicians from the Mayor of New Orleans through the President were making emotional promises that New Orleans would be rebuilt, and that it would be in better shape than it was before.

These promises naturally elicited passionate applause from the on-looking crowds, but after the cameras stopped rolling, several questions remained. The first, and perhaps easiest, question to answer is ‘can New Orleans be rebuilt?’ Of course it can. Rudimentary economics explains that anything is possible, the only obstacle is cost. This question, however, leads to more unpleasant questions that have yet to be asked in earnest. Will New Orleans be rebuilt? How much will it cost? Who will pay for it? Should New Orleans be rebuilt?

The answer to the first question seems to currently be a glorified shoulder shrug. It is simply too soon to tell. Regarding the cost of rebuilding, Hurricane Katrina is already the most expensive disaster in the history of the United States, and New Orleans was no doubt dealt the worse blow. Repair costs in that city alone are likely to be in the tens, if not hundreds, of billions of dollars. Factoring in the strengthening of the levee system that will now be deemed necessary, the price tag climbs another several billion dollars, and the timeline extends literally decades (as estimates place the whole process at nearly 25 years.)

The enormous cost of this massive undertaking begs the question — where will all the money come from? It certainly won’t be the local government. New Orleans businesses and wealthy residents have relocated, leaving decimated an already insufficient tax base. Insurance payouts will be woefully inadequate as only 45% of New Orleans’ residences had flood insurance, and those that were insured were only insured at a maximum of $250,000 for building property, and $100,000 for personal property. There is also no guarantee that insurance payouts will be used to rebuild in New Orleans.

Without a tax base and with the majority of rebuilding efforts otherwise coming as out-of-pocket expenses, it would seem that any large-scale rebuilding efforts in New Orleans would come on the Federal Government’s dime.

The tendency in America toward ‘gesture politics,’ that is, legislation for the sake of Public Relations rather than for effective policy, leads to massive government expenditures — often known as ‘bailouts’ — for things that would otherwise not be self-sufficient.

These bailouts, in effect, reward bad decisions and poor management. Bad decisions such as building a city below sea level and surrounding it with water, or such as not acquiring sufficient flood insurance, and poor management such as the misappropriations of government funds that characterized the New Orleans government.

Such policies also tend to themselves be inefficient uses of government funds. In the wake of Hurricane Katrina, there was a great deal of lamentation of the poverty in New Orleans that was thrust into the national spotlight. There seemed to be little question, however, if the billions of dollars that would be needed to rebuild New Orleans and strengthen the levee system could be better spent in aiding the former residents of New Orleans now dispersed throughout the nation.

At their roots, these bailouts also undermine the basic fabric of America — the ideas of free-market and self-reliance. If people truly desire the rebuilding of New Orleans, they will support local tourism, start businesses there, even move to the city and become part of the tax base — in other words, market conditions will function properly.

If these market conditions are ignored, however, and the city is rebuilt with no economic basis to support it, it will become nothing but a massive economic liability. It is not a question of if New Orleans will once again be devastated by a natural disaster, it’s a question of when. Political correctness aside, the question needs to be earnestly asked, and earnestly answered — is good P.R. and a good gesture worth billions of taxpayer dollars?


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