The Gulf Coast — What Next?

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What should be done next to rebuild the Gulf Coast? Let’s pick up where Walter Block left off. He has proposed that "no tax money should be poured into New Orleans" and that "Private enterprise alone should determine if the Big Easy is worth saving or not." He also suggested that private police agencies hired by property owners should be brought in voluntarily if desired as opposed to national guard or other troops.

I have opined already that there is no need to close off New Orleans (or any other part of the Gulf Coast) for months on end and that property owners have a right to return now if they wish to.

I also endorsed an e-mailer’s instinct that volunteers can organize themselves to do the jobs that need to be done, such as pumping out water and cleanup. I add now that this can be either on a charitable basis or a contract basis, to be paid for by residents of the area or anyone else who wishes to contribute to such efforts. The magnificent generosity of the American people can tie into volunteer efforts.

What else? The first suggestion comes from another e-mailer, an idea of his "libertarian nephew." It is that all the governmental authorities at every level should declare the Gulf Coast a tax-free and regulation-free area for 10 years. What a splendid idea! This at least creates the possibility of a resurgence in the area. It becomes possible, though by no means a sure thing, that the entire area will be rebuilt as a consequence. It even becomes possible that the shift of economic resources to that area will be so amazing and so large that it will put pressure upon other areas of the country also to reduce taxes and regulations. Here could be a demonstration project along the lines of Hong Kong, because New Orleans as a port city is an entrepot. Limiting these possibilities is the fact, mentioned below, that the prior 1927 disaster resulted in a big drop in the size of New Orleans and a big outward migration.

We can hope for a great success if this were implemented. We can predict that, other things equal, such measures will benefit recovery very greatly. Here could be a test case of what less government can accomplish. Of course, I’d prefer to see the area become tax-free and regulation-free irrevocably. And I’d like to see the idea extended to other areas of the country.

Getting rid of gas taxes for a month is nice, but it’s a mere bone thrown to the hungry. It’s far too little. Is that the entire extent of the sacrifice that a State can come up with? Let’s see some action with real substance to it. Let’s see a tax-free and regulation-free zone created. Let’s see the Gulf Coast turned into the Free Gulf Coast.

This is politically feasible if along side it no tax money whatever is sent to the area and State authorities leave the place alone. This has the ring of fairness about it.

The idea of no regulation overlaps with the observation of another e-mailer who reminded me that federally subsidized flood insurance contributed to the outcome of this storm by changing the incentive to live in the region and the incentive to protect against storms. When this insurance exists, it may well allow insurance companies to write policies that do not take into account the risks of large storms, so that they complacently accept dikes and levees that are insufficient to handle big floods. Whatever the case may be, it makes sense that such flood insurance should not occur in this area or anywhere else. That’s part and parcel of the no-regulation idea.

Privatizing the dike or levee system is essential too, in my view. How can this be done? I’m inclined to leave this to the ingenuity of those who will be living there. I don’t think that I know how to do this or know enough about the details to say how this can or should be done. I will offer a few thoughts on the matter to get things off the ground, if ever so slightly.

We should understand that the State of Louisiana has an extensive system of levees or built up berms around rivers in order to prevent flooding and control runoff after heavy rains. By one account there are 1,600 miles of levees. These are very much local projects, although sometimes one system connects with another and larger regions begin to be involved. Other states have similar sorts of situations. My first point is that these are not by any stretch of imagination public goods, even in the case of New Orleans. They mainly benefit those who are in that region, especially the owners of swampy or threatened land who are then enabled to develop and sell homes. Sometimes they are built after homes are already present, and then they benefit the existing homeowners whose property values rise. These are all private benefits.

Levee systems arose traditionally as local matters. This again suggests that residents of the area internalized many of the costs and benefits of them themselves, and there was no interference at first from larger political authorities. At first the settlers themselves built up protective dikes. It was not until 1899 that the New Orleans Sewage and Water Board hired Albert Baldwin Wood to improve the city’s drainage. He invented a number of superb devices that have lasted to this day. This resulted in reclaiming a good deal of land which was apparently sold or leased by the city to dwellers. The costs probably were recovered in part through taxes.

However, building a levee does not always have solely a local impact, because it diverts water flow to the downstream region. This raises a difficult question of justice as to who came first and who built first. In 1927 New Orleans dynamited levees 13 miles below the city and flooded out downstream residents (mostly poor whites) who, although promised compensation by government and business officials, were never fully compensated. Herbert Hoover, running for President at the time, walked out of the decision-making, leaving it to the Army’s Chief Engineer Edgar Jadwin as well as the leading lights of the City of New Orleans. Who is responsible for the levee system? In the case of the Mississippi River, even before 1927 the federal authorities had been heavily involved. This affects a just determination of who is harming whom, if such responsibility can be affixed. This is a tangled web.

In 1927 and 1928, the Mississippi River became even more federalized than it had already been. It is most extraordinary that President Calvin Coolidge’s State of the Union address delivered on December 6, 1927 contains a very lengthy discussion of dikes and flood control along the Mississippi River. Partly this was in response to a very destructive flood in 1927 that flooded the homes of 1 million Americans (Coolidge mentions 700,000) and brought great loss of life and property. The Federal government had already been involved in dike construction for many years, and the Flood Control Act of 1928 brought the Engineering Corps of the Army into the picture as the contractor to repair the dikes and extend them.

According to the numbers in Coolidge’s speech, disaster aid was $17,000,000 from private sources, $7,000,000 worth of federal support in the form of equipment, services and supplies, and $5,000,000 to $10,000,000 from railroads, the States and localities. In addition, there was banking loan aid. These numbers alone do not suggest that a federal takeover of the system of dikes was necessary as a remedy. However, levees shift water from one locale to another in a flood of the Mississippi, so that the problem of who controls what and who pays what is non-trivial. For a sample of some of the politics and issues involved, see John M. Barry’s interview on PBS given prior to Katrina. He emphasizes that the Corps of Engineers stuck to a "levees-only" policy despite the inadequacy of containing the mighty force of the Mississippi in flood, and that "you had a disaster that was waiting to happen."

New Orleans was far more prosperous and large prior to 1927 than now, and it may well be that its size and impact will fall still more in years to come because it is not located in an area where people are willing to take the flood risk.

The economy of the United States has so many controls, taxes, regulations, and restrictions that it is impossible to know who is subsidizing whom. Whole states such as Arkansas can be affected by a serious flood of the Mississippi. People have located in areas that are flood-prone partly because federal and state money has been spent to make the areas safe – or seemingly safe. To that extent, they are receiving subsidies for living in a risk-prone area. The rest of the U.S. also has written them an insurance policy to give them disaster aid should something terrible happen. Someday the Mississippi River will flood out a huge portion of some States and create a disaster greater than what Katrina has brought, and part of it will be man-made because of these economic policies.

This is one reason why, despite the difficulties of doing so, I believe that we should start to move in the opposite direction, to eliminate these aid, insurance and infra-structure subsidies. They are just encouraging more problems. The other, more fundamental, reason is that all of these policies involve coercion and are unjust. They are simply unjustifiable. They invade rights. Every so often, I read Lysander Spooner to remind myself of the fundamental wrongness of these and all State policies.

In order to privatize or get closer to privatization, the people who live in an area should pay for the costs of living there. The traditional ways of doing this, without the help of the Federal or State governments, are by local tax authorities. Revenue bonds require that the authority collect tolls or payments that are linked to the facility, like a toll bridge or a toll tunnel. Can this be done with levees? Maybe yes, maybe no. At some point, river traffic passes a levee system and/or unloads across a levee. Either of these provides a basis for charging river-users. This has problems. It can divert traffic to roads, rail and air. If this problem is large enough, it means that a transportation authority may work better, one that charges all forms of traffic in or out of a protected area.

Another possibility is that the locality issue general obligation bonds to finance the facility. In this case, the revenues come from tax payments assessed to residents and businesses. Both local revenue and general obligation bonds shift the costs closer to those receiving the benefits.

In a more libertarian world without coercive tax authorities, what might occur is that associations will form that handle the costs. Two solutions come to mind. In the first, large portions of land might be owned by an association of businesses or landowners or both who assess themselves via deed restrictions. In that way, anyone who moves into the area agrees to pay the assessment. This is like a large-scale condominium arrangement. It could be that the benefits to some businesses from being in this location are so great that it pays them to band together to pay for dikes. It may pay them to own several means of transportation so that fees could be charged for all. In these ways, the costs and benefits become internalized to the units that are paying and receiving them.

The libertarian solution that is just is easy to suggest: No tax authorities at all and leave it to individuals to work out solutions. At the same time, the solutions that result are likely to work better economically.

Right now, many people are suffering. They have lost loved ones. They have lost their homes and property. They are living on aid. They will turn into a political football in short order. A fast recovery could attract them back and reduce their losses. A fast recovery could help us overcome the poor management of this disaster, which contrasts sharply with the preparation and effort led by Herbert Hoover in 1927, according to John Barry. A tax-free and regulation-free zone is a wonderful way to foster a fast recovery.

Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.

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