Undercover Economist

Recovery positions

The Undercover Economist – FT Magazine 25 February

An extended version published has been published in Slate.

My collection of Dire Straits compact discs languishes, unplayed, in the “ghetto” section of my music library. My decision to buy the albums dates back 15 years to a time when my brain was half-grown. The actual discs, though, are newer. They were bought for me by an insurance company after my flat was burgled and Money for Nothing, and much else, was stolen. I could have done with something aligned with my current tastes, but the insurance policy ruled otherwise. How should we rebuild after disaster strikes? Should we try to put things back as they were before, try to improve them or cut our losses? The question is much in the US consciousness six months after Hurricane Katrina flooded New Orleans and destroyed other communities along the Gulf coast.
Part of the problem is that the victims are kept out of the important decisions. My insurance company could have saved administrative expenses by writing a cheque and letting me modernise my music collection without interference. But such an approach might have left me hoping for occasional break-ins. Since a careless householder exposes his insurers to unnecessary risks, their meddling is perhaps a necessary evil.
So, too, with New Orleans. The Bring New Orleans Back Commission set up by Mayor Ray Nagin has identified areas deemed to be unliveable and recommends compulsory purchase of houses in those places and a moratorium on rebuilding. Cue outrage from locals who believe themselves the best judges of whether their homes are salvageable or not. They are probably right, but also know that the government will bail them out financially if the levees break again. It’s not surprising that the government wants to interfere, just as my insurance company did.
Unfortunately, governments have predictable blind-spots when it comes to reconstruction projects. Any city – indeed, any economy – is a mix of growth and decay, but governments are not good at recognising decay and allowing it to happen. All cities contain “Dire Straits” sections that should simply not be replaced if destroyed.
After an earthquake flattened Kobe in 1995, some areas missed out on the rapid economic recovery. Kobe had a cluster of small businesses making plastic shoes, but they were under pressure from foreign competition. No entrepreneur was interested in trying to resurrect the sector, and nor was the government. On the other hand, the port was quickly rebuilt, only to find that after recovering to pre-earthquake levels, traffic ebbed away to rival ports and to air freight.
Cities have their own trajectories, governed mostly by the dynamism of their inhabitants and surprisingly little by their infrastructure. Disasters rarely interrupt growth in a thriving city, while reconstruction rarely prevents decay in a stagnant one. According to economist George Horwich, manufacturing in greater Kobe was back to 98 per cent of pre-earthquake levels within just 15 months, despite the fact that six months after the tragedy rebuilding had scarcely started. Chicago’s central business district was destroyed by fire in 1871, but the city’s recovery was astonishing and its population trebled in 20 years. Chicago was on the way up, and the fire cleared the way for a more modern city assembled chiefly by the chaotic genius of individual entrepreneurs.
For New Orleans, a charming place for tourists, but a desperate clump of poverty and poor schooling, the question is not whether the current reconstruction plans will create a thriving city – they will not. It is whether there are any that could.