Pete Boettke of George Mason University talks with EconTalk host Russ Roberts about the political and economic lessons he has learned as program director of research in the aftermath of Hurricane Katrina. In this wide-ranging conversation, Boettke discusses the role of civil society, the barriers to recovery that have hampered New Orleans and what worked well as people and institutions responded to tragedy and devastation.
Play
Time: 1:18:44
How do I listen to a podcast?
Download
Size:36.1 MB
Right-click or Option-click, and select "Save Link/Target As MP3.
Readings and Links related to this podcast episode
Related Readings
HIDE READINGS
About this week's guest:
Pete Boettke's Home page
About ideas and people mentioned in this podcast episode:
Books:
The Political Economy of Soviet Socialism: The Formative Years, 1918-1928, by Pete Boettke at Amazon.
The Economic Role of the State, edited by Peter J. Boettke and Peter T. Leeson. Elgar.
Articles:
"Katrina 10 Years Later: Disaster Recovery and the Political Economy of Everyday Life," by Peter Boettke.
"Mercatus Disaster Recovery Research," by Peter Boettke. August 2015.
"Introduction to The Economic Role of the State," by Peter J. Boettke and Peter T. Leeson.
"A Recovery Stymied by Redistribution: Public policy intended to make layoffs less painful actually made layoffs cheaper and more common," by Casey B. Mulligan. The Wall Street Journal. June, 2014.
"The Really Big One," by Kathryn Schulz. The New Yorker. July, 2015.
"Assume Anarchy: Why an orthodox economic model may not be the best guide for policy," by Raghuram Rajan. International Monetary Fund, September, 2004. PDF file.
Transition Economies, by Anders Aslund. Discussion of the collapse of the Soviet Union. Concise Encyclopedia of Economics.
Property Rights, by Armen Alchian. Concise Encyclopedia of Economics.
Disaster and Recovery, by Jack Hirshleifer. Concise Encyclopedia of Economics.
Rent Seeking, by David R. Henderson. Concise Encyclopedia of Economics.
Occupational Licensing, by David S. Young. Concise Encyclopedia of Economics.
John Stuart Mill. Biography. Concise Encyclopedia of Economics. On Econlib: Principles of Political Economy.
Adam Smith. Biography. Concise Encyclopedia of Economics.
George Stigler. Biography. Concise Encyclopedia of Economics.
Tjalling Koopmans. Biography. Concise Encyclopedia of Economics.
Web Pages and Resources:
How We Came Back: Voices from Post-Katrina New Orleans, Mercatus Center.
Podcast Episodes, Videos, and Blog Entries:
Pete Boettke on Katrina and the Economics of Disaster. EconTalk. December 2006.
Paul Robinson on Cooperation, Punishment and the Criminal Justice System. EconTalk. August 2015.
Nina Munk on Poverty, Development, and the Idealist. EconTalk. January 2014.
William MacAskill on Effective Altruism and Doing Good Better. EconTalk. September 2015.
Kling on the Three Languages of Politics. EconTalk. June 2013.
Paul Romer on Urban Growth. EconTalk. March 2015.
Pete Geddes on the American Prairie Reserve. EconTalk. September 2015.
Munger on Price Gouging. EconTalk. January 2007.
Munger on John Locke, Prices, and Hurricane Sandy. EconTalk. November 2012.
Sunstein on Worst-case Scenarios. EconTalk. November 2007.
Milton Friedman Archive. EconTalk.
Highlights
Time
Podcast Episode Highlights
HIDE HIGHLIGHTS
0:33
Intro. [Recording date: September 11, 2015.] Russ: Our topic for today is the aftermath of Hurricane Katrina. We first talked about this in December of 2006; and you actually confessed to me before we started recording that you went back and listened to that episode. Which excites me to no end. I did not. I kind of wanted to come back fresh to it, because I'm sure most listeners don't remember that episode. That was a while ago. But that episode--we taped that, we recorded that a little over a year after the hurricane struck. We are now 10 years after that destruction. And you've been involved in a project assessing the recovery and what we can learn from it. So, talk about what that study has involved and what's been your role. Guest: Yeah. So, at the Mercatus Center at George Mason U., very soon after Katrina in August of 2005, we decided that we were going to try to do a longitudinal study down there about economies can come back. And so we went and we got support from various different foundations and whatnot to engage in a study to see how resilient and robust societies are in the wake of natural disasters. And we decided to go about doing that by establishing teams, different research teams, that would focus on different components of the rebuilding period. And for the response and then the rebuilding period. And so we started making field trips down there, in the late Fall of 2005, and then into 2006, and made several trips. I was the principal investigator on that, but then we eventually would have teams that were either in residence or making very often trips there. And those scholars that were tapped for that were Russ Sobel, who was then teaching at the U. of West Virginia and now teaches at the Citadel; Emily Chamlee-Wright, who was then teaching at Beloit College but is now the provost over at Washington College; and then Sanford Ikeda, who teaches at State U. of New York at Purchase. And then underneath of them we had other junior faculty and then graduate students. And the teams were divided up into those who would focus on public sector issues or what we called the 'political and legal leg', and then those who would focus on the social and cultural kind of ideas, civil society component. And then the third one was the entrepreneurial or commercial society or market sector--private sector responses. So, if you think about it, you have a public sector, a private sector, and then a civil society sector. But we want--the study was, in detail, each of the various different aspects but then more important, the interaction between all three of those as you tried to both assess why the society is having difficulty coming back or why it is that it is succeeding coming back. And we wanted to sort of look at that question; and it turns out that New Orleans was quite an amazing place--tragic event made more tragic by a lot of follies. But yet also a very uplifting story, if you focus on certain aspects of it, with regard to resiliency of civil society and the interaction between commerce and civil society.
4:54
Russ: So, that's a very unusual plan, that you were planning to execute, and did execute. Most economists would probably look for some aggregate data on incomes or test scores in schools. They'd look across, maybe, neighborhoods or districts or parts of the city or parts of the state. But this three-legged approach--which I am of course a big fan of--and doing field work is very alien to most economic research and is much more, what people would call, sociology. Guest: Right. Russ: What were you thinking in taking that approach? Why did you take that approach? Guest: It's a great question. I mean, there's a sort of a methodological aspect of this, an analytical aspect of it; and obviously then a practical, public policy or political economy, in the art of political economy sense of this. I do think that we economists, you and I, were trained to think in terms of thin models and very clean data. And so we like to have, you know, large data sets that we can run statistical analysis on; and we get clean, you know, results based on [?] very refined models. And for some questions, it turns out that that's a very successful research strategy. At least it's proven to be one that is self-perpetuating. But in my own experience, in studying the former Soviet Union--so, I started my career studying the Soviet Union. It wasn't 'former' then. And my first works were on the origins of the Soviet system, and then on how that system operated, given the problems that we would associate from an economic point of view with the incentive structure and the informational constraints that a Soviet-type planning system would operate under: How could that system ever operate? So there's kind of two ways to pursue that kind of research. One way was what you were suggesting, which was: Take the growth figures; re-estimate them, taking into account that the Soviet system was going to bias them in certain directions; and then try to come up with other growth estimates of what was going on in the Soviet Union. And that is what a lot of people did in economics. But another aspect of it was, is that that didn't really kind of capture what was going on over there. And so, the idea was is that you had to sort of delve underneath, dig deeper, and get to like the real social interactions that were taking place to see how the failure in the planned system would generate, you know, markets and black markets, both in producer goods and consumer goods. So there was also a kind of an informal market that interacted to allow the planned system for the state enterprises to try to even pretend to meet their state, their output targets. But then there was also this vast black market activity, which is how consumer frustrations in a shortage economy get alleviated to some extent. Not that they ever got really alleviated. You didn't have an alternative supply network in that system, right? So it wasn't like goods were sneaking in to get in there from the West to get in there except when you had limited tourists--so then you could sell them your Levi jeans or whatever. But it wasn't like an open market, an easy supply network. So how do you understand how the Soviet system ticked? Just to give you one example, there's a study that was done in the late 1970s that estimated the amount of black market dealings for gasoline in Moscow. And they put that figure at like 80% of the transactions of gasoline were bought in non-official markets, in some sense. Russ: Under the table. Guest: Under the table, or side-payments, to be able to get it. And all kinds of different things. You know, the Soviet Union, it's not just like--I oftentimes say, 'Imagine the market for illicit drugs in the United States, then make it writ large for the entire economy.' That explains how the Soviet economy operated. That's actually kind of more pedagogical than real. Because what happened is the Soviet markets had various different gradations in the official market. You know, so-- Russ: Like a bribe. Guest: Yeah, like a bribe, to an outright black market dealing, where a state shortage of buns and a state shortage of sausage leads to a sandwich out the back window. That's not the same thing as someone saying, 'Oh, admissions to college, yes, but it will cost you x number of dollars.' That's more like the [?] and more be in a rent-controlled apartment idea. Anyway, so, if you are going to study that stuff, you can only study that because the official view is not clean and easy to get. And so instead you have to do field work, and you have to make access or use unusual data sources like memoirs, and you know, kind of more ethnographic data, to be able to actually get access to the information that enables you to study how this economic system operates. And then when the system started to collapse, it wasn't the textbook model that was collapsing. It was actually this, you know, Rube Goldberg kind of system that was in place that you were trying to then understand--and what the property rights were of that, and everything. [?] Barzell is fantastic on this, actually: he says, one of the only great achievements of the Soviet bureaucracy achieved was to convince you that while they owned the resources, that they didn't own them. Right? So that they were owned by all the people, but actually it was owned by these, you know, various different people in the party and whatnot. They just had control rights, but not cash flow rights. So, now, how am I going to change those property rights systems? And more importantly, for your question: How do I go about studying it? And I'll just be very brief here. It's just: You can't just rely on studying the official system. You have to open up to study the unofficial system. Which means you have to, you know, get on the ground and get access to data which is very dirty.
11:40
Russ: But I think it's more than that. I feel presumptuous telling you that. But let me take a crack at it. I think, as economists, when we say things like, 'Oh, the market will solve that,' or 'The market won't solve that,' we have in mind sort of a black box of what markets are. If we can draw it--we can draw a supply-and-demand diagram; we can draw a supply-and-demand diagram with intervention that keeps it from reaching its, where the curves cross. And we sometimes fool ourselves into thinking that's what's happening. Guest: Right. Russ: But that's just a very stylized way of conveying some very simple things. They're very important. I don't want to understate their importance. Guest: Sure. Russ: It's extremely important to focus on those basics like what things are going to cost and whether there will be waiting in line and whether there will be a gap between what consumers pay and what suppliers receive because of a tax or because of waiting. So that's all very important. But it's not what's going on in the street. And when you say, 'Well, that's not so important,' we're abstracting from that. That's the black box effect. What I think about, when I think about the Soviet Union's collapse and then the so-called aftermath, recovery, whatever you want to call it that's somewhat analogous to Katrina, is that a lot of economists use that black box--and the reason I said I feel presumptuous is: I've learned this from you. So I'm going to say this, and you can chime in and say I got it right or I'm missing something. But what I think I've learned from you, and some other EconTalk episodes, is that a lot of economists had a very stylized story about the recovery: 'Oh, it's easy. We'll just put in property rights and we'll sell off these state resources, and markets will emerge.' And dah-dah-dah-dah-da. And it didn't happen. Guest: Right. Russ: And when you confront people with that--most of them don't--to be honest, I think most economists don't even want to think about it. And what I respect in your work, especially, is that you said, 'This is a learning opportunity.' Instead of saying, 'Well, I'm going to wave my hands, and it wasn't quite like the models say and it's fine because we know markets work; we know what prosperity is based on. It's based on real law, property rights, and markets; and so, we just have to get there.' But it turned out that getting there was the most interesting part, and it wasn't easy to get there. And that these pieces didn't all emerge quickly. And so what I see your work and your methodological approach as doing is saying: 'Look, there's real value here in trying to understand how these pieces--in particular, government, entrepreneurship, commerce, and civil society, that is nonprofits and other voluntary activity--how they interact. Because if we just wave our hands and draw something on the blackboard and run some regressions, we are going to miss learning about what we should be learning. Is that a good way to--? Guest: Yeah. No, I mean, that's a better summary than I can ever give. I think that our first--if you go back to this post-Soviet context--let's say we Eastern-Central Europe in 1989 and then look at in Russia in 1991, the first thing you think about is, 'Oh, these were shortage economies. We know how to fix a shortage economy. You let prices--' Russ: Let prices adjust. Guest: Yeah. Let the price adjust. So our first and foremost period of reform was: Get the prices right. And then, you know, that like didn't go as smoothly as we hoped, because we had to realize that prices are formed within an institutional context. And so you needed to have, you know, various different institutions in place. And then that became in vogue to then say, 'Get the institutions right.' So we moved from getting the prices right to getting the institutions right, to then, 'Oh, well, gee, institutional transplantation is really difficult; you need to have certain value systems and beliefs'-- Russ: Culture. Guest: Culture. And so then it's like, 'Get the culture right.' Russ: And then it's like, 'Good luck.' Guest: But I do think it's important to keep in mind, you know, the fact that it's still the case you've got to get the prices right. So, even though it's so intractable, the culture issue, and you have to, for the pure positive economics of it, have to at least take into account that part, you also have to recognize that, yes, it's true that culture is this framework within which institutions are; and institutions sort of define or frame within which how markets operate. And in these transition or crisis situations, it's the framework that's up for grabs. Right? It's the thing that's fraying and whatnot. You know, I, one of my favorite EconTalks of all time, for you, because it's actually now been saved for all of us to hear, is Milton Friedman--the fact that you did Milton Friedman early on in your process and obviously before he passed away, so now we have it. It's there. And there's a fantastic one with him about monetary policy, and another one you did. But Friedman was famous in 1979 when he first toured China, and they said to him, 'Milton, how would fix things?' And he said, 'Privatize, privatize, privatize.' And then, you know, just a few months before he passed away, someone asked him: 'Professor Friedman, would you change your dictum at all?' He says, 'Yes, I would.' And he says, 'What would it be?' He said, 'Privatize, privatize, privatize, provided there's a rule of law.' And, you know, that--'provided there's a rule of law'--becomes a rather big issue. Because, where do those institutions come from? How do they get formed? How can we study them as economists rather than just treating them as given? And Raghuram Rajan, you know, wrote a famous paper for the IMF (International Monetary Fund) in the mid-200s, beginning part of the 200s, when development questions run, especially a lot of these reconstructions of these failed and weak states after 9/11, you know, there's a big discussion of all that. And he wrote an essay called "Assume Anarchy." And the argument was is that you had to assume anarchy because you can't treat the institutions as fixed and given. You have to study how those institutions come about. And that became a real impetus of what we were trying to do in our transition studies, in which we morphed out of Eastern Central Europe to then Africa and Latin America and even East Asia and whatnot. And then that became the impetus of what we thought we might do with Katrina. Russ: So, if I can just put on my sociology hat for a minute--and I don't have one, so you'll just have to imagine it. But I think one way to talk about what Friedman was saying was that, when you say, 'rule of law,' that's not something you just say: 'Do you have it or not?' It's not an on-off switch. There are many things in the United States, depending what city you live in, depending what county you are in, depending who is running the government this month, this year--how free you are to use your property as you see fit. And I think understanding that is part of what we're talking about here.
19:11
Russ: So, let's move on to Katrina. So, the bottom line is that you try to do a much richer, wider-breadth look at the process of recovery, rather than just saying, 'Well, how much did GDP (Gross Domestic Product) go up this quarter in the city of New Orleans? What happened to sales tax revenue? Guest: Right. And we wanted to see the interaction between these various different ideas, mainly to see how--so, again, you know, we take a lot of these inspirations from different people. So, John Stuart Mill has a great quote in the Principles of Political Economy where he says that one of the most amazing things that we see in human history is the great rapidity with which countries bounce back from famine, war, earthquakes, fires, whatnot. Right? So, we took that idea and we wanted to say, so what are the conditions under which Mill's proposition is true? What are the conditions under which it would fall away? So, one of the conditions that Mill says explicitly is: Complete depopulation. So, you know, if you came in and you know, something happened--an asteroid hit--and it wiped out--a small asteroid hit--so it wiped out like a whole country or whatever: yeah, that country is not going to come back tomorrow. Right? And so that--we understood that. But somewhere in between that and-- Russ: The electricity goes off for a week. Guest: Yeah. We want to see how they form. In fact, one of the really made-me-sit-up in my seat and realize how, you know, sensitive these issues are, is in one of my early trips, we went and met with a gentleman who was one of the leading, you know, business people in New Orleans. He took us to the top of his office building. And it still was the case when we looked out from over [?] that I think it was something like, you know, 3/5ths of the city footprint was still, the infrastructure was wiped out, because you know, the water had stayed there and then that wiped out their electric grid and all that. And he sat there and we were talking about what we were trying to do, and he turned to me and he said, 'Look. I understand. You guys are very excited, because not every time that you can fill the rat maze with water and then see what the rats do.' Russ: It's a lovely--what a lovely thought. Guest: And I sat up and I said, 'No--[?]'. But in some sense, that is what we were doing. But it made me realize that we are talking about real people, real lives; and we need to be very sensitive to the way that we think about, you know, this; because that's different if I were studying the rats. Right? Russ: Right. Guest: I wouldn't worry so much about--but these were real people and they were really affected. So you had to always balance that because we are who we study, and what we were trying to do was we were right in the midst of a lot of this when the nerves were still very raw. Russ: Tell us what some of the lessons that you've taken from that, from the work. Guest: You've talked--when we talked in December of 2006, I went back and as I said, I listened to it. And one of the things that I always like to stress when we start doing this is, first, at the moment of the crisis how people that were on the ground, there, mainly in this instance the churches and church leaders, played such an important role in getting people out of harm's way. And that isn't recognized enough because we always think of that as being the role of government to do. But it's phenomenal what the network of Southern Baptist Churches did. And also what the network of yacht club--boating clubs--did, where they came in, in little skipper boats and got people out and got people to safety that otherwise would have been stranded. And even in some of these instances like with the Church, they actually were violating the official rules, which said that people weren't supposed to be going in and out of the city like that. Because they were trying to control the evacuation or control the, centrally control how they were going to do the protection in the wake of the storm. And these were very, very courageous young people--one couple that we met was a youth ministry couple in central city New Orleans, and they really just responded. It was like your neighbors at this time were going to help. And obviously we hear the tragic stories of people being trapped in the 9th Ward or wherever and then at the Superdome, and those are the images that we have in our head. And those were very tragic aspects. Russ: And real. Guest: And real, and no one is denying that. But it is pretty phenomenal, the amount of effort that civil society expended and the resilience that they showed in the face of very difficult times. And I think we should celebrate that more, the human capacity for compassion and just getting the job done is a lot greater than we often think. Russ: Yeah. We talked with Paul Robinson recently about, in life or death situations, a cooperative urge somehow can often spring into action, and people can take risks for their own safety and do great things for their neighbors. Guest: So, that's the first thing that comes to my mind; and I really want to stress that. And that even comes back to the--so that's in the immediate response. But you also see varieties of this sort of strength and resiliency of civil society throughout the process, from response to recovery to rebuilding, to today, getting on with your life. And it's not perfect, and there's still a lot of lingering difficulties. But there also are some real heroic examples, and I think that we should pay more attention to that. Robert Putnam kind of made the argument that right before all of this happened, in the 1990s, that we were in fact becoming more atomistic, less connected to our neighbors. Russ: This is Bowling Alone, right? Guest: Yeah, Bowling Alone kind of idea. And I think that he just misidentified where people were finding their new forms of civil society; and that civil society isn't dead in America. It hasn't been completely crowded out, though I think it's not as vibrant as we could tap into. But when pressured it can actually respond quite well. And I think that that's one of the lessons that we learned from Katrina.
26:09
Russ: What about--talk about what happened in the education sphere, to schooling. Guest: Well, one of the things that you should understand right up front is that New Orleans had some of the worst schools, if not the worst schools in the country, prior. And so you have to ask this question: there's a variety of ways in which Katrina studies have gone in and looked at what's gone on with charter school movements and whatnot, afterwards. Russ: Because a lot of schools--well, you tell me. The public school system was gone for a while, right? Or is it--what was the status? Guest: Well, okay. So, one of the really great stories is in the St. Bernard Parish, this woman who was the Superintendent of Schools in that parish, Doris Voitier--she understood that in order to get the workers back, you would need to have your schools up and running. Because it's a coordination problem: I'll come back if you come back. Right? And I'm not going to come back if you don't come back. And so they needed to have all of that, like normalcy of life back for the workers to return back and sort of build their lives back up again, return to their homes, rebuild their homes, all that stuff. And again, the incentives get a little goofy here because FEMA (Federal Emergency Management Agency) had extended their payments for not working for a longer period of time. People moved to Houston; they look around and they're like, 'Hey, Houston ain't half bad compared to where I was living New Orleans'. Russ: Right. A lot of people did not go back. Guest: But what she did--and it's a kind of--so, they did a mix between her private effort, or her efforts as well as in the public schools. So, it's not like they were independent schools. She's a public employee, right? Working within the public school system. But she's acting very independently to help get people going there. Does that make sense? Russ: Yeah. So, what did she do? Guest: Well, in her case, what she did was she opened the school much faster than they thought they were going to do. Various different officials, FEMA and whatnot, said, 'You'll be able to reopen your school in, let's say, 18 months.' And she was able to open the school in like 8 months. And of course you can even see, like there's an HBO (Home Box Office) on one of the independent schools because they went to the state finals in basketball the next year, in which there was a conglomeration of a bunch of public schools and they put them into a school and they ended up having a decent team and helped rebuild back the community and build things. With Doris Voitier, what she did was she got the FEMA trailers, and she was able to use them; and when they didn't send them to her fast enough she would go and act very entrepreneurial and get them from some other place that had FEMA trailers. Then, later on, they complained to her that she was misusing funds, you know, because she wasn't--she was just, like, a real bulldog to make sure that she could get her school district set up. One of the trailers didn't have the right dimensions, so it was determined that it couldn't be used for school use. But it was just sitting there, vacant, on the lot. But her teachers were back and they didn't have a laundromat. So she turned this trailer into a laundromat. The original FEMA official that was on the ground said, 'Okay, go ahead and do it.' But then they cycled him out. And then this new bureaucrat came in, you know, who's got his pencil and pad of paper, and he's like 'This trailer is not supposed to be used for that. And you are violating the law.' And she's like, 'Hey, buddy, I don't have time for this now.' And they were actually going to bring her up on charges or whatever. And so she's very publicly entrepreneurial, but it's kind of this mix. Then you also have private schools, like the Catholic schools, trying to get their communities back, and how they opened up as well very soon after; and again, schools understood that in order to get the people back, they had to have a place for the kids to go back. And so it became a very big part of the community. I think that part of the story is a kind of significant part. And then, now, there's been this discussion of what's happened with the various different charter schools and their results. And I think that I don't really have that on the top of my head. Russ: It doesn't matter. Because one of the most obvious problems with those kind of analyses are, it's not the same people. Because a lot of people left, and the people who left or then came back are not the same people as the people who decided to stay. So I'm not sure how to interpret those results. Which I'm sure doesn't stop a lot of people from arguing about them. Guest: There's a lot of questions there about the density of the population and where you build. So, yes. To go back to originally when we first saw it, one of the things that we wanted to try to do was maybe do a comparative study between Biloxi and New Orleans. Similar like you might do a study between Poland and the Czech Republic in the post-Communist period, right? And we gave up on that idea very quickly because the conditions were so different from the initial start state. From the simple reason of the effect of the storm. Whereas in one area the storm came in and went out; and another where it came in and it sat. That changes a lot of the dynamics of what goes on. And so--but originally that was our idea: we were going to try to do this comparative study between Biloxi bounceback versus how New Orleans bounced back--what could we have learned from this comparison? But we gave up on that idea within, you know, like 3 weeks of originally studying it. And I think that's a similar idea to what you were just talking about with schools. Because it's not the same thing. You are not comparing apples and apples.
32:26
Russ: So, I interrupted you to ask you about schools. Let's go back to the more general question. I asked you what you had learned; what are the most important things you learned. One of the things you said was the role of the churches. What else is an important takeaway for you? Guest: Okay. So, also the role that entrepreneurship and commercial life plays in not only supplying initial responses but bringing a normalcy back to life--that if you can't have a commercial life, you are not going to rebuild. Those things go hand in hand together. And so the importance of not only small mom-and-pop shops getting started, restaurants and whatnot, but also the big box stores. How Walmart played a role in all of this, Home Depot. Large pharmaceutical, drug stores like CVS and Rite Aid, I think, and how they are very much a part of your communal life and make living happen. Russ: So, let me take this in an obvious and very different direction. When I interviewed Nina Munk about the Millennium Villages Project, her sort of bottom line assessment, the way--I mean, the reason it was, to me, such a memorable conversation, was her summary, which was two words: Nothing grew. Yes, there were some injection of cash and wellbeing and some activity. But when it receded, when the injections stopped, what was left? And again, this came up indirectly in my conversation with William MacAskill. I love the idea of giving people money rather than trying to figure out what they need. Let them figure that out. But how often is it that--what I worry about, then, is you give the money; does anything grow? Is it just a one-time effect that you have to continue to do, or does it jump start something? And if you look at the cities of America, the really bad parts of the worst cities of America, the biggest problem they have is there's nothing growing. Meaning, there isn't that commercial vibrancy. There might be one restaurant in a four-, six-block stretch of abandoned stuff of deserted buildings, of housing. But no commercial life. It's a big deal when they somehow work out a special arrangement to get a grocery, especially if it's a chain. People say--they don't go into the minority neighborhoods, they're racist, and for whatever reason they don't go in. But they are not there. And I find, when I think about development, whether it's in Africa or in an American city that's not been hit by a hurricane, or in the aftermath of a hurricane--coming back to our earlier conversation, I don't think we have a very good understanding of how to make stuff grow. What are the real requirements for that to get started? Guest: Yeah. I think that--so, if you look at, say, for example, the area of Baltimore where the riots broke out, obviously there's a huge problem there of public distrust about police and whatnot. But it's also the case in the particular area where the riots broke out is a very, very bad section of Baltimore in which there is no work--right? Unemployment among the young men in that area is extremely low. Russ: I bet the schools aren't very good, either. Guest: Yeah. As economists we really have to take seriously this idea of what happens to these communities when work disappears. There's a very sort of--I love Casey Mulligan's book on the Redistribution Recession because if you can boil it down to a very simple point, he says: 'Look, through public policies we've made it be very high-cost to hire people and very low-cost to be unemployed. So, don't be surprised when the gap rose--about the unemployment.' Mulligan does really nice economic analysis and summarizes in a really good way. And so I like that. But it's really getting at a point of an earlier theme of work which was done by Walter Williams and Thomas Sowell, but also captured in this sociologist William Julius Wilson, which is: What happens when work disappears? Because of a variety of circumstances, policies are adopted which actually cut the bottom of the economic ladder off for people. They can't climb up the economic ladder. That is a tragedy that we need to address in this country. And in Katrina, one of the other lessons was that initial conditions really matter for how resilient you can be. So, if your society or your area is one of the worst places in the country to do business, and then you shock it, and you don't do any changes in your policy space, it's not going to be an easy recovery. Because the reason why you were so bad at doing business before didn't have to do with race or anything like that: it had to do with rules of the game which prevent people to realize productive specialization and peaceful social cooperation through exchange. And New Orleans, and Louisiana as a whole, and New Orleans in particular, has been a section of our country which is very, very bad sets of rules of the economic gain. It's a connection-based society, not a contract-based society. So, that's why you have all the corruption and whatnot that's in there. You have regulations which are extremely onerous for anyone to try to come up with a new innovation, so you don't see much innovation. And now you shock it, and lo and behold, people don't come up with new ideas about how to make use of the resources there. And so, that was a really stark lesson [?]. So, initial conditions matter a lot. And unless you are willing to move off of those initial rules--say, relax those rules--you are not going to have the kind of commercial vibrancy that you would expect to see in a real growing and thriving metropolis.
39:22
Russ: So, let me challenge that point, or try to get you to make it a little more subtle. Because I think it's a really important point, but I think it's really easy to see it as a dogmatic point. And I don't think you see it that way. I don't see it that way. So, let's take--we're talking on September 11, 2015. So, if we think about 9-11, September 11, 2001, when we think about what happened to New York City--well, it bounced back incredibly well. Of course, the space that was literally, physically destroyed has been a long, dragged out process because of the nature of politics and the nature of real estate in New York. And in a different set of rules of the game, I think there would have been a building back up there in 6 months or a year. But that's just one square block, or 3 square, or whatever, 6 square blocks. At the same time, there's unbelievable stuff going on in New York City. You have the Hudson Yard s Redevelopment plan--this unbelievably ambitious entrepreneurial explosion. And New York is full of rules and regulations. It's an incredibly unpleasant, I assume, overall, to do business. But there's a group of people who figured out how to play by the rules of the game. Some of them--I won't mention who some of them are, but you could imagine. But they figured out the rules of the game. They're not the rules you and I would pick. They are not really great rules for encouraging commerce and exchange and social interaction and specialization. But people have figured out how to deal with them. And yet, you go to New Orleans, and it doesn't work at all in certain parts. Is that because the rules are really bad? Much worse than in New York? The point I'm trying to make here is that it's easy to make this sound like it's just an anti-government screed: government has much bad policies and of course it didn't bounce back like John Stuart Mill or you and I would think. But I think it's a subtler point. I think it has to do with the three legs of the stool and with how culture and civil society and the public sector interact. And in many places, you and I don't like the rules, but it works fine. Like Adam Smith said: There's a lot of ruin in a nation. And people find ways to be productive. But in other places they don't. And I wonder if you have any thoughts on why, in this particular place, some of the things just didn't get overcome. Guest: You're exactly right. There's a lot of moving parts in the story down there. I was going to invoke Adam Smith for you as well, which is, prior to the ruin of the nation he also has a line where he says that basically the power of economic interest is so strong they can overcome a hundred impertinent obstructions which human folly can thrust in its way. And I've always thought that that's brilliant that Smith says that. And then it's a gradation, right? A hundred impertinent obstructions, but how about a thousand? How about two thousand? And I do think that, while it's true that New York is a highly regulated--New York, New Jersey, the tax rates are ridiculous, and whatnot--it is the case that New Orleans was rated as the worst place to do business in the United States prior to this. But I also think that there's other aspects. New York is able to put up with a lot of ruin, as you might put it, because the rates of return are so high. Russ: Yeah. There's a big concentration of folks to sell to. Guest: Yeah. So, there's an attraction there of that. So, I think basically on New Orleans--so, I agree with you that we need to be very subtle and not present this as 'markets good, governments bad.' Jeff Sachs, when he was here in his conversations with Tyler had this very funny line--I am not always a complete fan of what Jeff is saying, as you might imagine, but he had a funny line. He said his wife is a pediatrician, and when she gets on the phone and someone calls, she doesn't just say, 'Property rights' and then hangs up the phone. Right? Russ: 'Vaccine.' Yeah. 'Medicine.' Guest: Yeah. She does diagnostic and then prescription[?]--blah, blah, blah. This kind of thing. And so I understand where you're going with it, and I don't want to be the kind of economist that just says, 'Property rights; prices and profit and loss; and let's get on with it.' But at some level I also don't want to lose emphasis on that point. I like to say to our colleague, Tyler Cowen, that, you know, simple economics is not necessarily simple-minded. People think a lot of times that you have to get really complicated about these ideas. But I think there's low-hanging fruit in public policy especially. In New Orleans, they had things like, and right after the hurricane, they did not allow people that were tradesmen--like electricians and plumbers and whatnot--from other states to be recognized for their occupational license in Louisiana. They had waiting periods and restrictions. So, of course, when people migrated, the flow of labor in there, there were menial laborers who were able to move debris. But not to rebuild your house. And since there was this huge outflow of population, one of the things you need to build is tradesmen again. And the state never relaxed. Now, compare that to Hurricane Andrew in Florida, where they actually reduced occupational licensing. And then all of a sudden--if I'm from New Jersey and I'm an electrician, I can be an electrician in Florida. And all of a sudden, rebuilding after Andrew takes off. And here, it doesn't. And the other thing that was really problematic was there was this going back and forth and political football similar to what you were talking about with the site of the Trade Center, where it just became a project of political football with people. In New Orleans, what became the political football in a lot of this stuff was where we're going to re-draw the flood plains. And so the public officials and the Army Corps of Engineers, and whatnot. And they delayed and delayed and delayed. And of course that has huge impact on whether or not I choose to rebuild or not rebuild. Russ: And where-- Guest: Because--yeah. And what I'm going to do with my home, and all this. And in the meantime, you have sitting water, which cause mold, which is worse than if the water came in and went right back out. And so it became sort of a comedy of errors that really could have been avoided.
46:41
Russ: You mention follies. So, those are two. Do you have any other, one or two, that stood out? Mistakes that were made that they might have done differently? That might have helped? Guest: Well, a lot of it is just basic incentives. Like, originally there was money sent to New Orleans to shore up the levees, or allocated towards doing the levees, before this storm. And then they just decided for political reasons that that money could be used elsewhere. And so it technically wasn't a violation of anything [?]-- Russ: Bad decision. Guest: Bad decision. Russ: Ex post, anyway. Guest: Of course, people sometimes--part of our studies, that was led by Russ Sobel and Pete Leeson, they really focused a lot on the corruption aspects of all of this: Basically that what FEMA does is create kind of a rent race. And so, FEMA allocates-- Russ: Before you go on, a rent race meaning rent in the economic sense of the term, meaning a chance to win a prize. Not related to apartments necessarily. Guest: Right. Russ: The economic term 'rent.' Just for our listeners. Guest: And that creates, then, the opportunity for those on the ground to do all the things to try to get those rents from FEMA. And so FEMA allocates based on politics, as you might imagine; it's a political entity. So, Russ [Sobel] had written several papers on this prior to Katrina. So, when Katrina happened we entrusted Russ with our public and legal sector team. And he and Pete Leeson, they wrote papers; they have a paper in the Journal of Law and Economics called Weathering Corruption which sort of looks at this issue. But they had a few others papers--one on knowledge problems that are associated with FEMA directions. But they also studied electoral politics and corruption issues. And of course they predicted that various different aspects of the political system to concentrate benefits and disperse costs; and of course Mayor Nagin is now in jail, with corruption charges. No one in this in the public officials comes off all that clean; but at the same time, for people like you and I who have been schooled in economics, none of it surprises us either, because it's just following basic incentives. So, again, I would stress one of the important lessons, even from when we're on the ground and we're learning, is to see how the structure of incentives impacts the direction of behaviors. So, if you want to change these outcomes, you need to change the rules of the game, not necessarily change the players. Because the players are all going to play the game facing the incentives that they face. And so what we really have to focus on is those rules of the game.
49:48
Russ: So, let me challenge you. I want to stretch you a little bit here, Pete. There was an interesting piece, I think in The New Yorker, Kathryn Schulz wrote--I hope I get that wrong. If I got it wrong I'll edit it out. But, it was about the fact that the really, really big earthquake that might be coming is going to hit Seattle, Washington. It's a very provocative, interesting piece. And of course it's a black swan--nobody--I don't know if it's literally a black swan, but it's--by that I mean, probably not going to hit tomorrow; not going to hit next year; but it almost certainly will hit in the next hundred years, or two hundred, let's say, or whatever the number is. Might be 50. Might be 20. And I hire you--I'm the mayor of Seattle, and I hire Pete Boettke and I say, 'Pete, you've studied New Orleans. If, God forbid, Seattle gets hit with a catastrophic experience like this, what do I want to be ready for--what do I need to do? What are the lessons that you took from their aftermath? What are the mistakes I want to avoid? And what do I want to do that they forgot to do?' Guest: I'm going to give you my snarky economist response, which is-- Russ: 'Get the prices right.' Guest: No, it's actually to invoke one of your teachers. So, one of my favorite books in economics is by George Stigler. It's called The Memoirs of an Unregulated Economist. And he tells a fantastic story in there of, during WWII, Tjalling Koopmans wrote him an outrageous letter saying, 'George, George, I'm very upset. I've been told that you argued that in the case of a bombing of New York City, we should use the price system to evacuate and reallocate resources.' And Stigler writes back calmly, he tells the story, he writes back calmly; he says: 'Dear Tjalling, No I did not write such a proposal. But on second thought,' and then he goes through and writes how the market would be the most responsive and resilient. But he does make the point before he starts that, by saying, 'In the case of a bombing, recognize that all rationing systems will be chaotic.' So, in comparison to all the other chaotic systems, the price system will actually do better than all the other ones. So, now, let me move off of that-- Russ: Yeah. Go ahead. Guest: The real position, which is--but I think that passage in Stigler, we should all think about as a thought experiment and think about it seriously, because it's always: As compared to what? And a lot of times we think the 'as compared to' would be the way that we would do it if everyone followed in the right way and all the efforts were, everyone trusted the public officials; the officials were trustworthy; and everyone did it the right way. And we have to always do the 'compared to what.' But what I would stress is, first and foremost, that the proposition that's most key to Mill is the idea of the free mobility of capital and labor. And so I would love to see restrictions on capital and labor relaxed in the immediate aftermath of a horrific event. Russ: Give me an example. Guest: So, like what I was saying before about occupational licensing, right? Or any kind of regulations that would make it undesirable for people, including foreigners, to want to invest in your area. So, New Orleans could be not quite New York, but could be like New York because it could be a gateway into the United States from Latin America for a lot of business and commerce. In fact it already is to some extent. But it could be even more if it wasn't such a regulated and restricted environment. Russ: It could be more like Miami. And less like the south side of Chicago, say. Guest: Or, it could be like Hong Kong. Everyone can be like Hong Kong in that sense. Russ: Hang on. I've got to stop you there, Pete. I've got to stop you there. Because I want to come back to our opening conversation--that it's not just these simple things. And you just--I think-- Guest: just committed-- Russ: you just slipped into that: 'You know, if they just got rid of these rules, they'd be like Hong Kong.' Do you really believe that? I'm open to the possibility; I like the idea of it. I just don't know if I believe it any more. Guest: I believe it; but I don't believe that they'll get rid of the rules. And that's part of the culture issue, too. Right? So it's kind of like: Ideas--so I have a very simplistic kind of linear model in my head a lot of times. Ideas generate institutions or legitimate institutions. Institutions structure incentives and control the flow of information and the knowledge feedbacks. And that generates economic performance. Now, that-- Russ: Say that again. I love that. Say it again. Guest: Ideas legitimate institutions-- Russ: I'm going to annotate it. So, when you say, 'Ideas legitimate institutions,' you are talking about the fact that we might have some cultural beliefs; we might have some things that we perceive as principles. That's what you mean, right? Guest: Right. And so, think about this like: If I didn't believe something about private property, then if someone had private property, I would violate the private property all the time unless they had a policeman all the time looking over it. Russ: Correct. Guest: But if I believe that private property is sacrosanct, even if no policeman is looking at me I might not violate another's property right. And so I think it lowers the cost of enforcement-- Russ: Yep-- Guest: of the institution. So, ideas. And then these institutions, why they're important is because they structure the incentives that we face; and they generate a flow of information and the various feedbacks of knowledge that we need to learn. And then that generates our economic performance. But now, once I have that linear line, then we have to recognize that, what does it mean to live like--what does wellbeing mean? Wellbeing means more than GDP (Gross Domestic Product), right? We don't eat GDP rates. So, wellbeing--then what does flourishing mean? And those ideas about that, they feed back into the ideas. Right? And that's going to influence what institutions are acceptable and so forth and so on. And so there's this giant feedback: I take a very linear presentation and the next thing you know, I've got arrows going everywhere all over the place, because it gets very complicated very quickly. And we're very fortunate because we live in a heritage that comes from Europe and then transplanted into the United States, which believed in, had a variety of things that justified Western liberalism--justified market economies, private property, contracts, contractual-based society; and that generated these economic benefits that we've all enjoyed over the last 200-300 years. And so this is a huge blip in human history, that we've been able to do this. And so I think that those things matter. And deep questions like you've asked about, when Adam Smith is asking us to think about our moral sentiments or Hayek is asking us to think about our moral intuitions and the moral demands. And so we have to, as economists, open up to this idea of where we get these--where these sentiments, what do these sentiments suggest to us, because they legitimate or de-legitimate these institutions. So, as an economist, a lot of times, I'll just go: institutions to performance. But I always have to be reminded that those institutions don't get plucked out of thin air. They have these intellectual support networks which are in ideas, belief systems. Some of which are not scientific support systems, but mythologies and [?]superstitions and stuff.
58:16
Russ: Yeah. There are traditions. The way you were raised. I think about, when you mention Baltimore, I think about any of the places you might think about around the world--the poorest parts of the United States, the poorest parts of Latin America, the poorest parts of Africa--where there isn't an opportunity for people to flourish. And you say, 'Well, what's wrong?' And the answer is: Everything. Guest: Yeah. Everything. Russ: Everything is wrong. The incentives are wrong, the culture is wrong. And we cherry pick--I'm going way off the track here because it's interesting to me--based on our ideology, philosophy, specialty. I think about Arnold Kling's three languages of politics. He argues that people look at the world according to a certain axis. So, if you are a conservative, you see the world as about savagery versus civilization. If you a liberal, it's about oppressors versus the oppressed. If you are a libertarian, it's about freedom versus coercion. Guest: Right. Russ: And I see myself all the time in those boxes, if I'm not careful. And I think a thoughtful person needs to go beyond that. And it's so difficult. [more to come, 59:36]