The finance of Katrina

Purpose - The purpose of this paper is to discover the causes of the devastation of New Orleans and the Mississippi Gulf Coast and how it may be ameliorated. Design/methodology/approach - Economic analysis of the prior conditions causing susceptibility to flooding, and of the subsequent events involving long‐term assets: how assets had been selected and what changes have occurred in the evaluation and selection process. Findings - The devastation caused by the hurricanes was far exceeded by: the prior governmental misleading of entrepreneurs and property owners regarding the actual level of flood protection provided to New Orleans by the bureaucratic Army Corps “flood protection system”; the resulting Rothbardian “cluster of entrepreneurial error” which allowed the devastation of New Orleans capital goods; the Hayekian unintended consequences of government actions and pronouncements following the storm, which interfered with market signals, increased subjective risk, reduced return expectations of entrepreneurs for capital assets, reducing net present values below zero; and the Misesian bureaucratic inefficiency of the corps and other governmental agents both before and after the storm. A sharp increase in their perception of flooding risk caused market participants now to see that no improvement in flood control can be achieved under the present bureaucratic structure, and they have permanently increased their perceived risk and discount rates, thereby reducing the pace of asset emplacement. Replacing the system of Lachmanian heterogeneous capital assets and their communications connections destroyed by Katrina cannot be accomplished in the present situation. New government actions and regulations are continually changing, noisy, and have altered property rights. The interactive efficiency of the asset system has been decreased. Incorrect assets are being built, necessary assets are being neglected, and the communications network between assets is not being replaced. Research limitations/implications - A finer level of detail could be investigated, focusing on smaller sub‐systems and interactions. Practical implications - Greatest improvement in asset rebuilding would follow the elimination of all government regulations and regulatory agencies impeding the decision process, and private companies should be contracted to replace the destroyed wetlands and emplace flood controls. Originality/value - The paper employs an inter‐disciplinary analysis of events using several different theoretical tools combined in an innovative way to examine why systematic errors were made and are continuing, and how errors can be stopped. The paper is of greatest value to those charged with repair of the damaged infrastructure of southeast Louisiana and Mississippi.