Dynamism and Disasters
My latest NYT column looks at rebuilding after disasters. Here's an excerpt:
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 That is because some physical assets, whether outdated manufacturing plants or homes in declining areas, are worth keeping only because they were paid for long ago and cost next to nothing to use.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.
Read the whole thing. It's free!