Nearly five years after Katrina and the devastating failures of the levee system, New Orleans is well on its way to getting the protection system Congress ordered: a ring of 350 miles of linked levees, flood walls, gates and pumps that surrounds the city and should defend it against the kind of flooding that in any given year has a 1 percent chance of occurring.
The scale of the nearly $15 billion project, which is not due to be completed until the beginning of next year’s hurricane season, brings to mind an earlier age when the nation built huge works like the Brooklyn Bridge, the Hoover Dam and the Interstate highway system.
I'm sure to get in trouble here, but here goes:
According to the National Hurricane Center [PDF], about 1300 lives were lost as a direct result of flooding in Louisiana. Valuing these lives at $7 million each leads to a social cost of $9.1 million. If there is a 1% chance of another hurricane Katrina each year then the expected value of the social cost is $91 million.
The NHC also reports that property damages in the U.S. totaled $81 billion as a result of Katrina (roughly double the insured property losses). Assuming that all of the property damages would be avoided by the levees, an overestimate, and an annual 1 percent chance gives an expected value of $810 million.
The total annual expected benefits would be $901 million. Since the $15 billion is an upfront cost, it should be compared to the avoided social cost over time. Discounting by 3.5% for a 30 year life of the levees leads to a present value of benefits (avoid social cost) of $16.57 billion, just over the costs. The net present value is $1.57 billion and the benefit-cost ratio is 1.1.
My guess is that if the property damages are scaled back to cover only NOLA then the result is less optimistic. Of course, if social benefits that would be enjoyed by the rest of the country from category 5 levees are included then the result would be much more optimistic (a benefit-cost ratio of about 1.8 holding constant damage costs).
Three questions: Did I make any errors of assumption, omission or commission?