Saturday, September 03, 2005

Why keep New Orleans? 

The boys on NARN discussed with Rep. Mark Kennedy the notion that perhaps we should not rebuild New Orleans after Hurricane Katrina. It sits below sea level and prone to flooding, and we cannot afford to keep rebuilding it, the story goes. (Greg Ransom has a roundup.)

Ari Kelman writes that the purpose of New Orleans has always been business.
In 1718, when the French first settled New Orleans, the city's earliest European inhabitants saw riches inscribed by the hand of God into the landscape of the vast Mississippi valley. The Mississippi river system takes the shape of a huge funnel, covering nearly two-thirds of the United States from the Alleghenies to the Rockies. The funnel's spout lies at the river's outlet at the Gulf of Mexico, less than 100 miles downstream from New Orleans. In an era before railways, good highways, and long before air travel, much of the interior of the nation's commerce flowed along the Mississippi, fronting New Orleans. The river system's inexorable downstream current swept cotton, grain, sugar, and an array of other commodities to New Orleans' door. Because of the region's geography and topography, many 19th-century observers believed that God�working through nature, His favorite medium�would see to it that anyone shrewd enough to build and live in New Orleans would be made rich.
Adam Smith in the Wealth of Nations points out how important navigable waterways are as well.
As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland part of the country. (p. 25)
The quote appears at the start of a paper by Jeffrey Sachs and Steven Radelet in 1998 on the advantages countries have when they have access to navigable rivers.
The basic conclusion of this analysis is that geographic isolation and higher shipping costs may make it much more difficult if not impossible for relatively isolated developing countries to succeed in promoting manufactured exports. Firms from such countries will likely have to pay lower wages to workers and accept smaller returns on capital to compensate for higher shipping costs. For some production processes with a high import content and small profit margins, such as electronics, high shipping costs can essentially eliminate more remote countries from international competition.
That certainly applied to New Orleans of the 18th century, but does it continue to apply in the 21st? Does a post-industrial economy require port access still? I think that has to be answered positively. You could look at input-output tables and see that even for our economy today manufactured goods and transportation services have an impact on each other sector of the economy. And add to this the fact that a whole architecture of fossil fuel delivery centers on the place, and you can see that people will move there for business regardless.

But there should be some thought given to what policymakers can do to enhance and speed up the process. Hugh Hewitt is proposing sweeping tax breaks for the area, including a $500 tax credit for tourists who go visit the area. That last idea sounds bad to me: This just pushes up prices even further in an area where vacations are going to be expensive for awhile (there are fewer tourist spots to visit now, alas) and make Bourbon Street unaffordable to the middle class tourists it has always catered to. And enterprise zones generally have mixed results (cf. this legislative analysis from Minnesota, or this Mackinac study on "renaissance zones" in Michigan). The short of it is: Cities get built and rebuilt because it's profitable individually for people to (re)build there. Tax preference zones are most often not the deciding factor in an investment and tend therefore to waste a good deal of money that might be better put towards, say, better levees.

The thing that will make New Orleans most vibrant would be for Mayor Ray Nagin to fulfill the promise of cleaning out the corruption for which his city is notorious. Fred Smith of the Competitive Enterprise Institute -- a Louisiana native -- tells of the state's longtime status as a regulatory welfare state.
Louisiana and New Orleans were at one time prosperous�the leading communities in the South. Louisiana�s natural advantages made it a major port and that role stimulated the growth of regional banking and other financial services. Oil and other natural resources were plentiful, and, of course, tourism and hunting and fishing were added assets. As a result, Louisiana prospered for some time, even though its politics and its policies were increasingly destructive.

However, over the past 50 years, industries have sought to shift their operations to more favorable climes. Houston became the nation�s oil capital and grew far more rapidly. Indeed, Houston is now sheltering refugees from New Orleans. Atlanta became the South�s commercial capital and Charlotte its financial capital. Even Louisiana�s natural advantages faded as shipping firms�finding corruption rampant�sought to move their goods through other ports wherever possible. Populist policies have consequences: A politicized economy becomes too often a corrupt one. Louisianians sometimes joke: �We�re a state that does not tolerate corruption; we insist on it!� Amusing, but tragically true.
The goal should be to build a new New Orleans, not rebuild the old one.