When Disasters Act as Accelerators of Change

The New York Times, "Economic Scene" , October 06, 2005

Speaking after Hurricane Katrina, President Bush promised that "we will do what it takes, we will stay as long as it takes, to help citizens rebuild their communities and their lives" on the Gulf Coast.

"As long as it takes" may not be as long as a lot of people expect. Consider what happened after a major earthquake struck Kobe, Japan, in 1995. Many people, in Japan and abroad, thought that the port city would take years, even decades, to recover. The quake, which had a magnitude of 6.9, was the worst ever to hit a modern city. It wrecked the port; destroyed 100,000 buildings and severely damaged many more; ruptured the water, sewer, electrical and gas systems; and destroyed roads and rail lines.

Yet despite the catastrophe, Kobe's economy recovered rapidly. Only a year after the quake, Kobe was handling as many imports as before the disaster, and exports had recovered to 83 percent of their previous level. Within 18 months, manufacturing was at 98 percent of where it would have been without the quake.

"Economic output was back in 15 months and could have been sooner if there hadn't been so many disputes about land use," the economist George Horwich said in an interview. Kobe's resilience, he argued, was not an aberration. Modern economies bounce back quickly from natural disasters because they depend not on physical assets but on human expertise. People quickly figure out how to replace damaged operations, either by rebuilding or finding substitutes.

"Destroy any amount of physical capital, but leave behind a critical number of knowledgeable human beings whose brains still house the culture and technology of a dynamic economy, and the physical capital will tend to re-emerge almost spontaneously," Professor Horwich, now retired from Purdue, wrote in "Economic Lessons of the Kobe Earthquake," published in the April 2000 issue of Economic Development and Cultural Change.

Rebuilding lives and communities does not, however, mean returning the economy to exactly where it was before. Rather, a disaster tends to accelerate economic changes that are already under way. That is because some physical assets, whether outdated manufacturing plants or homes in declining areas, are worth keeping only because they were paid for long ago and cost next to nothing to use. They would cost more to replace than they are worth.

"Any modern economy is normally in constant flux," Professor Horwich wrote. "As such, the destruction of physical assets is a form of accelerated depreciation that hastens the adoption of new technologies and varieties of investment." In Kobe, the plastic shoe industry never came back after the earthquake, and air freight expanded at the expense of the port.

The more flexibility businesses and individuals have, the more adaptable they can be and the faster recovery can take place. That is one reason money helps more than in-kind gifts. Donors, Professor Horwich said, "can only guess what recipients want most" and often provide gifts of clothes or food in forms that are hard to use.

The same principle applies to the rebuilding commitments now being made in Washington. The final cost of Katrina relief is widely expected to top $100 billion, and the Louisiana Congressional delegation has submitted its own $250 billion wish list.

Those are very big numbers. With $100 billion, the government could give every man, woman and child from New Orleans a check for $200,000. Expanding these payments to the entire metropolitan area would allow a generous $75,000 per resident.

Yet nobody expects the displaced residents of New Orleans to see anything close to those potentially life-changing amounts. Federal spending is aimed not at "rebuilding lives" but at "rebuilding communities," primarily by spending a lot of money on construction projects and on government services.

But, the Harvard economist Edward L. Glaeser argues, such an approach is backward. "If there is disaster insurance, then it is, presumably, the people of New Orleans who are insured, not the place itself," he writes in an article for The Economists' Voice, an online journal (www.bepress.com/ev). The article is called "Should the Government Rebuild New Orleans, or Just Give Residents Checks?" He favors the latter.

His basic argument is that individuals are better at picking where to live and work than any centralized government planner. Evacuees know their own wishes, skills and opportunities.

Besides, "if you're going to bet on place," Professor Glaeser said in an interview, "New Orleans is probably not the right place to be betting on. It's a mid-19th-century city built around a tremendous water-based advantage of the mid-19th century, not around any kind of advantage of use in the 21st century."

The port is economically vibrant, but it employs fewer than 7,500 people, most of them highly skilled. The oil and gas industries employ even fewer local residents. Trying to restore the city to its pre-hurricane state does not offer its displaced residents, particularly the poor, much hope for a better life.

"It's just crazy to think that the right insurance mechanism is to spend hundreds of billions of dollars on public infrastructure," Professor Glaeser said in the interview.

In the article, he said: "There is a big difference between rebuilding lives and rebuilding communities. Given limited funds, the two objectives may well conflict."