Bastiat's Bastions

One of New Orleans‘ original “Catholic League” schools, Holy Cross, recently announced its intention to move its campus out of the lower 9^th Ward. The area had been in decline for years and hurricane Katrina heavily damaged the century (plus) old campus. There was somewhat of a battle over the new site – some wanted the school to relocate to Jefferson Parish, others wanted Holy Cross to stay in New Orleans. New Orleans won, so to speak, as the school announced it will move into a recently vacated Archdiocese of New Orleans school district.

What I found interesting was the logic that some opponents used to fight against Holy Cross moving into Jefferson. A recent article in the Times Picayune stated:

Ray Ferrand, principal of Bonnabel High School in Kenner, said Holy Cross would increase its enrollment at the expense of Jefferson Parish’s public elementary, middle and high schools.

Joe Potts, head of the Jefferson Federation of Teachers, urged the board to reject the sale, saying it does nothing to help public school children.

Holy Cross charges a tuition of about $6,000 per year. If parents would opt to take their children out of Bonnabel, where they do not directly pay any tuition, to spend $6,000 per year, could this possibly be indicative of a problem with Jefferson‘s public schools? And is it is even plausible that increased competition for Jefferson‘s public schools could lead to improvements? If Holy Cross had paid Jefferson Parish more than $2 million for land, couldn’t that money have been put to use to aid the public schools?

NM

Kimberly Barrilleaux, a student in my Econ 211 class, sent me this New Orleans Times-Picayune article on a new type of rent control passed by the St. Bernard Parish Council (10/4/2006). As you can see by reading the article, St. Bernard has established a peculiar style of rent controls, not on the level of the rent charged, but instead on who one could rent to. In a parish where 93% of the homeowners are white, establishing an ordinance that denies homeowners the right to rent their homes to anyone but blood relatives (which the ordinance does), clearly keeps most non-whites from being able to rent in St. Bernard, unless they were renting their before the storm. This clearly violates the civil rights of anyone not kin to someone wishing to rent their St. Bernard homes out. The lawsuit charging a violation of the fair housing act and equal protection under the law is surely warranted.

Councilman Mark Madary nails the issue on the head. In the Times-Picayune article, Paul Rioux writes:

Madary…said St. Bernard can’t afford to turn away anyone who wants to invest in rebuilding the parish after virtually all of its 27,000 homes were swamped by Katrina.

“Without an infusion of outside investors to jump-start the recovery, you might be living next to a debris pile for a lot longer than you would like,” he said. “The longer the houses sit empty, the harder it is to convince people to come back.”

He said the ordinance also unduly restricts property rights.

“When you buy property, you buy the rights that go with it,” he said. “To go back retroactively and change those rights is unconstitutional in my opinion.”

This ordinance is a violation of the property rights of all current homeowners. It denies them the right to sell their property to those who would build rental housing in the area (as this potential market for their houses disappears) and to rent their homes out to the renter who would pay them the highest rent.

This ordinance constitutes a “takings” because the property owner is denied the market that was once part of their potential market. By reducing the number of potential buyers and renters, the demand for housing in St. Bernard is kept down, as is the incentive to build such homes for rental or speculative purposes. This ordinance limits housing and the future growth of St. Bernard.

To make matters worse, this ordinance is not a very smart move for politicians who wish to spend money raised through taxes. Rental homes are not given homestead exemptions and are completely taxed and their value is affected by the rental income they generate. Owner occupied housing, which is partially homestead exempt (for the first $75,000 in value), will generate less income as the housing demand is depressed by this ordinance, which reduces the values of all homes.

MC

You'd think in the three months I'd be able to come up with a more clever title…

Two interesting articles about the labor market in New Orleans with seemingly contradictory statements. One says the going wage for unskilled workers is more than $10/hour, the other says are plenty of folks who will work betwen $6/hour and $8/hour.

First, from NOLA.com, the plight of NOLA firefighters. It seems to me that firefighters have three basic complaints.

(1) They were not included in the group of city employees that received across the board raises. Notably, police officers were included.

(2) There are fewer firefighters than there were pre-Katrina and they are having difficulty attracting new firefighters.

(3) The salary being offerred to attract new firefighters is higher than the salary being earned by many firefighters that have been on the job for some time.

This situation where the salary of inexperienced workers exceeds the salaries of experienced workers is called "salary inversion" and can be a very sticky situation for firms. It happens at places, for instance, like Nicholls State University. As the article notes, fast food restaurants are offerring wages of $10/hour. If the city is to attract new firefighters, they will have to pay competitive wages. This means new hires would be earning more than experienced workers. It seems then, that solving item (2) causes item (3), while item (1) isn't possible with the budget.

Is salary inverstion equitable? What should the city do? The firefighters? Does your opinion change depending on whether or not you are the new hire?

One last thing about the fire fighters…I'm not sure about Parent's math, it would seems firefighters are not very healthy these days…

"Because of resignations and retirements, it now has 695 employees, including 651 actual firefighters, but about 100 are out on sick leave on a typical day, meaning "manpower is down between 30 and 60 members on a daily basis," Parent said.

On to the second article. The Soutern Poverty Law Center is suing Decatur Hotels on behalf of a group of immigrant hotel workers. Without getting into the details of this lawsuit (the complaint is on the SPLC's website), a central part of the story is that Decatur Hotels claimed they could not find any domestic workers to work in hotels. As such, DH sought and received approval from the US Department of Labor to bring in "guest workers".

To recruit guest workers, DH had to certify to the U.S. government that it could not find U.S. workers to fill the jobs. Indeed, in its request for labor certification, Decatur claims to "have offered work to hurricane evacuees" but "no one applied."

Decatur Hotels ultimately paid the immigrant workers wages of between $6/hour and $8/hour. The SPLC contends that Decatur didn't try very hard to find workers willing to do the work at those wages. The SPLC claims that there were many workers, already in New Orleans, willing to do the hotel work at these wages.

Now for the inconsistency. Given that fast food resaturants are paying $10/hour, would you expect that Decatur Hotels would have much luck in attracting domestic workers at between $6 and $8 an hour as the SPLC claims?

–CT

Update: All fire fighters (even the experienced workers) get their raise after all.

Ron Utt and Brian Riedl of The Heritage Foundation have a new paper out that examines the newest piece of pork in the US Senate.  The paper details what, it appears, would be the largest earmark in history, as well as earmarks for other pet projects. 

All of these projects are being added to the Senate version of a supplemental bill, one that is supposed to fund the war in Iraq and the rebuilding along the Gulf Coast.  Guess how many of the new earmarks are related to the war and the rebuilding?

 NM 

As someone who is an educator and is very interested in education in general, I find this article fascinating, but all together unsurprising.  

I hope someone at the Department of Education has the brains to record all the statistics for the displaced students.   Following them around will be a natural experiment from which I think researchers can learn a bunch about school quality.  

What of the three reasons given in the article for the poor evacuee performance?  

Sticking students in the wrong grade – that  seems problematic, but I am a bit confused.    How is  it that a  student or parent doesn’t know what grade they are in?  

Trama of students – I don’t want to dismiss this outright, but it sounds a bit flaky to me.   My sense is that third graders are pretty resilient.   If we believe this is the case and students have recovered  by next test, then we’ll see a sharp increase in the pass rates of evacuees.   Stay tuned.   Unfortunately for disentangling the causes, the students will have another year of Texas schools under the belts.

Quality of New Orleans Schools – now we’re on to something.   I think ultimately what will be handed down is an indictment  of the New Orleans  school system.    My guess?   The younger the displaced student, the smaller the gap in the pass rate, controlling for all the other important stuff.   As the students spend more time in New Orleans schools, they get further behind.   There is some evidence for this in the statistics given in the article.  

What I think would be super interesting would be able to find families with different aged children.   Many studies of educational outcomes find that socioeconomic status of parents are a powerful predictor.   The nice thing about using two children in the same family is that they have the same parents.   The difference is, the older of the two would have spent more time in New Orleans schools, while the younger more time in Texas schools.  

–CT

In Sunday’s Times Picayune we learn that most people in the New Orleans area did have flood insurance after all. Somebody actually took the time to look at the data and, low and behold, about 67 percent of the homes in New Orleans were covered by flood insurance.

The data also show that LA residents have received more than $12 billion in flood insurance payouts as of February 22nd. This amount is only for flood claims – many people also have received homeowner insurance payouts, but those figures are not in the article.

The politics of all this is what I find so intriguing. As the article points out, just after the storm:

Members of Congress rose up in righteous indignation to scold residents of New Orleans, one of the most vulnerable cities in America, for failing to buy federal flood insurance and then coming hat in hand and asking to be bailed out with federal money.

Well, who was asking for the money?

In those early stages, much of the righteous indignation was in regard to a bill by Louisiana’s own Richard Baker. This was the now famous “Baker Bill,” the one that would provide a home bailout to residents and mortgage companies.

In our February 9th post, Baker’s Moral Hazard, I noted that Baker’s bill had passed the House Financial Services Committee 50-9. I then asked (sort of rhetorically):

Could this be a sign of rent seeking?

So, I’ll put my question differently: Is it more likely that “the residents of LA” were “coming hat in hand and asking to be bailed out with federal money,” or that mortgage company representatives were asking to be bailed out?

This morning’s Times Picayune contains an excellent article that explains the current state of teachers’ unions in New Orleans. Basically, Katrina has busted the unions, for better or worse. Either way, the article serves as a great summary of the arguments for and against these unions in public education systems.

Here’s a synopsis:

Critics accused the union of coddling incompetent teachers and stifling moves toward a more innovative curriculum. Supporters saw the union as a necessary resource for employees of a highly dysfunctional system that routinely lost paychecks and was so cash-strapped it almost failed to make payroll before a private management team was brought in last year.

What usually bothers people about this issue is that the unions always seem to fight against hiring/promoting teachers based on merit. Instead, the unions almost always favor using seniority as a criterion. Charter schools, on the other hand, are exempt from collective bargaining rules and, theoretically, free to hire teachers based on merit.

What I find most tragic is that the unions never seem to be fighting for the kids in their schools. There is a well documented failure of most of New Orleans’ public schools to deliver a decent education, and the unions don’t want the teachers to be held accountable – literally.

Mitchell [the president of the local union in New Orleans] said it’s unreasonable and unfair for charter schools to lay years of poor student performance at the feet of the union. “The whole notion of eliminating unions so the school can work well is a crock,” Mitchell said. Even in pre-Katrina days, “Ben Franklin High and Lusher School had union teachers, and they were performing well.”

Interestingly, the principal at Ben Franklin (the highest performing public school in the state), Carol Christen, admits that she has circumvented union hiring rules. Christen says:

Whenever I would have a vacancy I would write a job description with expected performance outcomes, and plenty of people shied away from that.

The debate over whether unionized public schools or charter schools are better for delivering education is being waged across the country. Another recent example, one that has nothing to do with Katrina, can be found in Minneapolis, MN. In this traditionally Democratic city, poor African-American families are getting fed up with the public schools and leaving them – in droves – for charter schools. See this recent article at the Wall Street Journal’s (free) OpinionJournal website.

Should teachers be fired if they don’t do their job well? What about tenured college professors who perform poorly? Would parents care more about the education their kids receive if they paid (directly) for the tuition?

In the interest of full disclosure: I’m not tenured.

NM

I spent approximately four years of my life working in public policy in Washington, DC, and the one phrase that I became absolutely tired of hearing come out of politicians’ mouths was: I believe the children are our future. No kidding? How long did it take you to figure that out?

Well, now I’m back in Louisiana and out of public policy, so I need a new least favorite phrase. I don’t have it yet, but I suspect it will have something to do with Katrina. Why? Because I’m already tiring of every single thing that happens being blamed on the storm.

Your waiter is late getting hot bread to the table? Katrina. No crayons for the kids’ menu? Katrina. No plugs for that flat tire? Katrina. Chad Turner hasn’t published any articles this semester? Katrina. Actually, I haven’t either….that’s definitely Katrina.

Anyway, you can imagine my horror when I came across this post on the Times Picayune “Voices of Katrina” Weblog:

Children lined the streets playing with sticks, riding bikes, bouncing basketballs. The elderly would sit on porches, fanning a breeze, chatting about days gone by. Young men walked the streets, brown bags in hand, carrying what little hope they had left for their futures.

I honestly wasn’t going to post anything about this until the author of the post put the words “children” and “future” two sentences apart. That was enough to push me over the edge. The author goes on to discuss the lives of the children, the young men, and the young women of a not-so-nice section of the city:

Their routine rarely varied. One day ran into the next. Then a shooting would happen and the streets would clear for a day, maybe two, then return to normal. This was their future, marked out for them by a society that had forgotten its rich history. Then came Hurricane Katrina, August 29, 2005. There was no more hiding these people who had been left behind for decades. This time they were left behind for all the world to see.

I’m posting this because I hope to start a discussion (and I hope people read the entire post on the Times’ website). Here are my questions to get things going:

-How does “a society” mark out someone’s future?

-How does “a city” hide people?

-Can “society” cause one person to shoot another?

-How much individual responsibility should we attribute to one’s economic condition?

-Is there really a lack of economic opportunity for those who seek it?

NM

Shortly after hurricane Katrina, U.S. Representative Richard Baker (R-Baton Rouge) introduced a bill that would allow the Federal government to step in and buy homes damaged by Katrina. The actual buying would be done by the Louisiana Recovery Corporation (LRC), a new federal agency created by the Baker Bill (latest version here).

Congress did not vote on the bill before its Christmas recess, so the bill died. Actually, it’s probably more accurate to say it was put on life support. After Congress adjourned, Baker quickly announced “No matter the circumstances, we must try again.” And, shortly thereafter, U.S. Senator Mary Landrieu (D-LA) introduced a Senate version of the bill. The Bush administration – in an apparent attempt at fiscal restraint ?? – has refused to support the bill from the very beginning. You can find their latest position on the bill here, via the Washington Post.

One reason the White House gives for opposing the Baker bill is that they do not want to create another government agency. After reading just the first two pages of Baker’s bill, it’s easy to see what will happen if the bill is signed into law. For instance:

The principal office of the Corporation shall be located in the State of Louisiana, but there may be established agencies or branch offices in the District of Columbia and in any municipality or parish in Louisiana to the extent provided for in the by-laws of the Corporation.

Multiple offices….And, multiple divisions:

(d) CORPORATE DIVISIONS.— (1) IN GENERAL.—At a minimum, the Corporation shall establish and maintain separate divisions for the following subjects:
(A) Environment and Land Use Management.
(B) Economic Development.
(C) Property Acquisition.
(D) Property Management.
(E) Property Disposition.
(F) Urban Homesteading and Community and Faith-Based Organizations.

Just what we need. I would certainly prefer to save the money it would cost to run this new agency – oh, sorry, corporation – but I dislike the bill because of the unhealthy incentives it creates.

The newly created (LRC) would pay owners of damaged homes no less than 60 percent of their pre-hurricane equity. And the “corporation” would give lenders up to 60 percent of the money they were owed. Then, to “cover some of its expenses,” the LRC would sell the homes (or giant tracts of land ?) to private developers.

So, homeowners that did not have flood insurance (or insufficient flood insurance) can get most of their equity back from the taxpayers, many of whom did actually pay for sufficient flood insurance. And it’s these taxpayers that will be forced to bail out the lenders of the uninsured/underinsured. Why, exactly, have I been paying for flood insurance?

It certainly is difficult to not feel sympathy for those most affected by the storm (I lost a house too), but that doesn’t change the fact that Baker’s bill produces perverse incentives. In general, this phenomenon is referred to as a moral hazard – homeowners will no longer want to pay for flood insurance because they expect to be compensated for their losses. And lenders will not perform due diligence to ensure that homeowners in low-lying areas purchase flood insurance (which, by the way, they were required to do by law).

I would not be too surprised to learn that some of the homeowners in LA fully expected to receive some compensation from the government in the event of a disaster such as Katrina. And I would even argue that one reason many lenders did not require sufficient flood insurance is because they fully expected the same thing.

Historically, moral hazard and flood insurance go together so well that many economists have used homeowners’ lack of flood insurance to explain “moral hazard.” One example is in Mankiw’s popular Principles of Economics (1st edition, page 581):

A family lives near a river with a high risk of flooding. The reason it continues to live here is that the family enjoys the scenic views, and the government will bear part of the cost when it provides disaster relief after a flood.

I guess Mankiw can include a Katrina/Rita analogy in his next edition.

For discussion:
What impact could the moral hazard associated with the Baker bill have on future flood insurance rates?
Could this type of moral hazard have caused over-building in flood prone areas?
Baker’s bill passed the House Financial Services Committee 50-9. Could this be a sign of rent seeking?

Norbert Michel

Predictably, in the wake of hurricane Katrina, several so-called economists quickly reminded us that all was not bad. Indeed, there really is a silver lining in the storm, and that shiny metallic coating is: the coming boom in reconstruction, they say. This is our choice for howler of the year (via Pacific Views):

Prof. Doug Woodward, with the Division of Research at the Moore School of Business at the University of South Carolina, has researched the economic impact of hurricanes.

“On a personal level, the loss of life is tragic. But looking at the economic impact, our research shows that hurricanes tend to become god-given work projects,” Woodward said.

Disasters are good for the economy, he said. Within six months, he expects to see a construction boom and job creation offset the short-term negatives such as loss of business activity, loss of wealth in the form of housing, infrastructure, agriculture and tourism revenue in the Gulf Coast states.

This argument about disasters has been made for years and years, but that has yet to make it correct. Frederic Bastiat countered this basic error in logic in the 1850s in “What is seen and what is unseen.”

As Bastiat told it, a man’s son breaks a window at play. People try to console him saying that such destruction actually does some good, in that it provides employment for the fellow who is hired to fix the window. Bastiat noted that the employment and income for the repairman is what is seen, but that an economist looks for what is unseen. For instance, the man with the broken window had, before the damage, a window in good repair and money to buy something else – say, a pair of shoes. Once the broken window is fixed, the man has a window in good repair, as he did before, but no money left for shoes. The damage cost him and society, a pair of shoes. Nothing at all is gained.

If there truly were some good from the broken window, then people should rush to smash more windows, break them all, as Katrina seems to have done. Break the windows in Baton Rouge, in Houston, in Thibodaux and Houma, too. If one broken window is good, thousands broken would surely be better. Just as the New London, Connecticut City Counsel OKed the use of eminent domain to force people from their homes in the name of economic development, surely they would welcome some broken windows to accomplish the same end.

Economically, Katrina is simply devoid of any silver lining. The “god-given work projects” to which Woodward refers have to be paid for by someone (even if it comes from Uncle Sam), and that money could have been spent on other items. Someone may have been about to purchase a new computer, now they won’t. The workers at Dell lose out. Someone could have been on the verge of buying a new car. People working for GM lose. And so on. This is a basic principle of economics, that the science fiction author Robert Heinlein named TANSTAAFL in his book, The Moon is a Harsh Mistress. TANSTAAFL is simply an acronym for “There ain’t no such thing as a free lunch,” because somebody has to give up something for the lunch.

In much of economics, it is the unseen part of a situation that holds the key to understanding. Unfortunately, the unseen activity usually slips by too many – even trained economists.

We mentioned only a few examples of goods not purchased, but there is surely more unseen activity that deserves a look. For instance, all those workers rushing into New Orleans will put a strain on labor markets in other areas, probably causing prices to rise. And, all those building materials (and cars?) rushing into the city will put pressure on markets in other areas, likely causing prices to rise in those markets. And, we will never be able to recapture the wasted resources left in the wake of Katrina.

Economically, there is no silver lining in destroying a city. Would anyone seriously contemplate tearing down a major U.S. city when unemployment rises?

To end on an upbeat note, there is some sort of silver lining to Katrina. We have witnessed a great deal of charitable giving and many people across the Gulf Coast communities have done everything possible to help their neighbors. This sort of human reaction is encouraging, and all of us along the coast are sure to need our neighbors more than ever in the coming years. We see that most people are basically pretty good (though we witnessed some pretty awful behavior, as well) and will do what they can for someone in need. Now that we have learned that lesson, we don’t think anyone wants to repeat it.

Norbert Michel and Morris Coats