Recovering from Another Great Disaster

By Mason Gaffney, Dollars and Sense. Posted April 18, 2006.

[Editor's Note: Tuesday, April 18 marks the 100th anniversary of the great earthquake and fire that leveled San Francisco. Seven months after Hurricane Katrina accomplished the same feat in New Orleans, why has the city not even begun to recover?]

Our latest Nobelist in economics, Thomas Schelling, offered the following advice in the wake of Hurricane Katrina: "There is no market solution to New Orleans. It is essentially a problem of coordinating expectations...." By that he meant simply that each person's incentive to move home and rebuild depends on his or her confidence that others will do likewise. "But achieving this coordination in the circumstances of New Orleans seems impossible."

So economics has come to this. Only yesterday, the approved posture was not to recommend programs, but merely to advise timidly on how different ones might work, covering one's back with caveats. Now our top dog has gone the next step, and advises us that nothing can work, not even the market. A discipline with roots in Utilitarianism has morphed into Futilitarianism.

Actually, there is a time-tested way to solve the problem that defeats the most advanced economics theory. American urban settlers and investors have a long history of building and rebuilding cities by "coordinating expectations." In 1891 the traveling Lord James Bryce wrote of Americans, "Men seem to live in the future rather than in the present: ... they see the country not merely as it is, but as it will be." They achieved critical urban mass by faith in each other, a mutual faith more economic than theological.

"The chief tax is in every State," Bryce noted in 1891, "a property tax... ." The property tax at that time fell in many places mainly on land values, because that is most of what there was to tax. This tax was the mechanism for "coordinating expectations." Each landowner felt the pressure to use his land, knowing his neighbors felt the same pressure at the same time. (There were also pioneering religious and ethnic groups that fostered mutual faith, as the Greek Orthodox community is doing now in its small part of New Orleans. In the game theory Schelling & co. study, we are all greedy monads, so such things do not happen in the models -- and who cares about the extra-modular [i.e., real] world outside the laptop?)

It's not that Schelling never heard of the stimulative effect of taxing land values. In 1969 I had the privilege of presenting it to a seminar at the Brookings Institution. I suggested raising the land tax, and lowering sales taxes and taxes on buildings. Most attendees listened with at least moderate sympathy, notably excepting Schelling, who objected that any change in tax policy would break the social contract, destabilize expectations, shatter investor confidence, and risk bringing the world down in ruins.

In 1966 I had spoken on the same point to a New Orleans civic group, sponsors of a Brookings urbanism program. They were charming hosts, eager for ideas about how to clear "undesirable" neighborhoods but obsessed with preserving Le Vieux Carré, which they saw as unique, wholesome, a money machine, and too fragile to survive competition that would replace it with the commonplace. Like Schelling, they chose stasis, with the results that we see today. Actually, there can be no stasis: buildings depreciate every year, and need constant upkeep, operation, adaptation to markets, and often replacement.

A going city or region, leveled by catastrophe, has an easier time returning to critical mass than does a new city or region flying blind. London renewed itself after the Great Fire of 1666; Schenectady after Frontenac razed it in 1690; Lisbon after the 1755 quake; Dutch cities after flooding themselves out to balk successive Spanish, French, and German invaders; Moscow after 1812; and Washington, D.C., after 1813. In 1848 John Stuart Mill highlighted "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."

Since then there have been a series of such rebirths: Atlanta after Sherman; Chicago after 1871; swaths of Wisconsin after the epic 1871 fire named for little Peshtigo; Johnstown, Pa., after the killer 1889 flood; San Francisco after the quake and fire of 1906; Flanders after World War I; Tokyo after 1926; the Mississippi Valley after the great flood of 1927; Nanking after Japan's devastating occupation. After World War II came Germany's Wirtschaftswunder, and the rebuilding of Coventry, Rotterdam, Tokyo again, Hiroshima, Nagasaki, and Russia after Hitler. There was Anchorage after its quake; Kobe after its; and on and on.

Permanent hazards may remain, as in New Orleans. Yet, Chicago was rebuilt on the foundation of its "stinking swamp," where the city's architects and engineers pioneered the modern skyscraper on deep caissons. Tokyo was rebuilt at the confluence of four tectonic plates, and after 1945 with no navy or army of its own. San Francisco was rebuilt on the San Andreas Fault, and went high-rise on its crazy hills while Los Angeles was still capping building heights and opting for sprawl. Much of the Netherlands thrives below sea level.

Mason Gaffney is professor of economics at the University of California, Riverside.

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