What if it is true that through natural erosion New Orleans is destined to be further below sea level in ninety years? What if 100-foot levees are eventually required to keep it alive? How would we decide now not to rebuild the city - if that were a wise choice?
The easiest case to understand from an economic and political perspective is one in which the loss of acreage to the water is not gradual but occurs in one swoop in 90 years. That is a long time off, and most investments that are profitable now without the threat of the sea (or hurricanes or lakes) will be profitable even if we cut off all revenue streams that are more than 90 years away. If we know that a place will be a ghost town in 90 years, it might still be worthwhile to invest in it today. But as the ghost-town (or the need for hugely expensive levees) scenario comes closer, we face the interesting question of whether to invest in order to maintain the investment that is in place. This is not exactly a sunk-cost fallacy because to abandon a place is to require investment in infrastructure somewhere else in order to move several hundred thousand people (which is to say the number that will be living in the place that must be evacuated or shored up). There will also be sympathy for the place that can be saved, as well as the culture and history contained there. And the taxpayers who will likely be called on to shore up the place with yet larger and larger levees will be dispersed and poorly organized to combat the claim of the organized interests who will need saving.
If we spend $50 billion or $250 billion (two current proposals) in federal money now in order to recreate New Orleans, it is therefore likely that we are dooming future generations to invest much more in order to sustain that city-below-the-sea. Harsh as it seems, there is something to be said for requiring the taxpayers who want to live in a future ghost-town to pay for the infrastructure that they require. And if we have sympathy for those whose city was washed away by Katrina, then perhaps we ought to give them money but let them choose where to live. We should not pay them to live where they will need a future bailout - and yet at the same time if we let them take the money and run we may miss the opportunity to re-create a city where it is in fact efficient or otherwise desirable to have one.
It is difficult to to do a cost-benefit analysis as to where cities ought to be. And given the imperfections of the political market, and the short-term horizon of politicians, it is not obvious that any institution is well situated to inform us as to which cities are worth building with public money. My intuition is that the federal government ought to help rebuild New Orleans in a manner that aims to support and house 100,000 (rather than 450,000) people. If more people want to live there, they will need to tax themselves in order to create the necessary infrastructure. Indeed, I plan to argue in a future paper that we probably need to impose a special tax on residents in order to set aside funds for the 90-year event (or for precautions to prevent that disaster). In the best of all free-market worlds, the private market and local governments would bring about this re-created city on its own (if it were desired), but the reality of local and state politics makes such a free market solution unlikely. A modest (but high quality) rebuilding might satisfy political interests, and set the stage for something of a natural economic evolution.