The Economics Of Disaster

Michael Kurth Thursday, October 5, 2017 Comments Off on The Economics Of Disaster
The Economics Of Disaster

It was impossible to watch our neighbors in Southeast Texas get flooded by Hurricane Harvey and the people of Florida get slammed by Hurricane Irma without thinking back to our own experience with Hurricanes Katrina and Rita 12 years ago. We know what they are going through. Now that the waters have receded and the winds have died down, the work of rebuilding their homes, their communities and their lives will begin.

Disasters such as hurricanes, floods, earthquakes, tsunamis and wars destroy physical capital — buildings, homes, power lines, roads and bridges — but they generally leave intact the other forms of capital essential to our long-term prosperity: human capital (our knowledge and skills); social capital (our ethics, values and community bonds); and political capital (our laws, regulations and public institutions).

When I was in the army in the mid-1960s, I was stationed in West Berlin. It was just 20 years after the end of World War II, and having seen pictures of the destruction in that city — Berlin was the capital of Hitler’s Third Reich and had been reduced to rubble by allied bombing and Russian artillery — I expected to see bombed out buildings and rubble everywhere. Instead, I found a thriving modern city. One could still find some bombed out buildings if one searched for them. But the rubble was gone. It had been gathered and piled up in the Gruenewald (green forest), creating a mountain called Toefelsberg (the Devil’s Mountain) that was the highest point in Berlin. That is where I worked: on top of a huge pile of rubble from the war.

That was West Berlin, which was controlled by the British, French and Americans. East Berlin was a different matter. It was the same people with the same level of education and culture as the people in West Berlin, but they lived under a vastly different political regime. Under the communist government, there was little private initiative, and recovery efforts were totally dependent on the government. This doesn’t mean that the government in the west wasn’t involved in the rebuilding effort; just that it was more responsive to the peoples’ needs than the corrupt government in the east.

Germany and Japan both made remarkable recoveries after World War II, and soon returned to being economic powerhouses. Although their physical capital was destroyed, their human and social capital was intact, and their political capital was improved.

Ironically, the destruction of physical capital can sometimes benefit a dynamic economy. When a disaster strikes, the old physical capital is destroyed and replaced with the most modern physical capital. For example, U.S. industry was spared from destruction during World War II and our factories and steel mills built in the 1930s soon found themselves competing with new, modern facilities in Germany and Japan that incorporated the latest technological efficiencies. In a competitive economy, the last plant built is usually the most cost-effective plant.

We experienced some of this after Hurricane Rita. In the gaming market, Harrah’s was ultimately replaced by the Golden Nugget; Chennault, the Civic Center and other public facilities were upgraded; and the damaged homes and buildings were replaced with better, more modern homes and buildings. This is not a matter of ripping off insurance companies and government aid. In many cases, modern building materials are not only better, but also cheaper, than the materials they replace. And new technologies, such as energy conservation and the internet, can be more easily incorporated into a new building than retro-fitted into an old one.

When it comes to federal aid, the best thing the federal government can do is deliver the funds directly to the people affected by the disaster or to local officials and let them decide how they are best spent. Unfortunately, after Katrina and Rita, Gov. Blanco hired an urban planning firm to hold “charrettes” around the state where people fantasized about how government planners could build their communities. Such social engineering is something a socialist government might attempt. It went nowhere in Louisiana. The job of the government should be to help people rebuild their communities, not tell them how those communities should look.

When FEMA arrived after the storms, it came in with a model of disaster recovery that said the first priority was to get people jobs to sustain their income and spending ability. So FEMA began hiring a large number of workers at exceptionally high wages. But it wound up taking them away from local businesses and created a labor shortage that prolonged the recovery period. One lesson from this is that when dealing with a massive recovery effort, FEMA should bring in workers from other parts of the country rather than compete with local businesses for local labor.

This could be especially important in Southeast Texas, where all along the Gulf coast there is an economic boom going on similar to the one in Lake Charles. It has been estimated that half the housing construction workers in Texas are undocumented workers from Mexico. Even before Hurricane Harvey, there were news stories about how housing prices were soaring due to a labor shortage. For example, this headline appeared in the Houston Chronicle on Aug. 2: “Trump’s immigrant crackdown causing Texas construction worker shortage, industry experts say.”  Regardless of how one feels about immigrant workers, we know from experience that when you have water pouring through your roof, you don’t particularly care about the nationality of the person repairing it.

Thus, the current situation in Southeast Texas is that its people are in the midst of a historic economic boom; its construction workforce is dwindling; it now has 100,000 homes that need to be rebuilt or repaired ASAP; and FEMA is about to hire thousands of Texans to work on its recovery effort.

Some people say the government should send the undocumented construction workers back to where they came from and let wages rise for U.S. construction workers. But labor markets are interconnected; doing this would not only drive up wages for construction workers; it would also drive up wages for all low-skilled workers and hamper small businesses trying to recover from the storm.

Ultimately, the cost of the higher wages would be passed on the consumers, just like a tax.

The least disruptive thing for FEMA to do would be to bring in Mexican construction workers on temporary work permits and make sure they return home when the recovery crisis is over.  It’s technologically feasible, but is it politically possible?

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