September 16, 2005
President Bush has offered a bold-many would say breathtaking-promise to rebuild the devastated Gulf Coast region. That effort will take enormous resources and vision. The President sees private investment, direct assistance to individuals, and sound economics as the basis of recovery. He is correct. But there are also potential dangers with parts of his plan. The huge federal commitment, especially for new infrastructure and programs to reimburse states, could easily be turned by Congress into a vast, bureaucratic, and inefficient vehicle that ends up benefiting many who are not victims of the disaster. That must not be allowed to happen.
Gulf Opportunity Zone
The President rightly calls for the creation of a Gulf Opportunity Zone. That proposal recognizes that the key to both immediate and long-term economic recovery is to spur Americans to invest in the area. History shows that for successful recovery, new enterprises must be the result of investors' visions for the future of the area, not businesses selected by planners to comply with a paper plan.
To generate enterprise and jobs in the Zone, the President calls for tax relief. To be effective, the heart of this tax relief must be a zero capital gains tax for investments made in the Zone. That will spur investors to take business risk in these uncertain times, and the "cost" to the Treasury in lost revenue will only occur on successful investments that add value to the region. Full expensing for tax purposes is also needed to encourage firms in the Zone to purchase new equipment and rebuild facilities.
Just as important, however, the President should call for an Emergency Regulatory Relief Board for the Zone. The Board should identify federal, state, and local regulations that unnecessarily impede redevelopment, from EPA rules that might currently block rebuilding in some areas polluted by the flooding to zoning rules that might prevent a temporary school being opened in a vacant building until new schools are constructed.
For the President's proposed assistance to be effective, emergency spending for rescue, relief, and recovery efforts must be targeted efficiently to individuals and businesses directly affected by the hurricane. As the President emphasized after his Thursday speech, Congress and the Administration must make tough choices on national priorities by paying for the federal share of aid through offsets in other programs. The President must hold the line against an ever-growing demand for more federal money as part of these efforts.
Many of the President's initiatives will involve tremendous amounts of new spending. To date, Congress has passed $63 billion in emergency spending to provide immediate rescue and relief assistance to Katrina's victims. While there are no firm cost estimates, early estimates top $200 billion.
The President did not outline how this relief was to be paid for. He should demand that Congress follow the example of previous Congresses and pay for Katrina's cleanup by redirecting existing spending. Emergency spending for the Northridge, California, earthquake and the Oklahoma City bombing was offset with spending reductions elsewhere in the budget.
Congress should start by redirecting earmarked infrastructure projects in the highway bill. Many of these projects are examples of wasteful pork-barrel spending, but even those projects that are not should be temporarily set aside and directed to the higher national priority of rebuilding the Gulf Coast, as should the many other earmarked projects across the federal budget.
In addition, the $154 billion appropriated for programs identified in the President's budget as ineffective or unable to demonstrate results should be eliminated or reduced and their funding then redirected.
Furthermore, Congress should delay implementation of the Medicare Prescription Drug benefit and retain the existing Medicare Prescription Drug Discount cards that have significantly reduced drug costs for those seniors enrolled in the program.
Housing assistance for displaced families should largely rely on tenant-based assistance that will leverage existing private-sector resources in a cost effective way.
The President's plan for housing has undergone considerable improvement since the first pronouncements in the days immediately following the hurricane. Where shelter was once expected to be provided in the form of portable physical units-notably cruise ships, RVs, and mobile homes-the President is now calling for a rent voucher/certificate program for evacuees. According to the President, "We're providing direct assistance to evacuees that allows them to rent apartments." By using rent vouchers and certificates, the relief effort can take full advantage of the tens of thousands of vacant apartments in the country and provide quality shelter on a flexible and cost-effective basis. And rather than be isolated in remote, hastily arranged trailer parks, evacuees will instead be housed in existing neighborhoods with proximity to schools, jobs, and medical care.
The President has also announced an Urban Homesteading Act that will redeploy existing federally-owned land in the area to facilitate homeownership for some of the returning evacuees. Because these opportunities are to be allocated by lottery, this will likely be a modest program, probably utilizing the existing inventory of foreclosed Federal Housing Administration (FHA) and Veterans Administration (VA) properties in the region.
The mobile homes and cruise ships already leased or purchased in the early days following the hurricane will now be used to house the many relief and reconstruction workers who will need temporary housing close to the damaged cities for many months to come.
Congress should agree to support a voucher-based housing assistance plan that will use the existing stock of privately-owned, vacant rental units for temporary housing. Congress should also support the use of foreclosed FHA and VA properties to create homeownership opportunities for evacuees whose incomes are sufficient to meet the financial responsibilities of homeownership. Congress should avoid making any permanent commitment to the federal construction and ownership of housing units beyond those needed to house transient relief workers.
Programs to rebuild and replace damaged infrastructure should be based on the public-private partnership programs that are being successfully implemented in other states.
As for public infrastructure such as roads, bridges, transit, school buildings and wastewater treatment systems, the President stated that "Federal funds will cover the great majority of costs." Because these costs are likely to be substantial, this could very well be the most expensive component of the federal commitment, particularly if local officials see this as an opportunity to put forward an extensive wish list. The President should reconsider this commitment and foster, where feasible, the creation of public-private partnerships to fund, build, and operate the infrastructure under contract with the public sector.
Another significant and costly commitment the President made is to rebuild the city "better and stronger than before the storm," suggesting a substantial investment in stronger levees, more and bigger pumps, and a rebuilding effort that either fills in the low parts of the city or elevates everything rebuilt in those areas. He and Congress should think carefully about such a commitment. Many experts have noted the risky nature of the New Orleans topography and suggested that certain areas be abandoned as indefensible against nature at an acceptable cost. Given that many of these low-lying areas have suffered extensive damage and will have to be completely rebuilt, careful thought should be given to rebuilding the lost homes and businesses in a safer location and allowing the more disaster-prone areas to revert to parkland or wildlife habitat.
Congress should insist that the affected states, as a condition for federal funding, enact the type of accommodative partnership infrastructure legislation that has been so successful in Virginia and Texas in attracting large sums of private investment money to build roads and bridges and other types of public infrastructure. Congress should also refrain from making any immediate commitment to rebuild the city's storm protection system until a thorough review of options is undertaken to determine the cost and feasibility of securing all of the existing urbanized area from flooding.
An estimated 372,000 students have been displaced in the wake of Hurricane Katrina. Their families now face the challenge of finding schools for them for the 2005-06 school year. In addition, policymakers face the long-term challenge of creating an environment in which quality educational opportunities are available to all students returning to the Gulf Coast.
The President proposed providing federal aid for the students and the local school systems affected by Hurricane Katrina. First, he pledged approximately $2 billion in aid for schools, both public and private, that have taken in displaced students during this transition. In addition, the President alluded to long-term efforts to rebuild school systems in the Gulf Region and called for the creation of an Opportunity Zone for the entire Gulf Region.
The President appropriately recognized the need for student evacuees to have the opportunity to attend any public, private, or charter school available to them. Moreover, the President also took a bold step in calling for an Opportunity Zone for the Gulf Region. This has the promise to bring innovative education reforms to school districts that were not adequately serving students prior to the Hurricane. The President's speech, however, did not provide many specifics about either of these proposals.
Congress should respond to the President's call for $2 billion in education relief by providing Education Smart Cards-$5,000 scholarship grants to pay for enrollment costs at public, private, or charter schools for all affected students.
Congress also should enact a strong Opportunity Zone proposal that includes tax and regulatory relief to increase incentives for quality education service providers to help rebuild schools in affected areas. As a part of the Opportunity Zone initiative, Congress should use existing federal charter school funding to encourage the development of charter schools in Gulf Coast states. In addition, Congress should direct Opportunity Zone oversight personnel to work with state leaders to expand the role of charter schools in Louisiana, Mississippi, and Alabama.
The President briefly mentioned health care coverage, stating that the federal government will reimburse states for the extra expense they face for caring for evacuees. The danger implicit in this open-ended commitment is that states will have little incentive to address these health care needs efficiently, because the tab will be passed to Washington. That, combined with the popular idea of opening up Medicaid to evacuees at federal cost, could lead to a cost explosion. A better response would be to estimate a realistic budget for short-term care and provide the affected states with specific grants to offset those costs.
The President and Congress should go on to focus on steps to address the longer-term needs of those affected by Katrina. The problem is that many of these families have evacuated far from the site of the disaster, and many may not return. Because these families' health insurance coverage is almost certainly tied to employment, the President needs to outline quickly an alternative system of health insurance that will meet the personal needs of displaced individuals and families.
Congress should create emergency medical accounts.These accounts could exist for six months or a year to pay qualified medical expenses, such as for routine medical care and prescription drugs, as well as premiums for current, previous, or new group or individual insurance coverage, or COBRA coverage, regardless of where the insurance plans are domiciled. The accounts would be subject to renewal after six months or a year. Congress should allow the accounts to receive refundable federal health care tax credits, Medicaid, SCHIP, and personal and charitable contributions.
The central feature of a longer-term solution is to createindividual health care tax relief for displaced workers and their families. This tax relief would be in the form of individual, refundable health care tax credits for private health plans of an individual's or family's choice, regardless of where the plans are domiciled. This credit could be assigned directly to the plan in return for reduced or eliminated premiums, and so evacuees would not have to bother with IRS paperwork and those without any tax liability would still get the benefit.
In the absence of a clearly articulated and comprehensive health policy initiative from the President, the danger is that the Congress will simply resort to a massive Medicaid expansion-eligibility for all, regardless of a person's desire to retain private coverage-and thus crowd out previous or existing private health insurance coverage. There is also a danger that Congress will prescribe Medicaid expansions in such a fashion as to prevent the governors of Alabama, Mississippi, and Louisiana from using Medicaid funds in the most efficient and effective way, including the adoption or use of "cash and counseling" programs or consumer-directed care options.
Improving National Response
There is little question that the U.S. needs a greater national capacity to respond to catastrophic disasters that leave state and local resources overwhelmed from the onset.
The President rightly called for a review of the nation's ability to respond to these kinds of challenges. Since September 11, 2001, the overwhelming amount of federal homeland security dollars have been spent on fighting yesterday's battles and doling out money to state and local governments. The federal government needs to focus federal dollars on making all Americans safer by building a national system prepared to respond to catastrophic disaster. The President also rightly called for building a greater capacity in the military to meet these kinds of emergencies. We have a National Guard structured to fight the Cold war, but not to meet 21st century challenges. This does not mean, on the other hand, that we should "federalize" or "militarize" our national response.
The worst thing that the U.S. could do is try to run disaster response out of an office in Washington. Congress can help by demanding that the Pentagon take reorganization of the National Guard seriously and by supporting Secretary Chertoff's proposed reorganization of the Department of Homeland Security. Both would strengthen the nation's means to meet disaster.
Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies, James Jay Carafano, Ph.D., is Senior Research Fellow for Defense and Homeland Security, Alison Acosta Fraser is Director of Economic Policy in the Thomas A. Roe Institute for Economic Policy Studies, Dan Lips is Education Research Analyst, Robert M. Moffit, Ph.D., is the Director of Healthcare for the Center for Health Policy Studies, and Ronald D. Utt, Ph.D., is the Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies.