AEI-Brookings Joint Center Policy Matters 05-29

Cash Money. Thomas W. Hazlett.  September 2005

The Bush Administration’s pledge for unlimited funding to rebuild New Orleans reminds some of a dead-beat dad plying his kids with sweets and treats to win back their affection.  Not a bad analogy, except that this free-spending poppa has some one else’s platinum card to assuage his guilt. 

Let us suppose that we do indeed want to get the Gulf Coast back on its feet, and do something positive for the poor who live there.  The problem is that a house destroyed in Jefferson Parish may be rebuilt in more than a thousand ways, some of which involve building the new home in Louisville.  Deciding what buildings and businesses to fix, and how to fix them, involves complex trade-offs.  Millions of them.

Using other people’s money will not result in smart choices.   Federal bureaucrats have no stake in actual, post-flood outcomes, but a keen interest in politics.  In determining how vast sums are spent, the squeakiest wheels get greased.  Already, local pols are finding out that the best way to get a phone call answered at the Federal Emergency Management Administration (FEMA) is to score some TV airtime.  Efficient reconstruction plans?  Not usually, and never during Sweeps Week.

Let’s do the math.  The federal government’s open-ended commitment is now at $62 billion in relief appropriations; the New York Times projects a total of between $200 billion and $300 billion.  There were slightly fewer than 500,000 residents in New Orleans, and slightly over one million in the total area of devastation.  This places the more conservative estimate of per capita costs at about $200,000 for the one million victims of Hurricane Katrina.

In other words, each family of four dispossessed by this natural disaster, could be given $800,000 tax-free if the funds about to be spent went directly to them. Does anyone think that Mr. Bush’s made-in-Washington reconstruction scheme will deliver benefits to the average family anywhere near this level?  Or that, however much it takes to rebuild the Big Easy, many thousands of its residents will not still be desperately poor.

Sending victims the relief money rather than in-kind aid provides numerous advantages.  First, it eliminates the bureaucratic reconstruction planner.  One might ask: Hasn’t FEMA done quite enough without managing a construction project larger than any in U.S. history?  Cash grants allow individuals to make their own choices.  Polls suggest that four in ten evacuees don’t want to return to New Orleans; holding their benefits hostage by building expensive new homes and infrastructure for them is perverse.  Those who reduce social costs by moving out of a hurricane zone ought not to be punished.  Let families take the money and run.

Second, fixed cash transfers do not destroy incentives for property owners to buy insurance.  With the feds picking up an unlimited reconstruction tab, those who insured against hurricane and flood damage gain nothing for their responsible behavior.  Fixing amounts on a per capita basis means that damage claims will not be devalued; insured property owners will yet be rewarded. 

Third, setting the cash payout to a fixed amount per person favors the less affluent.  Repairing damage, conversely, rewards large property owners and well-connected federal contractors.  The concerns expressed over the poverty on display in the New Orleans Superdome ought not serve as the cover story for a funneling of massive public funds to the wealthy.

Fourth, the transparency of cash transfers is good for voters and taxpayers.  Explicit per capita grants are simple to understand, while appropriations for countless projects vanish in a haze of complexity.  The sums President Bush aims to expend may not withstand democratic scrutiny, as Americans could decide that $100,000 per adult and $50,000 per child were sufficient to compensate victims.  (About this amount has already been appropriated by Congress.)   

The cash payment plan allows this excellent debate to commence, while achieving profound efficiencies once the level is set.  Is it possible to maintain that the poor and dispossessed of New Orleans would prefer FEMA-led reconstruction to $300,000 or $1,000,000 per family in cash assistance?  Perhaps we should inquire before we flood the Gulf Coast with yet another predictable natural disaster.

Dr. Hazlett is Professor of Law & Economics at George Mason University.