The Case For or Against New Orleans - Research Paper Example

LASA 2 – The Case For or Against New Orleans Overview Hurricane Katrina severely damaged New Orleans in August 29, 2005 with a Level 5 intensity thattook the lives of 1,118 people plus 135 more missing after a year of search. The American Society of Civil Engineers (ASCE, 2007) estimated direct loss in terms of damaged properties to be at $ 27.7 billion. They noted that 124,000 jobs were lost. Several levees with concrete I-walls collapsed. Floods covered 80% of New Orleans. Some parts drowned under 10 feet depth of water. About 400,000 people evacuated the city. Statement of the Problems in New Orleans, LA What should be the allocated budget for the reconstruction and developments in New Orleans after it experienced a level 5 Hurricane Katrina? Objectives This research and case study aims to establish the facts about the damages caused by Hurricane Katrina, considering both the short-term losses as well as the long-term potential losses in the event that nothing or little is done to reconstruct and prevent a similar calamity. On the basis of facts, it also aims to discover advantages and disadvantages, risks and opportunities of substantial investments which will be required to allow New Orleans to prevent another level-5 disaster. Finally, a Cost-Benefit Analysis will be formulated to arrive at a recommended decision about the budget that should be allocated for the reconstruction. Alternative Courses of Action A. Proceed with funding the ongoing development of New Orleans until Level 5 standards are achieved. B. Cut down the funding and stagger developments in New Orleans. C. Stop funding the NOLA development. Areas of Consideration and Analysis Risks Involved By reconstructing the levee with a standard capable of withstanding a Level 5 hurricane similar to Katrina, the substantial productivity of New Orleans will not be stopped as it did when 400,000 people evacuated the place and 124,000 lost their jobs. There will be social unrest as a result of failure of the government to do its role of providing emergency measures to bring back the normal conditions in New Orleans. 80% of the entire city and metropolitan areas there were damaged due to flood and strong winds. All those people affected will naturally protest against any government inaction in times of calamity. Costs and Benefits What are the costs and benefits of the New Orleans Flood Protection System, according to Hallegatte, Stephanie (2005)? As to the effects of climate change, it includes the increase of intensity in the power of hurricanes (p.5). This implies a greater need for stronger and higher levees to protect New Orleans against another major flood. The estimated cost from the viewpoint of local officials was $ 32 billion. Another estimate which considered loss of human lives and the views of insurance companies amounted to $ 30 billion. Hallegatte admitted that the basis for calculating the justifiable budget was not solidly grounded (p.4). This was apparently due to a failure to consider the productivity of people in the area which would cease to be delivered if the workers of New Orleans decide not to be established in New Orleans. In a study of workers’ productivity, the report cited that Americans are most productive on the average per worker. Each one can produce “$63,885 of wealth per year, more than their counterparts in all other countries, the International Labor Organization said in its report. Ireland comes in second at $55,986, followed by Luxwmbourg at $55,641, Belgium at $ 55,235 and France at $ 54,609.” according to Klapper, Bradley S. (2007) of Associated Press. This opportunity loss should be the major basis for deciding to what extent New Orleans should be rebuilt, for the simple reason that $63,885 x 124,000 people who lost their jobs = $ 7.9 billion per year. In 130 years, which is the number of years it might take before another major flood tries to destroy a reconstructed New Orleans, the workers of New Orleans will have produced $ 1.027 Trillion worth of wealth for the USA. In another report about the Cost-Benefit Assessment, Hallegate, Stephanie (2005. p. 2) identified various points of view with different estimates on property losses. There were the state officials who estimated the cost, in order to protect New Orleans from level 5 hurricanes, would be $ 32 billion. Hallegate cited Schwartz (2005) for an estimated $ 1 billion to protect against a level 3 disaster, and gave $ 5 billion as the estimate to get protection from a level 4 disaster. She admitted having difficulties with quantifying the benefits, although the definition was defined to be “the net present value of the expected amount of damages avoided by the protection system upgrade.(p. 2)” Such a definition completely disregards the opportunity cost in terms of lost productivity as a result of not reconstructing New Orleans to a level 5 standard system of protection. The working people of New Orleans will hesitate to return home if they are not assured of adequate protection from a similar hurricane. If the concern would be just the reconstruction to a standard prior to the time hurricane Katrina destroyed the place, then New Orleans might never be as productive as it was prior to the disaster. Given a 50:50 chance of people returning to their places and getting back to work will mean about $ 500 billion worth of opportunity losses over 130 years. The estimated range of benefits, “from $ 6 billion to $ 22.8 billion depending on the discount rate” (p.5) appears as opportunity cost that will be saved as a result of rebuilding New Orleans to a level 5 capable region assuming higher frequency of experiencing floods due to climate change. At this point of argument of whether to spend $ 32 billion to protect against $22.8 billion, it would not appear logical to proceed with such an investment. Effects of changes in the discount rate can only be minimal compared to the value of productivity that may be expected from a fully rebuilt New Orleans. Risk aversion applied to the situation of New Orleans will lead to substantial opportunity losses up to over 300% the highest estimate of reconstruction which was made by the local officials. This will be further explained in next pages. Heterogeneity of damages of hurricanes in welfare losses can only add up to the potential losses of the State of LA in case the decision will be to downgrade investments such that New Orleans cannot withstand another level 5 disaster. The losses considered included the loss of lives valued at about $ 5 billion only, given that each life was worth $ 5 million. Cost of capital that will be lost as a result of investing in restoration was estimated at 7% in the USA (p. 3). There is a probability of 1/500 that a hurricane with Level 5 magnitude like hurricane Katrina will hit Hew Orleans (p. 3). And there will be a probability of 1/130 years that a major flood will hit New Orleans. Vaslag & Rein (2011) says it is safe to assume a higher frequency of floods and that the floods will be greater than that which took place in the past. The cost of levees built in response to Katrina hurricane was $ 14 billion. Cost of damages by hurricane Katrina considering over 1,000 human lives alone was $ 5 billion, while properties lost was estimated to be at $ 25 billion (p.4). However, total costs were estimated at $81 billion. And cost to protect New Orleans against a similar powerful hurricane would be $ 32 billion, according to Hallegatte, Stephanie (2006, p.2). If the protection level will be lowered to level 3, restoration cost would be only $ 1 billion; for level 4, it would be $ 5 billion. However, direct costs will only represent a part of the total losses. Direct costs are only those insured or estimated to be insured. The greater parts are not insured. What are the expected utilities that the population will utilize? New Orleans is business site of the State of Louisiana’s petroleum infrastructure. LA ranks 5th largest producer of US oil. It is a business center of oil industry players like “BP, Shell Oil, Chevron, and ConocoPhillips.” (ASCE 2007, p.5) Busy ports in New Orleans serve as gateways for USA imports of “ petroleum, steel, copper, rubber, cement, coffee, and containerized goods. The chief exports are grain and other food…Thousands of ocean vessels from Europe, Asia, Latin America move through New Orleans on the Mississippi River every year.” According to ASCE (2007, p. 5) It can be made clear that by just convincing the workers of New Orleans to return to work shortly after making the place resistant to floods and capable of withstanding level 5 hurricanes, benefits will overtake the value of quality reconstructions starting 2016. Considering that the benefits can last for 130 years or more, they should be considered to be overwhelming compared to the cost of reconstruction. This cannot happen if the people are not convinced about returning to New Orleans. A more important group that should be considered are the people working for the productivity of New Orleans, since they are responsible for the creation of wealth coming from that place. Furthermore, it can be shown, by providing the people of New Orleans with better protection against level 5 calamities, the value of benefits that can be gained would reach over $ 1 Trillion even if the interest on savings or profits from potential investments as a result of growth in the wealth are excluded. Thus the immediate investment of $ 32 billion for reconstruction would be dwarfed by the accumulated benefits. Even if such cost of reconstruction is computed to earn at 7%, the cost and benefits will appear as follows: Cost 2007 2008 2009 2012 2013 2014 2015 2016 2017 $32B with 7% Interest 34.24 36.64 39.20 41.95 44.88 48.02 51.38 54.98 58.83 Benefits in $ Billions Yearly added wealth Source= labor w/o Interest $7.9 B $15.8 $23.7 $31.6 $39.5 $47.4 $55.3 $63.2 Table 1 – Cost of Capital versus Labor Productivity It is clear that by just convincing the workers of New Orleans to return to work shortly after making the place resistant to floods and capable of withstanding level 5 hurricanes, benefits will overtake the value of quality reconstructions starting 2016. Considering that the benefits can last for 130 years or more, they should be considered to be overwhelming compared to the cost of reconstruction. This cannot happen if the people are not convinced about returning to New Orleans given the knowledge of having a levee not capable of withstanding a similar level-5 overflow from the sea. What are the advantages and disadvantages of alternative decisions for each of the group of constituents? The national government can compromise the budget and settle for evacuation each time there is a threat coming. But this will definitely convince the people of New Orleans to find a more stable place to live in, since nobody would want to frequently live in a fearful place. The advantage to national government is less disruption for the progress of other States, while the disadvantage would be the dislocation of 400,000 people who had to evacuate and who would most probably prefer not to plan their immediate to long term stay in New Orleans. Thus resources in that part of the USA will become idle for a long time. $ 6 billion to $ 22.8 billion was the benefit identified (Hallegatte, Stephanie 2006, p. 5). This figure excludes social costs or costs arising from unstable social conditions that can cause “political and social unrest” (p.7). It also excludes the value of productivity being generated by 124,000 workers who lost their jobs because of the calamity. Computed annually for the next 130 years, such a value can exceed $ 1 Trillion (124,000 x $63,885 / worker wealth generation per year x 130 years = $ 1.03 Trillion). Certainly, the value generated by the labor force will result in savings which will become capital at some point in time. At some point in time, the $ 32 billion capital can be raised so that the cost can no longer be higher than the earnings from the newly generated capital. It is as though, the principal will be paid in full after some years of labor. The 3 % average growth rate in GDP should likewise be in favor of an increase in the average productivity output per labourer. Although the estimated cost of recovering for future level 5 disasters was identified by the local government to be at $ 32 billion, only $ 14 billion had been spent for the recovery so far. It was difficult to quantify the value of losses other than the actual properties damaged. What appeared clear was the cost and the value of capital that would have to be invested in favor of reconstructing New Orleans with levees that can withstand level 5 flooding. However, what Hallegate, S. and FEMA failed to consider was the actual productivity of American workers who lost their productivity as a result of Hurricane Katrina’s damages and the evacuation. FEMA should also consider building a heavy duty complex building that can serve as a place of refuge for 400,000 people within New Orleans every time there is a forthcoming hurricane. And reconstruction of homes must be regulated in the sense that only those that can withstand a level 5 hurricane may be issued a building permit. Although these will mean substantial investments in the billions of dollars, it can be mathematically proven that such billions can be recovered within less than a decade. The reason is because of the American productivity. Such productivity can be realized with certainty if the entire New Orleans is made strong enough to be a permanent home for all its workers and their families. Benefits will be overwhelming after 10 years as shown in Table 1. Recommendations and Conclusions Executive Summary for the Rebuilding New Orleans FEMA and Congress should be easily convinced by the fact that the benefit of investing even the highest estimate of $ 32 billion for New Orleans reconstruction to a desired standard will be at least $ 1 Trillion in 130 years compared to the cost of capital which will be far below that figure. Such an investment along with the cost of capital can be returned by the labor force productivity long before the 4th decade assuming a $1 billion savings per year, Given the productivity of the American labor force per person per year, as reported by the ILO, this is almost certain to happen. Thus the comparison should be $ 32 billion x (1.07)40 versus over $ 1 Trillion in 130 years. That would be roughly $ 480 billion cost of capital as against more than $ 1 Trillion. Cost of capital can be made to stop by simply paying back the principal utilized after 40 years. The gap will be even much bigger if further savings of $ 1 billion per year starting from the 41st year to the 130th year will be invested to earn at least 7% per year. $ 1 billion x (1.07%)90 = $ 441 billion will be the earnings from $ 1 billion by 2137. 2048 $ 1 billion x (1.07%)89 $ 412 billion Cumulative = $ 853 billion 2049 $ 1 billion x (1.07%)88 $ 385 billion Cumulative = $ 1.2 Trillion 2050 $ 1 billion x (1.07%)87 $ 360 billion Cumulative = $ 1.56 Trillion With each year that New Orleans is able to generate savings of $ 1 billion, the benefits will keep on increasing to prove the big difference of investing whatever it will take to make New Orleans capable of withstanding a level 5, from not investing to meet the desired results of protection against level 5 calamities. And that excludes growth in productivity per worker plus growth in the number of labourers in the region. It is obvious that the government will invest the cost of reconstruction. Therefore, alternative course of action C is not an option at all. Alternative B will not derive the needed decision from families and labourers to establish them in New Orleans and continue to generate productivity there. They will want to relocate and find work elsewhere. The best choice is Alternative A, although completing the project to meet the required specifications for another potential level 5 calamity should be expedited without sacrifice to quality. Social heuristics can be utilized advantageously by praising the Americans in New Orleans for having delivered their share of productivity over the years, and by expressing confidence in their ability to continue with such a performance even after Hurricane Katrina. However, the government should be very willing to invest the needed amount to build more durable levees capable of withstanding level 5 calamities. When the morale of people in New Orleans is revived and the residents are finally protected with a set of durable buildings for their flood-proof and hurricane-proof place of evacuation within the city, aside from the completion of durable and higher levees, their productivity will rise again so that the brighter future will vindicate the power of American labour value over the years. Visual evidence to support the foregoing analysis are shown separately in the last part of this case study. References ASCE (2007). The New Orleans Hurricane Protection System: What Went Wrong and Why. A Report by the American Society of Civil Engineers Hurricane Katrina External Review Panel. Virginia, USA [Online] Retrieved from Hallegatte, S. (2006). A Cost-Benefit Analysis of the New Orleans Flood Protection System. Center for Environmental Sciences and Policy. Stanford University. [Online] Retrieved from http://hal.cirad.fr/docs/00/16/46/28/PDF/Hallegatte_NewOrleans_CBA9.pdf  Klapper, Bradley S. (2007). Study: US Workers Are World’s Most Productive. Asociated Press. Articles Collections Boston.com. September 03, 2007. [Online] Retrieved from Vastag, B., & Rein, L. (2011, May 11). In Louisiana, A Choice Between Two Floods. The Washington Post. Retrieved from  http://www.washingtonpost.com/national/in-louisiana-a-choice-between-two-  floods/2011/05/11/AFrjFotG_story.html Figure 1 – Visual Evidence of Flooded Petroleum Storage Tank Farm ASCE (2007, p.6) Figure 2 – Visual Evidence of Population Drop ASCE (2007, p. 9) Figure 3 – Visual Evidence of a Level 5 Hurricane ASCE (2007, p.14) Figure 4 – Visual Evidence of 80% of New Orleans Flooded ASCE (2007, p. 31) Figure 5 – Visual Evidence of Flood Depth Near Rooftops ASCE (2007, p. 30) Figure 6 - Visual Evidence of Breached Levee ASCE (2007, p. 65) Figure 7 – Visual Evidence of People Evacuating ASCE (2007, p. 44) Read More