Why New Orleans won't recover.

Why New Orleans won't recover.

Why New Orleans won't recover.

The economic mysteries of daily life.
March 4 2006 7:31 AM

Why New Orleans Won't Recover

An economic explanation based on the Chicago Fire, the Kobe earthquake, and my CD collection.

My collection of Dire Straits compact discs languishes, unplayed, in the "ghetto" section of my music library. My decision to buy the albums dates back 15 years to a time when my brain was only half-grown. The physical discs themselves, though, are much newer. They were bought for me by a kindly insurance company after my flat was burgled and Money for Nothing, along with much else, was stolen. I could have done with something a little better aligned with my current tastes, but the insurance policy ruled otherwise.

How should we rebuild after disaster strikes? Should we try to put things back as they were before, or try to improve them, or cut our losses? The fraught question is much in the collective consciousness of America six months after Hurricane Katrina flooded New Orleans and destroyed other communities along the Gulf Coast.

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Part of the problem is that the victims are kept out of the important decisions. My insurance company could have saved administrative expenses by simply writing me a check and letting me modernize my music collection without interference. But such an approach might have left me hoping for occasional break-ins. Since a careless householder exposes his insurers to unnecessary risks, their meddling is perhaps a necessary evil.

So too with New Orleans. Mayor Ray Nagin's "Bring New Orleans Back" commission has identified areas deemed to be unlivable and recommends compulsory government purchase of houses in those areas and a moratorium on rebuilding work there. Cue outrage from locals who believe themselves better judges than the mayor's commission of whether their homes are salvageable or not. They are probably right, but they also know that the government will bail them out financially if the levees break again. It's not surprising that the government wants to interfere, just as my insurance company did.

Unfortunately, governments have predictable blind spots when it comes to reconstruction projects. Any city—indeed, any economy—is a mix of growth and decay, but governments are not good at recognizing decay and allowing it to happen. All cities contain "Dire Straits" sections that should not be replaced if destroyed.

For example, after Kobe, Japan, was flattened by an earthquake in January 1995, with much greater loss of life even than in New Orleans, some areas missed out on the rapid economic recovery. Kobe had a cluster of small businesses making plastic shoes, but they were already under pressure from foreign competition. No private entrepreneur was interested in trying to resurrect the sector, and neither was the government. On the other hand, the prestigious port was quickly rebuilt, only to find that after briefly recovering to pre-earthquake levels, traffic ebbed away to rival ports and to air freight. The government had failed to appreciate that even though it could supply a world-class port facility, it could not provide the demand for it.

Cities have their own trajectories, governed mostly by the dynamism of their inhabitants and surprisingly little by their physical infrastructure. You can get a hint of that by looking at the price of a typical apartment in Manhattan, which topped $1 million a couple of years ago. Most of that price isn't the cost of the building but the value of being surrounded by other New Yorkers. A successful city is home to countless interpersonal networks that create innovation, or efficient economic production, or simply a good place to live. The architecture and city planning may help to establish those networks, but it can always be recreated quickly if damaged.

That may be why disasters rarely interrupt growth in a thriving city, while disaster reconstruction rarely prevents decay in a stagnant one. According to George Horwich, an economist at Purdue University who studied the aftermath of the Kobe earthquake, manufacturing in greater Kobe was back to 98 percent of pre-earthquake levels within just 15 months, despite the fact that six months after the tragedy rebuilding had scarcely started. Seventeen-thousand buildings in Chicago's central business district were utterly destroyed by fire in October 1871, but the city's recovery was astonishing, and its population trebled in 20 years. Chicago was on the way up, and the fire simply cleared the way for a more modern city assembled chiefly by the chaotic genius of individual entrepreneurs.

For New Orleans, a charming place for tourists but a desperate clump of poverty and poor schooling, the question is not whether the current reconstruction plans will create a thriving city—they will not. It is whether there are any that could.