Friday, September 02, 2005

New Orleans’ Breached Levees: Ex-Ante How Much Should Have Been Invested in the Levees and Whose Money Should Have Paid For It?

As could be expected in the midst of a crisis there is a lot of finger pointing right now. Who is to blame for exacerbating this tragedy? Paul Krugman knows who. He points his finger at the White House in today's New York Times piece ""A Can't Do Government"

I quote: "Second question: Why wasn't more preventive action taken? After 2003 the Army Corps of Engineers sharply slowed its flood-control work, including work on sinking levees. "The corps," an Editor and Publisher article says, citing a series of articles in The Times-Picayune in New Orleans, "never tried to hide the fact that the spending pressures of the war in Iraq, as well as homeland security - coming at the same time as federal tax cuts - was the reason for the strain.""

Putting on my cold economics hat, I have some questions for you and then I will discuss some simple economics of climate change and cities.

1. How much did the people of the New Orleans metro area invest in their own levees? Given that property owners and public safety in this metro area are the main beneficiary of such investments, why wasn't this sufficient incentive for the Mayor and the metro area's other political leaders to tax citizens collect the money and invest in better, more modern levees?

2. Were the political leaders of New Orleans aware that the levees were at risk to collapse? More formally, conditional that a major hurrricane struck near New Orleans what did they believe was the probability that there could be major flooding? In this state of the world, how much did they guess that New Orleans would suffer? Expected value theory would say that if the Mayor is risk neutral and he thinks there is a 5% chance of a billion dollar loss if the current levees are not improved then the expected benefits of improving the levees would be 50 million dollars. This could be compared to the costs of improving the levees and the net cost/benefit analysis would have determined ex-ante whether this was "good policy"?

To convince me that federal tax payer money was need for such a local project, you'd have to convince me that New Orleans was liquidity constrained (couldn't get a loan) or that there political leaders were over optimistic about the quality of the existing levees and thus were underestimating the benefits of upgrading the levees.

3. Repeating myself, everyone in New Orleans knew that their city was below sea-level why didn't the major property owners lobby for greater investments in "insurance policies" (i.e better levees) to reduce the probability of disaster? I realize that this is monday morning quarterbacking but it is an obvious strategy for a risk averse person and most people are risk averse.

4. Turning to climate change. Cities ranging from London to New York City are studying how climate change will affect their city's quality of life? Should such cities finance their own investments to pre-empt climate change impacts or should their federal governments subsidize such investments? Given that the major beneficiaries of such policies such as inhibiting flooding are land owners in these cities, a simple public finance argument would say that these cities should handle their own financing of "self protection" against mother nature.

I do not mean to "blame the victim" here. Instead, I'm hoping to stimulate myself here to think about what local environmental threats should be handled by local government versus when should costs be spread. There may be a terrible moral hazard here that the politicians of New Orleans delayed invested their own people's tax revenue in building up the levees because they were hoping that the Federal Government would pay the bill though the Corps Engineering program that Krugman talks about today. I hope I'm not right about this!

10 comments :

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Tim Hicks said...

"To convince me that federal tax payer money was need for such a local project, you'd have to convince me that [...] there political leaders were over optimistic about the quality of the existing levees and thus were underestimating the benefits of upgrading the levees."

Strictly speaking, wouldn't that be an argument for federal government to mandate expenditure of local money, not spend federal money?

(N.B. I'm from the UK, so I don't really know whether such a thing is possible in the USA.)

elhuevon said...

Prof. Kahn,

The thing you have to remember is that organization matters.

The USACE has basically taken away the rights of individual localities to deal with flood management and planning. Since the Corps has a staff of over 36,000 highly qualified engineers and environmental specialists this was generally considered a good thing. In fact the "Flood Control Act of 1936 gave the Corps the mission to provide flood protection to the entire country." That's taken direct from their website: http://www.usace.army.mil/public.html

No locality that I know of, ANYWHERE in the country has ever superceded the USACE guys from this type of work - they are the best there is. In fact, they've been implementing a plan to fix the levees in New Orleans since 1995. The Corps always has more priorities then funds, but their budget for domestic projects was put under tremendous strain in 2003 and 2004.

I have very few doubts that the Iraq War and federal government budget crunch have contributed quite a bit to the slowdown in funds delivered to NO. Newspaper articles from the past three years seem to agree. Here's an excellent read on the recent Corps history in Louisiana:
http://www.alternet.org/story/24871

Anonymous said...

Considering the expense of this work, I believe it is wildly beyond the capability of local population. If that is case then why would the federal government choose to fund it or having funded it, rebuild it?

(Reminds me of demanding the local counties handle the Irish potato famine. We wouldn't want to introduce a moral hazard in agricultural farming practices now, would we?)

Anonymous said...

NOLA has transformed over the last 35 years or so from 70% white to 70% black. Why?
White-flight from blacks?
flight from street crime?
flight from municipal corruption?
How much of a factor was the increasing drumbeat that the Flood was inevitable?

Also - NOLA is 28% below poverty line. Their taxbase stinks.

ANSWER - Whatever rebuilding is done MUST be on high ground - NOT underwater.

JohnG said...

Can someone explain to me why a dollar paid from the national treasury is a panacea? Why is that dollar more potent than the tax dollar raised in the locality where the need exists?

Is the debt, or bond, or cost associated with the construction any less formidable because it's paid for by federal tax dollars than by local tax dollars? Or, is it simply a case of "Other Peoples' Money" being more appealing than my own?

Does not either debt have to be repaid? Is one local debt less than 10,000 federal debts? Or, 100,000 federal debts?

Why does the federal government "give" money to local projects in the first place? Whatever happened to the concept of a loan to the locality if, indeed, the project dwarfs local treasuries?

For example, New Orleans would undoubtedly claim that the cost of the levees is beyond its financial means. Yet, the City of New Orleans is able to tax, literally, billions of dollars of petrochemical and shipping assets located within its midst.

So, at present, it's able to reap federal windfalls to protect private property, yet exact a tax on an industrial base that is probably unmatched elsewhere in the country. And, it gets to keep the money in both cases.

Curious.

Bruce Hayden said...

In response to elhuevon's suggestion that it was ACE's fault because they have taken over flood control, and then the often implied suggestion that it was the Bush Administration's fault for going to war in Iraq, I would suggest that this is one of the big problems with abrogating responsibility to the government. The higher the level of the government, the more remote it is, and the less that you can depend on it in the long run.

I have to ask why in 2005 am I, sitting here over a mile above sea level in Colorado, funding flood control along the Gulf seaboard or up the Mississippi valley?

I shouldn't be. I have no economic interest in NO. Most Americans don't, except that it is a major sea port. But that can be replaced much more cheaply than the city itself, and, indeed, can be moved to higher ground.

No, the people who should be paying for this are those affected. And because they chose to let the federal government pay for it instead, they are stuck with the ramifications of when the government has more important things to spend its money upon.

cathyf said...

It's not clear to me that the levees "failed" in this case. It looks to me like the decision was made decades ago: sacrifice the Mississippi delta (including New Orleans) by turning it into open water in the Gulf of Mexico in order to have a channel at the south end of the Mississippi which has enough water in it to allow large ships & barges to move through 365 days/year.

It's like you hire a contractor to dig a flood-control retention pond next to your building. Then years later a flood comes, the retention pond fills up, your building is dry. And then you complain about the pretty flowers that were at the bottom of the pond and got killed.

It looks to me like, from an environmental point of view, the only positive thing which has happened to the Mississippi River delta in the last 100 (200?) years was in 1927 when they dynamited the levees in the Great Flood. Of course that wasn't very good for the 2-legged (or 4-legged) inhabitants!

This arguing about the best economic model to simultaneously produce: 1) a healthy delta, 2) no/minimal flooding, 3) the Mississippi as a useful shipping artery, are getting way ahead of themselves. The engineering facts are that all three together are a Free Lunch. Fundamental Theorem of Economics is that there is no such thing as a free lunch. Under any economic system.

cathy :-)

Anonymous said...

We forget how interdependent we all are. My sewage runoff is your problem; your deforestation is my drought; my oil dependence is our global warming. According to stratfor, the economic greatness of the United States has, from the beginning, depended on the port of New Orleans. Maybe this isn't a local issue. Here's the article: http://www.stratfor.com/news/archive/050903-geopolitics_katrina.php