Katrina, Cost-Benefit Analysis, and Terrorism--Posner's Response to Comments

The ghost of Congressman Chisolm (who died in January) in an interesting comment states that the rhetoric of cost-benefit analysis "dangerously backgrounds challenging ethical ramifications," by which she means the disproportionate impact of Hurricane Katrina on the poor people (mainly black) of New Orleans. Many poor do not own automobiles and so found it difficult or impossible to comply with the initial evacuation order; later, of course, evacuation became impossible. What this shows, however, is not that cost-benefit analysis ignores the fact that people and groups are different in their access to various resources, but that an evacuation plan that assumed that everyone has a car would flunk a cost-benefit test, because the benefits of providing public transportation for those people would exceed the costs. The City of New Orleans could have had a fleet of buses cruising the city street before the hurricane struck and offering free transportation from the city to people who didn't have a car. Katrina does underscore a point that should be obvious but tends to be neglected: poverty does not mean just having fewer physical goods than the nonpoor. It means living a riskier life, because among the resources that the well to do acquire are resources for protecting one's life and health. It is not correct, as another comment states, that Becker and I think that New Orleans should be abandoned to teach the City a "nasty lesson." The question is simply whether rebuilding is worth the cost. The same question would arise if Beverly Hills was destroyed by a North Korean nuclear missile. Or consider that the World Trade Center is not being rebuilt--is that to teach New York a "nasty lesson"? Another comment suggests that the port of New Orleans should be preserved. That may well be true. The question should be what parts of New Orleans should be preserved (say, the historic districts, for their tourist value, and the port) and how much of a residential hinterland would be required for the persons employed in the preserved areas. Some, undoubtedly, but it should be located on high ground. I certainly agree, by the way, that in comparing the costs of relocating the former New Orleans population elsewhere and rebuilding the city so that they can return, the attachment to place that many people have should be factored in as a cost of the relocation option. I don't want to truncate cost-benefit analysis, but only insist that it has an important role to play in guiding so immense an allocative decision as whether or to what extent to rebuild New Orleans. I agree emphatically with the comment that people's thinking about the abandonment option is fogged by familiar cognitive errors--failing to treat sunk costs as bygones and inability to understand the most elementary statistical theory. So many people think that since New Orleans cost a great deal to become the city it was before the catastrophe, we should pay whatever it takes to restore it; and that now that the hurricane has come and gone, we are not due for another one of comparable magnitude for a long, long time--in fact the probability of another such hurricane tomorrow is the same as the probability of Hurricane Katrina before it was formed. A value of cost-benefit analysis is in combating these cognitive errors. A subtler mistake is to assume that the issue of abandonment can arise only after disaster strikes. In principle, if the expected cost of disaster is great enough, a city should be abandoned before the disaster occurs. Indeed, the case for abandonment could be stronger, because the benefit would include averting the first disaster. Cutting the other way, however, is the fact (related to the sunk-costs point) that once disaster has struck, the cost of recovery becomes another cost of not abandoning, along with the expected cost of a future disaster that would nullify rebuilding efforts.

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