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How Government Can Help the Economy Recover From Sandy

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Nov. 5 (Bloomberg) -- If natural disasters such as Hurricane Sandy are becoming more frequent, and their aftermaths more expensive, then the federal response needs to become more dynamic. Especially in fostering economic recovery, there’s more the U.S. government can do.

Some steps are small and obvious, yet still valuable. Barack Obama’s administration, to its credit, has made progress in cutting disaster-relief red tape, for example. Still, the patchwork of application requirements and eligibility criteria businesses must sort through to receive aid can be further streamlined and made more consistent across agencies.

It may also make sense to designate one federal agency as responsible for economic disaster relief. Whatever agency takes the lead (a report from the International Economic Development Council recommends the Department of Commerce’s Economic Development Administration) should have a consistent, dedicated level of money on hand to respond to disasters. The IEDC suggests $100 million. This would free up cash quickly and help insulate economic disaster relief from political manipulation.

Fed’s Role

In terms of monetary policy, a study by the Federal Reserve Bank of St. Louis found that in most cases, the central bank should actually increase its nominal interest-rate target after a natural disaster. When a catastrophe destroys capital and decreases production, companies typically respond by increasing prices and hiring more workers. This leads to a period of low output and higher than expected employment and inflation, which would normally warrant higher interest rates.

Given that the inflation rate remains low and unemployment remains persistently high, that would be counterproductive at the moment. But the Fed shouldn’t expand its quantitative easing program beyond what it has already announced or resort to more exotic monetary policy -- such as buying municipal bonds on a large scale -- in response to this natural disaster.

Fiscal policy, prudently applied, is far better suited for such targeted stimulus. The federal government already has tools it can use to jump-start ailing local economies and businesses, including tax incentives to encourage reinvestment and low-interest or forgivable loans to spur hiring and investment. Gap financing, wage subsidies and retraining programs for small businesses should also be priorities.

And given budgetary realities, private investment should be part of any solution. One approach, tried with success in the past, is for Congress to approve federal tax-exempt disaster bonds to help states, cities and businesses deal with the daunting costs.

Such bonds help finance public works without increasing government debt, because a private entity -- often a consortium of companies -- holds or backs the debt. They’re structured as private-activity bonds, meaning they’re issued by a municipal authority (such as the Port Authority of New York and New Jersey) on behalf of a private entity working on a qualified project (such as improvements to electrical facilities and water-treatment plants).

Similar bonds were used in previous disaster-recovery efforts, such as after Hurricane Ike in 2008. The drawback is that they require congressional authorization -- at a time when Congress seems unable or unwilling to do much of anything -- and the issuance can take months or years. Putting in place a predictable bond-issuance system that states and cities know they will be able to rely on quickly in an emergency would be a valuable service.

Private Power

Public-private partnerships are also especially useful in economic disaster relief. These are generally agreements between governments and companies to finance civic projects such as airports and toll roads. A company builds, owns and operates a new piece of infrastructure, such as the Chicago Skyway toll bridge, and the government typically provides tax-exempt status and makes lease or other payments. Twenty-four states have undertaken public-private transportation projects, according to the Brookings Institution.

To make such partnerships ubiquitous will require that states enact laws clarifying how they should work, including procurement terms, and ensure the projects are transparent and fair.

The federal government’s role in helping a region’s economy recover from disaster is by definition limited. Sandy, for example, may have caused more than $50 billion in damage and could shave half a percentage point off U.S. growth for the current quarter. Countless small businesses won’t be able to survive.

That said, there’s a lot the government can do to make its response more forceful and its policies more consistent.

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