The reconstruction of the Gulf Coast in the wake of Hurricane Katrina is a forgone conclusion. The question is not will the region be rebuilt; the question is how – and what role the government will play. We know which policies are likely to work best for, as Milton Friedman famously observed, the lesson of the 20th century is that markets work.
The resources are there for successful reconstruction—the challenge is using them effectively. The federal government has already committed to spending an amount equal to $40,000 per victim; the final tab will likely be triple that. Policymakers must craft policies that spur the entrepreneurial spirit and the human capacity for innovative problem solving while minimizing the ability of government to erect roadblocks made of red tape.
The nation has a unique opportunity to create a Liberty Zone that will return us to free market first principles and demonstrate the power of individual liberty to achieve economic success. Direct government intervention is no substitute for policies that limit government and empower individuals.
What will those policies look like?
The imperative for the physical rebuilding will be encouragement of private ownership, which we know works, rather than the moral hazards of public ownership, which badly exacerbated the hurricane’s impact. Developers and insurance companies will buy folks out and redevelop the area in an economically rational manner. The levees themselves will be locally owned and controlled, ensuring that they are maintained by people who have a vital interest in their soundness—they are too important to entrust to Washington bureaucrats.
Federal flood insurance will be phased out or privatized, discouraging irrational building in areas where the true risks, as priced by private insurance markets, are too great. This will lead to a rational redevelopment of the region that will dramatically improve safety and end the irrational practice of subsidizing the very rich and their beachfront homes.
Individuals will be empowered with smart cards or vouchers for all vital government services, especially health care. The health care cards will be linked to health savings accounts for purchasing insurance, creating a consumer-driven universal coverage system.
We propose transforming the Hurricane Zone into the Liberty Zone, where the policy mix will pare back the tentacles of Leviathan and allow the full creative force of individual initiative to restore the region.
In the Liberty Zone there will be a fresh look at all federal regulations, suspending them by default unless they can be justified by cost-benefit analysis. Justifiable regulations will be implemented only through market-based mechanisms, not command and control. We will stop taxing capital gains and allow businesses to immediately expense their capital purchases. We will suspend all tariffs on imports to the zone, reducing the cost of materials and allowing the benefits of free trade to drive the reconstruction process forward.
The possibilities are limited only by the scope of our imagination. The guiding principle is the empowerment of individuals, whose new ideas will leave big government bureaucracy behind. Unfortunately, calls for tax relief to spur redevelopment are already being co-opted by every special interest in Washington. The government does a notoriously poor job of picking winners and losers.
What’s needed is genuine, across-the-board tax relief as part of the policy mix. Along with complete suspension of all taxes on capital to encourage investment, the individual income tax for those who actually live in the Liberty Zone year-round should have a substantial rate reduction or outright suspension as well. This will encourage the large-scale return of human capital—that is, people—to the region. It’s critical that all of the tax and regulatory relief included in the package be neutral, avoiding special interest subsidies and tax breaks that substitute government whim for market rationality.
If we are bold and pursue this agenda based on the principles of free enterprise, we will transform a region now suffering incredible hardship into an engine of prosperity, an example to the nation and the world that freedom works.