September 16, 2005, 10:02 a.m.
Unleash a Liberty Zone
What Bush’s “opportunity zone” should look like.

By Mallory Factor

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. The resources are there for successful reconstruction, but the challenge is to use them effectively.

The federal government has already committed to spending an amount equal to $40,000 per victim; the final tab will likely triple that. But as Milton Friedman famously observed, the lesson of the 20th century is that markets work. 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.

Direct government intervention is no substitute for policies that limit government and empower individuals. In his address to the nation on Thursday night, President Bush suggested the promising concept of turning the area impacted by Katrina into an “opportunity zone.” If we have learned anything from this natural disaster, it’s that more central planning and greater federal control only help to make matters worse. Bush’s opportunity zone, if it is to succeed, must be a Liberty Zone, where limited government unleashes the power of individual initiative.

What should the zone look like? Lawmakers have a unique opportunity to return us to free-market first principles and demonstrate the power of individual liberty to achieve economic success. The physical rebuilding of the Gulf Coast should encourage private ownership, which we know works, rather than public ownership, which badly exacerbated the hurricane’s impact in the first place.

Developers and insurance companies are the ones who should buy folks out and redevelop the area in an economically rational manner. As for the levees, they are too important to entrust to Washington bureaucrats. Instead they should be locally owned and controlled, ensuring that they are maintained by people who have a vital interest in their soundness.

Federal flood insurance should be phased out or privatized, discouraging irrational building in areas where the true risks, as priced by private insurance markets, are too great. This would lead to a rational redevelopment of the region that would dramatically improve safety and end the irrational practice of subsidizing the very rich and their beachfront homes.

Individuals, meanwhile, should be empowered with smart cards or vouchers for all vital government services, especially health care. Such cards should be linked to health savings accounts for purchasing insurance, which would create a consumer-driven universal coverage system.

In other words, the Hurricane Zone should be transformed into a true 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.

A Liberty Zone would suspend federal regulations by default unless they can be justified by cost-benefit analysis. Justifiable regulations should be implemented only through market-based mechanisms, not command and control. In such a zone, we should stop taxing capital gains and allow businesses to immediately expense their capital purchases. We should 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 should be the empowerment of individuals, whose new ideas would leave big-government bureaucracy behind.

Unfortunately, calls for tax relief to spur redevelopment in the region are already being co-opted by every special interest in Washington. As 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 afflicted areas year-round should feature substantial rate reduction or be suspended outright. This would encourage the large-scale return of human capital — that is, people — to the region. It is critical that all of the tax and regulatory relief included in the recovery package be neutral, avoiding special-interest subsidies and tax breaks that substitute government whim for market rationality.

If we are bold and pursue an agenda based on the principles of free enterprise, we will transform a region now suffering incredible hardship into an engine of prosperity — into a Liberty Zone that will show the world just how freedom works.

— Mallory Factor is chairman of the Free Enterprise Fund.

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