The political, economic, and social aspects of Katrina.

1. Introduction

Disasters, whether man-made or natural, represent a "natural experiment" for social scientists. As one business leader put it to us on one of our first research trips in February 2006 to New Orleans after the storm, "Heck, I understand it is not every day that you can flood a city of half a million people and see what happens." The tragic dimensions of the event in terms of lives lost and lives disrupted must never be forgotten, but the opportunity to learn about the resiliency of social systems also must not be lost. (1) Natural disasters are the social scientist's equivalent to tests done by engineers to learn about the strength of materials and machines. Much can be learned about the political economy of everyday life when we examine behavior under conditions of great stress.

John Stuart Mill, in fact, argued in his Principles of Political Economy that it is a surprising fact of life how robust free economies are in the wake of devastation.

This perpetual consumption and reproduction of capital affords the

explanation of what has so often excited wonder, the great rapidity

with which countries recover from a state of devastation; the

disappearance, in a short time, of all traces of the mischiefs done

by earthquakes, floods, hurricanes, and the ravages of war. An

enemy lays waste a country by fire and sword, and destroys or

carries away nearly all the moveable wealth existing in it; all the

inhabitants are ruined, and yet, in a few years after, everything

is much as it was before (Mill 1848, pp. 74-5).

Mill argued that the possibility of rapid recovery mainly depends on whether or not the country has suffered massive depopulation or not. But there are other issues involved as well as the human capital embodied in the population. The free flow of labor and capital seems to be an important aspect, as well. In addition, the ability to quickly reestablish clearly defined and enforced property rights seems to be a characteristic in common with rapid recoveries from disaster. Jack Hirshleifer (2002) in his essay "Disaster and Recovery" states clearly that: "Historical experience suggests that recovery will hinge upon the ability of government to maintain and restore property rights together with a market system that will support the economic division of labor."

Hurricane Katrina offers us some unique challenges. First is the magnitude of the storm. Katrina was estimated early on to have caused between $100 billion and $125 billion worth of damage (more than half of that attributed to the New Orleans flood), whereas the costliest hurricane to that date in U.S. history was Hurricane Andrew (1993), which cost roughly $44 billion. The massive amount of debris generated by the storm--some 100 million cubic yards, or 35 times the rubble generated by the September 11 attacks in Manhattan--made simply cleaning up the Gulf Coast a uniquely Herculean task.

Second, problems associated with the state of affairs before the storm could contribute to nonresiliency. New Orleans, for example, was not a particularly good environment for business before Katrina. (2) In fact, it ranked at the bottom on various measures of economic freedom and the costs of doing business. As a result, few major businesses were located in the city. Only one Fortune 500 company, Entegry, is headquartered in the city. Taxes and regulations did not attract businesses. New Orleans was instead an economy dominated by politics and political connections. There is a reason why New Orleans was often portrayed as the stereotypical corrupt southern city. Historically, New Orleans and Louisiana were in fact extremely politicized environments with numerous high-profile examples of graft and corruption. (3)

In addition, the population in Orleans Parish was poor and undereducated compared with national averages (e.g., median household income was roughly $27,000, whereas the national average was $42,000, and roughly 28% of families in New Orleans were living below the poverty line, whereas the national rate was 12.4%). The population was particularly vulnerable to the effect of the storm because, in some areas of the parish, vehicle ownership was very low and the population was old and ill.

Finally, factors involved in the devastation of Katrina highlight how the folly of man compounds the fury of nature. Government-subsidized flood insurance led to excessive construction in areas most vulnerable to flooding. This was not just limited to the low-income areas, but also occurred in some of the higher income areas that were also devastated by the storm and do not get discussed as much in the national press. Also, government responses to the storms (and previous ones) might have impeded the commercial sector response that is necessary to reconnect the social-economic networks that are characteristic of a vibrant social system of exchange and production.

In the aftermath of Katrina, a research team was assembled by the Mercatus Center at George Mason University to study the political, economic, and social aspects of Katrina and to test Mill's hypothesis about "rapid recovery." The basic idea behind the project is that a social system of exchange and production is analogous to a three-legged barstool. The first leg represents the economic/financial institutions in place, the second leg represents the political/ legal institutions in place, and the third leg represents the social/cultural institutions in place. The idea is that unless all three legs are strong and sturdy, when weight is put on the seat the stool will tumble. The system, in other words, will not be "robust" and nonrobust systems are almost by definition not particularly resilient; thus, Mill's hypothesis of speedy recovery in the wake of a crisis must be qualified.

We learned this lesson during our examinations of the difficult post-Communist transitions during the 1990s and our studies of developing economies in the early 2000s. (4) In short, politics, economics, and society are embedded, and social scientists studying transition and development problems are mistaken to focus on only one of the factors to the exclusion of others if they hope to provide a full understanding of the problems under investigation. (5) Post-Communist transition was not as simple as just getting the prices right, and solving the problem of underdevelopment is not just about getting the right institutions. Of course, getting the right market prices and establishing a rule of law are essential components to addressing these problems, but simply stating that is not the same thing as addressing that topic. (6) It is our conjecture that tackling the problems of transition and development cannot proceed as if the economy, polity, and society are disembodied from one another and thus that the problems are technical in nature (analogous to engineering problems). Instead, in dealing with social systems, the technical problems of economic life find their solution within political and social "ecology" that cannot be ignored if progress in the behavioral and social sciences is going to be made on the questions of social change. (7)

The circumstances in a postdisaster situation, we conjecture, are similar to those of the problems of transition and underdevelopment. As Hirshleifer (2002) argues, "the subject of disaster and recovery can be regarded as a special case within the general problem of economic development." We follow him in that regard, and our research project was designed to reflect that.

In what follows, we report some of our preliminary findings from the project. In section 2 we look at the political/legal dimensions of Katrina and its aftermath, with a particular focus on the Federal Emergency Management Agency (FEMA) and the difficulties of government planning for disaster recovery and rebuilding. In section 3 we discuss the social/cultural dimensions and focus on the social networks and the signals that are required for these social networks to reform after devastation. In section 4 we discuss the economic/financial dimensions and focus on how cities rebound (or not) in the wake of crises. Finally, we conclude with a discussion of what we have learned so far and where we are going with future research on this topic.

2. The Political/Legal Dimension

As the events of August and September 2005 unfolded along the Gulf Coast, it became evident that government failures at the local, state, and national level were compounding the situation. In the aftermath of the storm, the extent of government failures became a topic of newspapers and talk shows. The confusion of relief efforts was soon followed by reports of misappropriated funds; the Government Accountability Office now reports that the cost of fraud and abuse in rebuilding could top $2 billion. With the Hurricane Katrina debacle raising questions about public corruption's effect on disaster relief, corruption has once again become an important issue in American politics. (8) In our work, we attempt to address this issue not by analyzing the effect of corruption on disaster relief, but rather by analyzing the effect of natural disaster relief on public sector corruption (see Leeson and Sobel 2007). Consider Figure 1, which plots the raw relationship between natural disasters and public sector corruption in the United States