Affordable Housing Institute : US

History’s biggest-ever experiment in urban reconstruction is about to begin.

 

Ladies and gentlemen, start your economic engines.

No, not the finger-pointing re-examination of our flaky-ceiling Big Dig, but the Gulf Coast rebuilding, which will now kick into high gear, plans or no plans, as billions will flow directly to property owners and thence into the market. As reported in July 17’s New York Times:

 

Nearly $10 billion in federal aid is finally starting to flow into the hands of people in Mississippi and Louisiana who lost their houses in last year’s hurricanes, the culmination of a year of political battling and bargaining between the states and Washington.

Gentlemen, start your experiments!

 

The money is widely considered the most important single factor in rebuilding the still-ruined landscapes of New Orleans and the other devastated Gulf areas of the two states.

In other news, rain is still wet.

 

“Yep, Noah, still wet.”

With it will come a test of what experts say is an unprecedented government effort to foster recovery from a natural disaster by giving taxpayer dollars directly to homeowners and allowing them to decide whether and where to rebuild or relocate.

 

“Toto, I think we’re not in Jefferson Parish any more.”

 

“Our belief is that this has never been done in this country, and certainly not on this scale,” said Walter J. Leger Jr., a New Orleans lawyer who is the chairman of the housing task force for the Louisiana Recovery Authority, which developed the Road Home, as the state’s housing program is known. “This may be the biggest redevelopment effort in history.”

 

 

There was at least one bigger!

Outside experts agree that the level of direct assistance to individual homeowners is unprecedented. “This is a dramatic shift in government policy,” said Mary C. Comerio, a professor of architecture at the University of California, Berkeley, who has studied housing after disasters.

How to stimulate an economy? Fling cash!

 

In Mississippi, the first round of up to $3 billion in checks should be in the mail within days, officials said, while Louisiana has just opened the first of 10 offices where homeowners will be walked through the process of applying for more than $6 billion in aid.

 

Just imagine ‘your money here’

Money is likely to start flowing in Louisiana late next month, officials there say.

What’s striking is how Mississippi (a Republican bastion) is using the laissez-faire approach of simply handing money to valid claimants, while Louisiana (traditionally Democratic) see a role for government administration:

 

On their faces, the two states’ plans look similar; each will give up to $150,000 in grants to the owners of houses that were damaged or destroyed by the storms. But the programs differ sharply in their details and in their goals.

 

This makes them that rarest of sociological experiments: a contemporaneous matched-pair comparison.

 

One’s a Rebbubligan, de udder’s a Demogradt

In Mississippi, the focus is on compensating owners of damaged homes who did not have flood insurance because they were not in a flood zone.

Paying people who did not buy flood insurance is a pure example of moral hazard (rewarding reckless behavior by bailing out those who were warned) — but justified because, as I suggested months ago, last year’s hurricane damage was unprecedented, and compassion and national self-interest intersect.

 

In Mississippi, those who receive grants to cover their uninsured damage must agree to get flood insurance.

Barn locked, screams the headline!

 

They must also strictly adhere to local building codes, and elevate their houses to the levels set by the Federal Emergency Management Agency.

 

I feel all better, knowing FEMA’s on the job.

 

Once they have satisfied any liens or mortgage arrears, they can use the money almost entirely as they see fit.

This means cities like Gulfport and Biloxi will be rebuilt or not based on thousands of individual decisions.

 

Gulfport after hurricane Katrina

Though homeowners do not have to rebuild, state officials expect most to do so.

“People have been dipping into savings, or they may need to restock their children’s college fund,” said Scott Hamilton, a spokesman for the Mississippi Development Authority, which is running that state’s program. The state hopes to have some money available to help homeowners in the flood zone who did not buy insurance.

Mississippi therefore proposes to give property owners money and stand back.

It worked for Oklahoma!

Louisiana has another strategy:

Louisiana’s leaders had a different goal in preparing their program, and were less focused on compensating homeowners than in rebuilding the state. Many Louisiana residents are still living in other states, debating whether to return, a problem Mississippi does not have.

Is this a problem? For some, Katrina has been not scourge but saint.

 

With far more damaged homes than Mississippi, but fewer that were wiped away outright, Louisiana wanted a program that would primarily induce homeowners to return to the state and begin rebuilding.

 

As a result, the state created a series of financial incentives to get them to do so.

 

Incentives are the rules of the game: and the first rule of any game, is to win.

Those who sell and leave the state will get less money than those who stay and rebuild, though Louisiana will still give the full amount to those who return but build or buy elsewhere in the state.

 

Problem number 1. It’s an absolute fundamental principle of economic gravity that markets always clear. Just as air always moves from high pressure to low, creating wind, where there is differential value for two similar situations, a market will rise to exploit it.

 

Otherwise known as gray markets.

(Officials will not object if residents want to live in safer parts of the state.)

Nice of them.

[Continued tomorrow in Part 2.]

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