EDITORIAL:   Rebuilding the Gulf Economy

First editorial in a series

November 2005

By Chris Engle, Vice President

AngelouEconomics

As the world watches in anguish the devastation of hurricanes on the Gulf Coast, we naturally seek to find ways to assist our fellow citizens with rebuilding their lives. As economic development practitioners, we are each reviewing our best playbooks for initiatives that have helped other distressed areas recreate themselves.

First, consider the recent estimates on the economic impact of Hurricane Rita and Katrina on the Gulf. While the full numerical effects will be revised, early estimates show a loss of over 500,000 jobs due to the hurricanes. This translates to over 1.25 million people in families that have been directly affected by job losses due to the hurricane (on average each worker supports 1.5 additional non-worker adults or kids). With each month that passes, over $3 billion in unearned wages are permanently lost.

Consider the toll on personal wealth by the losses in New Orleans' housing stock: Officials estimate that of the city's 180,000 homes, 110,000 were flooded, a majority in 6 feet of water for days and sometimes weeks. As many as 50,000 homes will need to be demolished. Lack of adequate housing will prevent most individuals from rebuilding their lives and recovering their jobs. Many of these individuals will face life-changing financial losses. Less than half of homes were without flood insurance according to the Insurance Information Institute. In total, an estimated $250 billion in property and infrastructure damages have occurred due to the combined effects of Hurricanes Rita and Katrina.

While stabilizing communities and re-establishing basic services will dominate government efforts in the short-term, officials will be faced long-term with the daunting task of rebuilding a shattered economy.

What will economic development efforts look like during the rebuilding efforts? Beyond direct payments to displaced families and infrastructure reconstruction projects, long-term efforts will focus on financial incentives to spur new investment.

Early federal efforts have focused on providing immediate tax relief to affected families and businesses, including broader personal tax deductions, tax-free IRA withdrawals, and broader deductions for donations to charities. Employers will be offered expanded tax credits for hiring employees, and long-term, Congress is expected to pass additional legislation expanding deductions for equipment purchases and offering bridge loans and grants to small businesses.

From the states, anticipate some level of business tax relief in the short-term. However, shrinking tax revenues will require a new strategy for funding economic development. Louisiana will have to slash $1 billion from its budget for the next 8 months due to loss of tax revenue according to state budget forecasters. New investment incentives will be difficult to create, but the goal of inducing companies to stay in the Gulf and attracting new companies from other parts of the country should take a high priority. Like any targeted incentive program, efforts should focus on industries that are deeply rooted in the region such as energy, manufacturing, and transportation sectors so that future investments will not be incentives-based. Building a foundation in new industries in the region will also be an important component to long-term recovery. Several states are already planning for an “image” rebuilding campaign (with EDA assistance). States should consider providing a tax-free (or near tax-free) environment from state and local taxes to targeted industries to maximize any new image and marketing campaigns. Consider how compelling the story would be if Louisiana could create the country’s “most competitive business climate” through new-era tax and incentives policies. This would surely change the perceptions and location decisions of companies.

Future efforts will also need to focus on creating an environment that serves the needs of high-impact (primary) employers. The creation of new industrial parks for the retention of local companies should take a high priority. New worker retraining programs will need to be created to place the vast numbers of displaced workers in new jobs, in new industries. New small business support programs could set the standard for entrepreneurship-based economic development. Neighborhood development could bring new concepts in work-live-play that cater to the “creative class” and provide greater equity across racial and income barriers.

The November Editorial provides the the first in a series of articles. AngelouEconomics will continue to monitor the rebuilding effort in the Gulf Coast region and provide you with new articles and commentary on the very issues of how economic development planning can be applied to this unique situation:

• The role of industrial parks in rebuilding the manufacturing economy
• How natural disaster risk-assessment has changed the site selection process for companies
• New state and local incentives that will most entice new development
• Target industries for a future vibrant Gulf Coast, and how to market successfully to them
• Retraining best practices from other economies in transition

We look forward to an ongoing discussion of these issues with you. Please feel free to email AngelouEconomics with your ideas, suggestions, or requests.