Commerce and Consumer Protection Implications of Hurricane Katrina

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Major Points of My Testimony

  • Do not impose price controls on food, gasoline, rents,etc.
  • Make all federal assistance to displaced households temporaryand independent of where they choose to live.
  • Allow local property owners and the proximate state and localgovernments to make the key decisions about the restoration andpost-Katrina composition of commerce on the Gulf Coast

Good morning. My thanks for this opportunity to testify aboutthe commerce and consumer protection implications of HurricaneKatrina.

We have all been concerned about the nature and magnitude of thehuman tragedy caused by Hurricane Katrina, but the recovery fromthis tragedy will depend importantly on both what the federalgovernment does and what it does not do.

1. Maybe most important, do not impose any formof rationing or price controls on food, gasoline, rents. etc. Priceincreases following a supply shock serve two important functions:they allocate the available supply of goods to those who value itmost, and they encourage those who own or produce the goods toincrease the available supply. The historical record documents thatprice controls lead to other, less desirable, forms of rationing -by waiting lines, bribery, favoritism, and the substitution oflower quality goods and services.

In the absence of price controls, the price of oil has roughlydoubled since 2002 with little general economic cost. In contrast,the economic effects of the oil shocks of the 1970s were moresevere and lasted longer, primarily due to the extended pricecontrols. The specific increase in the price of gasoline sinceKatrina was due to the temporary reduction of U.S. refiningcapacity by around 10 percent, not to some anti-social action byoil companies and distributors. At that time, I predicted that theprice of gasoline would fall quickly as electric power, employees,and a supply of oil were restored to the refineries. And that iswhat has happened. The national average price of gasoline, forexample, declined by 17 cents a gallon last week, and I expect thatit will continue to decline to the pre-Katrina average price inAugust of $2.50 per gallon, unless supplies are again disrupted byanother hurricane.

Katrina also destroyed several hundred thousand housing unitsthat will take longer to replace. In the meantime, the rents onavailable housing, especially on the Gulf Coast, will increase.Governments should not respond to this conditionby imposing rent controls. Such controls, as with price controls ongasoline, misallocate the available supply and reduce the incentiveto increase the supply. In addition, there is no reason to placethe burden of providing housing for the displaced households on theowners of existing housing.

2. There is a good case, consistent with our natural generosity,to make ample assistance to those households displaced by HurricaneKatrina, and there is ample funding within the $62.5 billionalready approved for such assistance. Such assistance,however, should be temporary, say for a year, and should beindependent of where the displaced households choose to live.Returning to the Gulf Coast, specifically, shouldnot be a condition for receiving suchassistance.

The federal budget cost of a rent voucher for displacedhouseholds, say of $10,000, would be around $6 billion, and thevoucher should be usable anywhere in the country. The budget costof a school voucher for all displaced school children would beabout the same, and the voucher should be usable at either a publicor private school anywhere in the country. President Bush'sproposal for a training and labor voucher of $5,000 per head ofhousehold would cost about half this amount. Such direct assistanceto each displaced households allow them to make their own choicesabout where the combination of available housing, schools, and jobsbest meets their interests. This combination of direct assistancewould be far preferable to the FEMA plan to build massive mobilehome villages on open land on the Gulf Coast -- villages with notrees, stores, schools, churches, or community organizations thatmake a house a home. The total budget cost for this package ofdirect assistance, assuming there are no more than 600,000displaced households that have no home to which to return, shouldbe less than $20 billion. One wonders what activities financed bythe $63.5 billion already approved should have a higher priority.The primary additional measure to protect both the Treasury andconsumers would be to assure that the vouchers are allocated to andused only by the households displaced by Hurricane Katrina.

3. All too often, I hear otherwise thoughtful people questionwhether and how "we" should rebuild New Orleans. My response hasbeen that these questions should not be resolvedby the federal government; no one individual or group here inWashington has either the information or the incentive to make thedecisions that best serve the interests of the Gulf Coastresidents. Nationalizing these decisions would make them unusuallyvulnerable to pleas by special interests for the federal governmentto favor some post-Katrina composition of commerce that does notbest serve the interests of the local residents. Most of the keydecisions about how the Gulf Coast cities should be rebuilt and thepost-Katrina composition of commerce on the Gulf Coast should bemade by the local property owners and by the proximate state andlocal governments.

The primary remaining federal role, other than the assistance tothe displaced households recommended above, should be to rebuildthat part of the local infrastructure for which the federalgovernment has had the historical responsibility. It is importantto avoid any increase in the federal response to Katrina relativeto its prior response to natural disasters. This would create a"moral hazard" problem by increasing the expectation of localresidents and governments about the future federal response. Thiswould reduce their own incentives to make those decisions thatwould avoid or reduce the cost of future natural disasters. It isespecially important for the federal government to avoid financingany rebuilding of private property that was not covered byflood insurance. Although flood insurance is heavily subsidized,many property owners do not buy this insurance, expecting thefederal government to bail them out whether or not they areinsured; this has already led to a decline in the share offlood-prone properties that have flood insurance. One potentialfederal measure that deserves serious consideration would be torequire flood insurance on all properties on which there is amortgage from a federally regulated and insured financialinstitution. But in the meantime, the federal government should notmake this problem worse by financing the rebuilding of privateproperty that was not covered by flood insurance.

On the three above issues, Congress faces a dilemma: thecommendable incentive to be generous to the victims of a naturaldisaster may increase the costs of future disasters, both to thelocal residents and to the U.S. Treasury. As you address thefederal responses to Hurricane Katrina, I encourage you to keepthis in mind.

William A. Niskanen

Subcommittee on Commerce, Trade, and Consumer Protection
Committee on Energy and Commerce
United States House of Representatives