Sunday, September 25, 2005

What doesn't kill us makes us stronger

In the aftermath of Hurricanes Katrina and Rita, it appears that the United States has received a couple of hard punches to the gut. We have had destruction of property and loss of life. We face the challenge of rebuilding a major American city and the areas in Alabama, Mississippi, and Texas affected by the hurricanes. There are long-term concerns about what to do with all the displaced residents. If you look at what we have lost, you may forget to look for what we have to gain. Despite projections about the cost of rebuilding and the difficulties that lay ahead, I believe this will prove to be a good thing for America in the long-run.

We stand to gain from changing the status quo in some areas. We also stand to gain by the benefits of massive reconstruction. And we stand to gain from the release of cash into the production of assets. You will see why, precisely, we should spend billions of dollars to rebuild our battered cities. This article will rely on some of the basic economic lessons that you receive from your first of second year of college or even high school economics.

Let us begin with the discussion of how the hurricanes will affect the status quo. First, let me explain which status quo. Louisiana is known for being different from the rest of the United States in several aspects. We will focus on how things get done there. It has become public knowledge that corruption is an accepted practice in Louisiana. If you want to do business, you have to accept that you will need cash to pay your way. Graft is common. You have those in power, who pretty much control everything and get richer. Then you have everybody else who is trying to get by or lives off government assistance. Of course, for those who live off government assistance, it is beneficial to receive more government assistance. This is how the politicians are able to get elected. Promise more benefits and services than your opponent and your constituents will re-elect you. In a state where a majority of the population is poor, that's a great status quo. A politician does not have to do anything to help people get out of poverty. All he or she has to do is keep bringing on the freebies. After all, if you actually help people out of poverty, then increased government assistance won't sway them to vote for you.

The hurricane and flooding that has affected the poor, as is reiterated so much and often by the press, is a good thing for the poor, long-term. Those who have moved out to other cities have been forced to do something that they would not have done otherwise. You will see that many of them will move into housing at their new locations and finding opportunities that did not exist where they were before the storms. They will see the different attitude towards success that permeates the rest of the country. At best, the relocated poor will be infected with the idea that their new environments offer them opportunity; and they will take advantage of the opportunity. We have already read many stories in which evacuees have stated that they don't want to return to New Orleans. They like the new cities where they are. At worst, they will be forced to remain in their new homes with government assistance just as they were back home, being unable to afford moving back to their original home or having nothing to which to return.

So, who will go back? At first, you will see that people who have a stake in rebuilding, business owners and home owners, will go back. The poor have nothing for which to return. Going back would mean having to rebuild. If they don't own anything, there is nothing to rebuild. If they at least owned a home, they wouldn't have the money to rebuild anyway. The poor who are set on rebuilding will have the motivation to work hard to save money to rebuild their homes back in Louisiana. So, in the beginning, we'll see the influx of people who run the clubs, factories, hotels, and other businesses. They will have to rebuild in order to continue their operations. I think, at first, hospitality businesses will open up. This won't happen to serve tourists, rather to house and feed the people who are going to carry out the rebuilding. So, you'll see property owners with the means to rebuild and people with the skills to do the rebuilding. So, in elections, you will see a change of leadership. Politicians won't be able to pander to the poor like they did in the past because the poor won't be around in the same numbers. The poor are out of state making lives for themselves where there are better opportunities. With the influx of professionals, you will see a change in the quality of public officials. To put it simply, the status quo will be changed.

There are many benefits to rebuilding the areas affected by the hurricanes. History shows that mass-scale reconstruction is tough on a country at first, but ultimately results in an advantage. There are two examples that come to mind. The first is post World War II Europe. The second is post World War II Japan. Both suffered great damage to their infrastructure after the war and were forced to rebuild. Europe was able to maintain some of its old factories and other means of production. After all, Germany wanted to take over the countries and add them to the empire, not render the countries useless. Japan was just beginning to enter into industry. Europe had a mix of old and new factories while Japan built all new factories. In later years, you can see the competitive advantage that Japan had with new factories. They were able to build better products at a lower cost than American and European factories. We clung to our old and inefficient plants and got behind in the race. You'll see that production facilities in New Orleans and other areas that need to be rebuilt will get the same competitive advantage that Japan got when they were forced to start from scratch. Keep in mind that Japan and Europe recovered from their problems thanks largely to American investment.

Another benefit of massive reconstruction is the increased value of properties that results from newer, modern buildings. When you buy an old building, particularly for business, it's expensive to remodel and bring it up to code. When you buy an old home, the same thing factors in if you plan to do some remodeling. The building will sell for less in order to discount the cost of the added work. If you have a brand new building that was built according to the latest building code and uses more modern materials, it will more likely appreciate in value than the perpetual fixer-upper of 100 years ago. An added advantage for business is that the newer building can be depreciated versus the old building that does not have any more depreciation left. One disadvantage is that the increased property values will drive out the poorer residents or force them to sell their flooded homes or empty lots at discounted prices.

Finally, the hurricanes have resulted in the release of money that would have been unproductive. We are all aware of the Federal Government's penchant for spending money unwisely. We also know that insurance companies hoarde money to use for claims. Obviously, insurance companies take in more money than they pay out. In any case, they do need to keep a large reserve of money. Both of these are sources of money for reconstruction. In the case of the government, the money would have gone towards salaries and few productive assets. Keep in mind, the government doesn't produce anything, it just pays others to do or not do things. In the case of insurance companies, they take your money and invest it; so, they don't make or do anything with it either. By releasing the money for reconstruction, the government is increasing tax revenue. Insurance companies don't fare as well. They are betting that you will pay them more money than they will pay you. In this case, they lost. Gambling is like that.

You may be wondering how the government would increase tax revenue by rebuilding a city. Generally, the government pays salaries to its employees and pays out benefits to people. Salaries are taxed once. Then, those people go and buy groceries, pay mortgages, and spend money here and there on non-durable goods and services. In the case of government programs or asssistance, non-profit organizations don't pay tax. Poor people don't pay tax. That immediately cuts a source of revenue for government. Poor people generally spend a major part of their money on basic needs like food and shelter, which aren't taxed. So, by shifting money away from these freebies towards rebuilding, the government will see a better return. Here is how.

You, the homeowner receive money from FEMA to rebuild. You hire an architect or buy plans for a home, the designer is taxed. You hire a contractor to build your home, he is taxed. The contractor pays his crew, and they are taxed. The contractor buys building materials, which are taxed. The aggregate demand for building materials for the whole reconstruction effort will increase sales and profits of the supply companies, which will pay taxes in addition to their employees income taxes. Think about it. You will have clean up crews, demolishing crews, architects, foundation layers, contractors, framers, finishers, roofers, painters, carpet layers, tile setters, plumbers, electricians, landscapers, pavers, inspectors, and so many other professionals involved in the reconstruction, all paying taxes. The suppliers of the contruction materials for the massive effort will also benefit the communities where they are based. Lumberjacks, manufacturers, truck drivers, and all other people involved in getting raw materials for construction from their sources to the Gulf coast will benefit.

Multiply this by the thousands and you will see that it is inevitable that New Orleans and other areas affected by the hurricanes will not be the same once they are rebuilt. The whole region will be newer and much of the population will be new. Being poor in the region will not be same as it was before the storm. The face of the hurrican stricken areas, particularly New Orleans, has changed forever.

It is sad that so much heartache and loss of life has happened as a result of Hurricanes Katrina and Rita. The economic impact is severe. It will take years to recover. On the other hand, the destruction has forced many things to happen that may not have otherwise have happened. Mostly good things. It has forced people to move, who may have otherwise not moved from a place that was not good for them. It has spurred on new construction of an aged infrastructure, and has forced an inflow of capital that will change the composition of the electorate in the region around New Orleans. In the years to come, we will see that the experience will make us stronger.
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