Louisiana Repurchase
Wall Street Journal February 13, 2006; Page A16
Congress begins its Mardi Gras of blame this week for what went wrong after Hurricane Katrina hit the Gulf Coast, and we'll all have plenty of time to enjoy the parade of recriminations. But for today we'd like to focus on the debate over what to do next to rebuild the region, and especially on a bad idea now gaining traction in Congress to spend as much as another $30 billion this year, with an option for more in future years.
That would be $30 billion on top of the $100 billion that Congress has already either appropriated or that the Bush Administration has requested. There's no denying that the disaster was unprecedented, that the federal government bears some responsibility for the failed levees, and that the rebuilding effort has so far been miserable on many levels. But this is also at least twice as much money as has ever been spent on a U.S. natural disaster -- equivalent to about $250,000 for every family that lost its home to the hurricane.
That doesn't seem to be enough, however, for media critics and Louisiana politicians, who are now pushing a proposal by Congressman Richard Baker, the Republican who represents Baton Rouge to the north of New Orleans. Mr. Baker is normally a free-market advocate who has been brave enough to challenge the bad practices of such politically powerful institutions as Fannie Mae and the New York Stock Exchange. So it's surprising that he is now proposing a new Fannie Mae-type entity called the Louisiana Recovery Corporation (LRC).
[Richard Baker]
Under the Baker plan, as many as 200,000 properties would be purchased by the LRC. Current homeowners in these areas would receive 60% of the "pre-Katrina value" of the house, and banks would receive 60% of the unpaid mortgage. Uncle Sam would clean up debris, rebuild homes and whole neighborhoods, then put the refurbished properties up for sale. Mr. Baker tells us he expects revenues from these sales would recoup some of the costs. Given the government foulups so far in New Orleans, the idea has a superficial appeal. But the closer one inspects the details, the more it looks like a potential long-term disaster of its own.
In a single stroke, the Baker plan would make the U.S. government the largest property owner/real estate agent in New Orleans. And property development is not the federal government's strong suit, to say the least (think HUD and Cabrini-Green in Chicago). By paying out at pre-Katrina values, the feds would also deter private investors from going in and buying up properties and thus creating a new market floor. Who knows what prices should be if Uncle Sam is setting them at what might be inflated pre-Katrina values? This is a recipe not for a rapid turn-around, but for making the feds the Donald Trump of New Orleans for a decade or more.
The price tag for the Baker plan is also preposterously high. Data from the Federal Office on Gulf Coast Rebuilding indicate that of the 200,000 houses destroyed by the flooding, only half are owner-occupied homes and 60,000 of the remaining homes already have insurance. This means there are only 36,000 uninsured homeowners who truly need aid.
The money already allocated is more than enough to make them whole. Uncle Sam has sent $24.5 billion for housing aid to New Orleans (not counting Mr. Bush's latest $18 billion request). Residents will also receive $27.2 billion in private insurance. And speaking of insurance, the Baker bill would bail out the banks that lent money to residents without the flood insurance that was required of residents who live in the flood plain. This is rewarding businesses for irresponsible behavior.
The LRC is also designed to avoid both Congressional oversight and the annual Appropriations process. Once the President sets funding levels, up to $30 billion each year, that number would automatically be spent. And while it's true he could set that figure at $1 if he wanted, any President would surely be lobbied publicly and privately by the seven-member LRC board that would include three members from a list provided by Louisiana Governor Kathleen Blanco. The Big Easy's politicians probably sense that the rest of the country will only write so many big checks, and so this automatic spending process is intended to avoid having to compete with other national priorities for funds.
In any case, the idea that rebuilding is impossible without the guiding hand of a federal planning czar is historically inaccurate. After the great Chicago fire and the San Francisco earthquake, these cities were at least as desperate as New Orleans is today. But both were well on their way to restored glory within three to five years with little federal money and no central planning agency. We'd rather trust private homeowners and developers to make rational decisions about where re-investment in New Orleans should occur and -- just as important in areas highly susceptible to future flooding -- where it shouldn't.
Alas, none of Louisiana's political leaders seem to have any confidence in private investment to do the job. New Orleans Mayor Ray Nagin has proposed a plan that could cost another $100 billion. And Ms. Blanco has floated a state version of the Baker plan -- a trust fund for land acquisitions and redevelopment that would be operated by a state agency, but that would spend federal dollars. This is the same governor and state legislature that approved $24 million to build white elephant projects, such as a sports arena in Northeastern Louisiana, while New Orleans was under water.
It's hard to imagine America without the festivity of New Orleans, and that city must be rebuilt. But $100 billion -- most of which is for the city itself -- is more than enough from taxpayers to put it on the road to recovery. The slow pace of rebuilding so far says far more about the post-Katrina bungling of the city and state governments and of FEMA than it does about any lack of federal commitment to rebuilding the region.
Senator Richard Shelby, who chairs the Banking Committee, says he plans to hold hearings on where all the money already appropriated has been spent. Mr. Baker's $30 billion federal land grab proposal -- a privatization in reverse -- would almost certainly make the problem worse.