An Economist Visits New Orleans

London recovered from the Great Fire of 1666. San Francisco survived the earthquake of 1906. The Mississippi River area recovered from the Great Flood of 1927, which displaced almost 1 million people. Many never returned to their homes, but the region remained culturally vital; the first recordings of Muddy Waters date from 1941.

Last month I spent a week in Louisiana studying economic development, or in this case redevelopment. The institutional roots of cultural success—whether it be Mozart, Michelangelo, or Louis Armstrong—are a long-standing research interest of mine, and I wanted to see how New Orleans might lay the groundwork for economic recovery and future cultural innovation. But in Louisiana I found that the various factions arguing about how to rebuild are too focused on finding “the right” master plan. A better approach is to support good institutions and freedom of contract so that many private plans can come to fruition.

Many economists have suggested it is not worth rebuilding New Orleans at all. But they belie their own discipline by not asking, “At what price?” Hurricanes or no hurricanes, the devastated areas in New Orleans remain more valuable than most parts of the world, if only because they lie in a famous U.S. city. At some price, people will want to work and live there. City planners simply need to acknowledge that this price is lower than it used to be.

Current reconstruction plans typically draw on state and federal funding and include regulations about what kinds of homes can be erected. The federal, state, and local authorities have yet to settle on a final set of rebuilding regulations, which has frozen activity; officials are still debating how big the homes should be, what kinds of standards they should meet, and how far above the ground they should stand. Pre-existing local safety codes impose additional constraints; even if they were enforced irregularly in times past, future homes will be in the spotlight. For all the talk to the contrary, the current approach is regulatory: The emphasis is on setting the rules, not on getting homes built or repopulating damaged neighborhoods.

Since so many homes were destroyed, the natural inclination is to build safer or perhaps impregnable structures. But that is the wrong response. No one should or will rebuild or insure expensive homes on vulnerable ground, such as the devastated Ninth Ward. And it is impossible to make homes perfectly safe against every conceivable act of nature.

Instead, the city should help create cheap housing by reducing legal restrictions on building quality, building safety, and required insurance. This means the Ninth Ward need not remain empty. Once the current ruined structures are razed, governmental authorities should make it possible for entrepreneurs to put up less-expensive buildings. Many of these will be serviceable, but not all will be pretty. We could call them structures with expected lives of less than 50 years. Or we could call them shacks.

What is the advantage of turning wrecked wards into shantytowns? The choice is between cheap real estate or abandonment. The land will not sustain high-rent, high-quality real estate. Given the level of risk, much of it will not even support bland, middle-income housing. Imagine that the government took a spot suitable for a McDonald’s but mandated that subsequent restaurants should have fancy décor and $30 steaks. The result would not be a superb or even middling bistro but rather an empty spot. No one would set up shop because the market could not be made profitable at that quality and price. A similar principle applies to New Orleans real estate. If various levels of government try to mandate higher values than the land will support, the private sector will simply withdraw its participation, leaving nothing behind.

Whatever it does, New Orleans needs to hurry. Surveys suggest that up to 80 percent of the city’s pre-Katrina African-American population will not return. A RAND Corp. study estimated that 300,000 housing structures have been destroyed in the Gulf region; local construction costs are rising dramatically. James A. Richardson, of Louisiana State University, projects a housing deficit of 149,900 units by 2008.

The next five years will determine whether the logic of “the tipping point” will favor the city or doom it. Many people would come back or move in if others do, but no one wants to live in a ghost town with unreliable infrastructure and few community services. Reducing building restrictions so developers can put up cheap housing quickly is probably the best way to jump-start recovery. For starters, cheap housing might be one means of inducing migrants—many of them Latino immigrants—who have come to the city for temporary construction jobs to stay. And as low-cost laborers settle in the city, they’ll boost economic activity and pay taxes, thereby attracting corporations, service suppliers, and entrepreneurial small businesses. It would be fitting if New Orleans were rebuilt, both physically and culturally, by Latin and Caribbean immigrants. After all, the city has long been influenced by Hispanic and Caribbean settlers.

To be sure, the shantytowns could bring socioeconomic costs. Yet crime, lack of safety, and racial tension were all features of New Orleans ex ante. The city has long thrived as more dangerous than average, more multicultural than average, and more precarious than average for the United States. And people who decide the cheap housing isn’t safe enough will be free to look elsewhere—or remain in Utah with their insurance checks.

Shantytowns might well be more creative than a dead city core. Some of the best Brazilian music came from the favelas of Salvador and Rio. The slums of Kingston, Jamaica, bred reggae. New Orleans experienced its greatest cultural blossoming in the early 20th century, when it was full of shanties. Low rents make it possible to live on a shoestring, while the population density blends cultural influences. Cheap real estate could make the city a desirable place for struggling artists to live. The cultural heyday of New Orleans lies in the past. Katrina rebuilding gives the city a chance to become an innovator once again.

The plan requires little or nothing in the way of government grants or planning commissions. It will be an experiment with parts of the city that otherwise will never recover. It can be applied selectively to particular wards and allowed to spread if it works. It is probably the last chance for New Orleans to regain its position as an American cultural innovator. Just imagine the chant: Shantytowns for New Orleans now.