Edmund Phelps is the McVickar Professor of Political Economy at Columbia University. In this Wall Street Journal ($) op-ed, Professor Phelps makes the remarkably simple but adroit insight that much of the political debate over the rebuilding of New Orleans from the damage of Hurricane Katrina is missing the true problem that bedeviled New Orleans:
The nation is still reflecting on the sight of New Orleans unprotected from Katrina and too feeble from poverty to run from it. Yet some basic issues have scarcely been debated.
So far, the focus has been on what to do about lost and damaged infrastructure. For our legislators and the public, that has raised fascinating questions of political philosophy. The federal government does not pay to defend New York state against Lyme disease or New York City against terrorist attack. So it is a question why it is a federal duty to pay for measures to protect or repair New Orleans from local storms.
The economist’s answer is that a disrupted New Orleans has external costs on the farmers upriver and the producers everywhere who depend heavily on the city’s great port to ship grain. At likely levels, New York’s Lyme disease does not threaten the rest of the nation. Protecting Wall Street ranks high on that external cost test, but not high enough in the estimation of Congress. It is a matter of degree.
