U.S. Economy

Harvey Won't Hold Back Houston

The forces that made the Texas city hot are intact. That wasn't the case with New Orleans.

Bright future.

Photographer: Heather Drake/LOOP IMAGES/UIG via Getty Images

The city of Houston has been devastated by flooding. An early estimate from consulting firm CoreLogic says that the economic damage from Hurricane Harvey could reach $40 billion. Fortunately, the loss of life so far seems to be small compared with 2005’s Hurricane Katrina, thanks in part to the brave efforts of city workers and private citizens. But many fear that the city will never be the same.

There’s a precedent for that worry. Even now, a dozen years after Katrina, New Orleans hasn't regained all of the population it lost. Even if it does eventually reach its old population level, the city has undergone permanent economic and demographic changes as a result of the storm.

Even though Harvey wasn’t as devastating as Katrina, there are reasons to think Houston might also suffer permanent damage. There will certainly be calls to shift development away from the floodplain where much of the city rests. As my colleague Justin Fox points out, the city’s sprawling layout makes it more vulnerable to flooding than people had previously realized. Climate change will also lead to more coastal flooding, if it hasn’t already done so, making Houston more vulnerable in the future.

But you should be bullish on Houston’s future. Though new flood protections may alter its geography, the city will rebuild, and will resume the rapid growth that it has enjoyed in recent decades. The economic forces favoring a quick recovery are just too strong.

Economists have spent a lot of time thinking about why cities exist in the first place. Paul Krugman theorized that a city’s prosperity depends on its geographical proximity to other cities, forming a network of trade and specialization. If economic geography dictates that a city be located in a certain spot, there will be a city there -- period.

The clearest -- and most grisly -- demonstration of this principle comes from the atomic bombings of Hiroshima and Nagasaki in Japan. Within 10 years after that horrific destruction, Nagasaki, a key port city and manufacturing center, had returned to its previous population growth trend line. It took Hiroshima about 30 years, but it’s now the eighth largest city in Japan, a thriving industrial and commercial center. In the long run, even nuclear bombs couldn’t overcome the power of economics.

Texas has been one of the U.S.'s great growth stories for at least the past two decades, with big gains in population driven by the energy industry:

Think Big

Texas gross domestic product in 2009 dollars

Source: Federal Reserve Bank of St. Louis

Houston itself has also been growing strongly. For years, Harris County, which includes Houston, had the nation’s fastest-growing population, and before the storm was still No. 2.

According to Krugman’s theory, growth like that is a sign that a city hasn’t yet achieved its full economic potential -- the node it occupies in the system of cities still needs more people. That means there will be no exodus of people or investment dollars from Houston. This is in contrast to New Orleans, whose population had been declining for decades before Katrina hit. New Orleans, according to the theory, was running on the economic momentum of long ago, while Houston hasn’t yet reached its apex.

A second theory of why cities exist has to do with knowledge industries. Smart people living in close proximity form a deep pool of workers for companies to choose from, and employees moving from company to company cause ideas to spread. This theory especially applies to high-technology clusters like Silicon Valley and Austin, Texas.

But although it’s not known as a magnet for the software industry, Houston is a tech cluster too. It is, of course, the center of the U.S. energy industry, which has gone increasingly high-tech in the past few decades. The city probably is home to more engineers than any other in the country. The same pool of skilled employees that sustains Houston’s energy industry makes it appealing to other knowledge-based sectors as well -- machinery manufacturing, chemicals, business and financial services, even information technology.

So Houston’s favorable population trends, key location and concentration of smart workers and knowledge-based industries indicate that it won’t suffer New Orleans’ fate. The city will emerge from Harvey’s devastation stronger than before.

But because Houston is destined to rebound, it’s even more important for the city, the state and the federal government to invest in measures to prevent future floods from wreaking havoc on the millions who live there. That will no doubt be politically difficult. But with the economic future of one of the U.S.’s most important regions at stake, governments have little choice but to spend more and do better planning for the next deluge.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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