The political, economic, and social aspects of Katrina

Southern Economic Journal, Oct, 2007 by Peter Boettke, Emily Chamlee-Wright, Peter Gordon, Sanford Ikeda, Peter T. Leeson, Russell Sobel

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 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 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.