The Rationale for a Scaled-Back City

WSJ.com - JON E. HILSENRATH : "House Speaker Dennis Hastert learned the hard way the perils of kicking a city when it's down. He was quoted in an Illinois newspaper shortly after Hurricane Katrina hit saying much of New Orleans "could be bulldozed" after the disaster, and opponents quickly silenced him with accusations of callousness and heartlessness.

The hurricane has clearly shown that New Orleans is home to energy and transportation infrastructure vital to the nation's economy. It's a city with a rich history and a vibrant cultural scene (and party life) that the nation values. And it's home to nearly 500,000 people with ties to their community. All are arguments for a big effort to get the city back on its feet quickly. History has also shown that cities have a way of bouncing back after crisis. (Think of Chicago's great fire more than a century ago.)

But some economists are starting to wonder if Mr. Hastert might have had a point about caution when it comes to rebuilding New Orleans, as poorly articulated as it might have been. It's not just the city's natural disadvantages (much of it is located below sea level) that worry economists. It's also its economic position -- rampant poverty and an exodus of people and businesses even before the hurricane touched down -- and the need to avoid creating incentives that could lead to development that is no less vulnerable.

"We have an obligation to people, not to places," says Edward Glaeser, a Harvard professor who specializes in urban economics. "Given just how much, on a per capita basis, it would take to rebuild New Orleans to its former glory, lots of residents would be much [better off] with $10,000 and a bus ticket to Houston."

Economists have wrestled for years with how to address the economic consequences of natural disasters. Gary Becker, the Nobel prize-winning University of Chicago economist, says policy makers need to consider something he calls the "Good Samaritan" paradox. Just about everybody's inclination after disaster strikes is to help the victims. "It is hard for a country to sit by and watch people in miserable circumstances as a result of a disaster," he says. "It is not desirable."

However the help, and the promise of rebuilding, also gives people an incentive to keep living in disaster-prone places. Like Mr. Glaeser, he's for helping victims. But to limit the perverse incentives, Mr. Becker says any rebuilding of the place should come with tough love from the government, such as tight zoning restrictions in flood-prone areas and tough flood insurance rules.

He's not the only Nobel-winner arguing for circumspection about rebuilding New Orleans. "The best policy is not to permit rebuilding in New Orleans in the areas that are subject to flooding," says Edward Prescott, a researcher at the Federal Reserve Bank of Minneapolis, who famously used flood-plain relief as an example of how seemingly sound short-run policies can skew incentives in the long-run. Richard Posner, the conservative jurist who shares an economics Web log with Mr. Becker, proposes that the city come back something like Colonial Williamsburg -- a quaint tourist site that isn't really attached to a city.

Of course, the city is highly likely to be rebuilt anyway. Besides the political momentum, the naysayers shouldn't under estimate the pressure on businesses to return, says Loren Scott, a Baton Rouge economist. Chemical firms, ship builders and energy firms have huge capital investments in the area that are of no value if they're not operating. "They're going to come back very quickly," he says.

But people might not. According to Census Bureau estimates, New Orleans's population declined by 4%, or 21,000, between 2000 and 2004, to 462,000. Among the cities with the largest populations in the nation, the only one with a larger decline during that stretch was Detroit. Some 24% of New Orleans families lived below the poverty line, according to the Census Bureau, compared to 9% nationally.

Many fled to the suburbs in search of better public schools. Some of those big investors have been fleeing as well. ExxonMobil, Shell and ChevronTexaco, for instance, have eliminated or moved hundreds of jobs to Houston in the past few years, continuing a two-decade exodus from the city. The result: Even though the energy sector is booming, New Orleans hasn't felt much of it. In 2004, private sector employment levels in the city were still below their levels of 1997.

Mr. Glaeser says very long-term issues were behind the city's pre-Katrina woes. Back in the 1840s, New Orleans was among the nation's three largest cities, along with New York and Philadelphia. Back then, water transportation was the dominant means of moving people and products, and the economy was largely agrarian. Its connection to the South and the Mississippi River made New Orleans an integral hub for commerce. Mr. Glaeser says the rise of rail travel, car travel, and industrialization over the next century changed all of that and helped to set off the city on a long, slow decline. Today's fastest growing cities, he notes, are ones like Las Vegas and Atlanta, situated for suburban sprawl and not bounded by water.

"It is a place that reached its economic peak relative to the U.S. economy 160 years ago," says Mr. Glaeser. "It certainly was not delivering a great economic future for a majority of its residents."

There is also a question of timing. Just two weeks after Katrina struck, cities like Baton Rouge and Houston are teeming with people and businesses trying to move on with their lives. By the time a reconstruction plan for New Orleans is developed and executed, thousands of people will likely have settled in somewhere else. As a reminder of how long -- and contentious -- the rebuilding process can be, four years after the Sept. 11 terror attacks on New York, the site that once housed the World Trade Center remains a scar of undeveloped land.

In these early crisis days, Washington seems in no mood for circumspection. The $62 billion pledged already to aid victims is just the first installment on a recovery bill that could reach $200 billion. But before committing billions to repairing the tragic city, these economists say policy makers should take a close look at where New Orleans has been, and make sure they don't send it back in the same direction."