There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights and attempt to make markets more competitive. Most government policies also redistribute income.
Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.
Originally published : fte.org
|“The fury of nature seemed to cause the institutions on which our society is based – those of government, commerce, and civil society – to crumble. First responders appeared overwhelmed as accounts of widespread looting, vandalism, theft, assault, and murder headlined newspapers and as the images of our fellow citizens literally swimming for their lives appeared on television and computer screens. The slow and seemingly inept responses of government at all levels both in preparation for and recovery from the storm infuriated Americans.” (Chamlee-Wright & Rothschild, 1)
The fury of nature followed by the fury of citizens railing at government ineptitude – in this case, the aftermath of Hurricane Katrina – is a disturbingly familiar scenario. The frequency of public dissatisfaction with government response to major disasters raises two important questions for the well-being of our republic: “Is public fury justified?” and, perhaps more importantly, “Is railing at government the best approach to ensuring effective action in the next disaster?” This lesson examines contemporary expectations of government in the wake of disaster and the prevailing assumption that only government is big enough to deal with major disasters by first looking at those tasks that government does well. Then, we will turn our attention to when and why government is unlikely to meet our expectations.
Because human society has shown great resiliency through the ages (See Introduction), we can learn from those instances where it has not. Events like Hurricane Katrina, which spawned the “storm [that] infuriated Americans” referenced above, provide a body of evidence to help us evaluate what government can do when its citizens are struck by disaster. Implicit in asking what government can do is a second question: “What can’t government do?” Also implied is the assumption that government should do only those things it can do well, and should not do those things for which it is, by nature, ill-suited.
Historically in the United States, disaster response and relief has not been considered the responsibility of government, and most especially not the federal government. People caught in natural calamities turned to family and to community organizations like churches and private charities for support. State and local governments readily engaged in rescue operations and the task of re-establishing and enforcing civil order when necessary, but the federal government maintained a hands-off stance until the early 20th century. The 1906 San Francisco earthquake and fire prompted the first-ever federal allocation of disaster aid. Congress appropriated $2.5 million* in disaster aid – a small gesture compared to modern FEMA response – to cover the cost of food, blankets, tents and other relief supplies requisitioned from West coast Army depots. While President Roosevelt telegraphed California Governor Pardee and San Francisco Mayor Schmitz to express concern and offer “assistance,” the assistance consisted mainly of sending Secretary of Commerce Victor Metcalf to the city to keep the White House informed of developments. Tellingly, Roosevelt declined assistance and donations from abroad, saying that the U.S. had sufficient resources, and he directed offers of domestic assistance from such sources as the city governments of Chicago, Boston, New York, and from John D. Rockefeller and Andrew Carnegie to go to the Red Cross rather than to the notoriously corrupt San Francisco city government. (Strupp, 18-23)
From that small initial aid “reimbursement,” the federal role in disaster relief has grown – some would say exponentially. In 1950, Congress gave the President the power to designate “disaster areas.” The designation triggers the availability of federal funds for rebuilding infrastructure and public buildings like schools, courts, libraries, police and fire departments, and other public institutions. In 1969, the Disaster Relief Act made federal aid available to individual citizens. In 1979 President Jimmy Carter issued the executive order that created FEMA, the Federal Emergency Management Administration.
The disasters of the 20th and 21st centuries can be studied as real world experiments, generating data to analyze and evaluate how effective the government is in the growing number of disaster-relief roles it has taken on. We have chosen Hurricane Katrina as the case-study focus of this lesson. (Please see entry in the “Catalogue of Disasters” appendix to the Introduction for background data on Hurricane Katrina.) Katrina may seem unique in our contemporary national experience of major disasters, but in the larger historical perspective, this is true only in the specifics of time and place. The story of inadequate and failed government response has been told and retold, and the anecdotes circulating in the media and on the Internet are disturbingly like those from the last disaster and the one before that. We recognize that the nature and quality of the information to be gleaned from anecdotes varies and that care must be taken when using anecdotes as evidence. To that end, the Katrina stories selected to illustrate points of analysis in this lesson are those we believe to be representative of modern government disaster response and relief.
*(Comparable to $300 million (nominal GDP per capita) or $1 billion (relative share of GDP) in 2006 dollars.) It is worth noting that, to some extent, this aid can be considered a case of the federal government’s hand being forced. The acting commander of the Presidio, Army General Frederick Funston, ordered his troops into the city to begin rescue operations without contacting either his superiors or city officials. Additionally, he requisitioned and distributed supplies from West coast military depots before being given authority to do so. Although he did subsequently gain after-the-fact permission from Secretary of War Taft, the eventual allocation of aid by Congress does have the air of being essentially a “reimbursement” for the expenses he initiated.
PART 1: WHAT GOVERNMENT SHOULD DO
1. The challenge for government in disaster response and relief is determining when it should take a “hands-on” role and become actively involved, and when the goal of recovery is best-served by stepping back in favor of other institutions better suited to the task.
- The rule of rational choice directs decision-makers to choose the alternative with the greatest excess of benefits over costs. This rule applies not only to private decision-makers but also to government decision-makers: Governments should undertake those activities for which the expected benefits outweigh the expected costs.
- There is general agreement among economists that those instances in which the benefits of government action outweigh the costs include:
- maintaining and enforcing the rule of law, and
- providing public goods.
- Economists distinguish between “public goods” and “publicly-provided goods.” Both are paid for by government spending of tax and other revenues. Public goods are those that would not be provided by private firms because they are non-rivalrous (consumption by one person does not diminish consumption by others) and non-exclusive (non-payers, or “free riders” cannot be excluded), making them not profitable. National defense is an example.
- Many other publicly-provided goods might well be profitable for private firms in the absence of government provision, but we have, collectively, made a decision to pay for their production with public funds. Public schooling is an example.
2. As institutionalized in the United States, the basic role of government is to establish and enforce the “rules of the game” by maintaining civil order and the rule of law.
|“The robustness of . . . markets and civil society depends crucially upon the social rules we tend to take for granted – rules of private property, the rule of law, contract enforcement, and basic rights of self-determination. As crucial as these rules are for day-to-day interaction, they are all the more important to ensure in the wake of disaster. [emphasis added]. . . By enforcing property rights and contracts or restraining inflation, for example, governments help to clarify and enforce ‘the rules of the game’ for our daily interactions with one another. When good rules such as these are clear and well-enforced, the signals that emerge in markets and other social interactions tend to be robust and allow the interactions between members of society to be more fruitful and peaceful. Citizens of liberal democracies tend to take these ‘rules of the game’ for granted, but they are vital to our daily interactions and overall well-being.” (Chamlee-Wright, 15-17)
- The immediate benefits of using military and police presence to keep the peace, deter violence, and protect property are quite clear, but it is also important to recognize the long-term benefits of re-establishing civil order.
- By enforcing the rule of law when disaster strikes, government provides a stable foundation of expectations upon which individuals can make choices among the alternatives they face – even, and especially, when their alternatives are limited or undesirable.
- When the rule of law is uncertain and when the rules of the game are inconsistent or subject to constant change, people and businesses delay decisions about whether to leave or return to the disaster area, whether to try to re-establish their businesses or give them up, whether to move back or move away.
- Re-establishing and maintaining the rules of the game stabilizes social institutions like schools and churches that are essential to attracting people and businesses back into disaster-damaged communities
- Restoration of civil order empowers non-government response, through which other institutions begin to re-establish the normal activities of the community.
Disaster preparation has received a lot of attention in the recent past. In fact, people who live in every corner of the world prepare for various disasters such as famine and war. Some of them even prepare for zombies. It is always better to prepare to face disasters as they can hit us at unexpected times. However, it should be done according to a plan. That’s where The Lost Ways comes into play. This guide follows a scientific approach to help people prepare for disasters. In fact, it would let people know about the secret methods followed by the ancestors to survive disasters. They include a variety of disasters such as droughts, diseases, financial crisis, wars, famines and everything else life threw at them. For More Information about The Lost Ways Survival Guide Click Here
- On some occasions, government can help to re-establish the rule of law and civil order by temporarily altering the old rules of the game to fit the needs of the current situation.
- The April 18, 1906, San Francisco earthquake and subsequent fire was one of the greatest natural catastrophes in North American history. (See addendum to Introduction for details of the disaster devastation.)A quick change in the rules of the game by California Governor George Pardee helped to prevent the financial collapse of a major American commercial center.Pardee declared every day between April 18 and June 3, 1906, a legal holiday.Since banks may not operate on legal holidays, he made it possible for businesses to postpone payment dates. His insightful action prevented the financial chaos that might have ensued in the initial panicked realization that most business and banking records had burned up. By June, banks and businesses were able to reconstruct records and reconnect with customers to set accounts right. (Strupp)
- More recently, the federal government’s decision to change the rules of the game in the market for fuel helped to prevent a gasoline crisis in the aftermath of Hurricane Katrina.
- The combined impact of Hurricanes Katrina and Rita was to greatly reduce American oil refining capacity.At the peak of the shutdowns, refineries were processing 5 millions of barrels of oil less per daythan before the storms hit.(For statistics detailing the damage to Gulf Coast production capability, please see the Case Study: “The Gasoline Market Coped with Supply Shock . . .” in Lesson 2.)
- Mercatus analyst Alastair Walling argued that the federal government helped to avert an oil crisis simply by getting out of the way.
WHEN THE GOVERNMENT HANDS-OFF HELPS: AVERTING A KATRINA OIL-CRISIS
|“. . . [W]hile the media fixated on the federal government’s failures, they ignored the quiet successes achieved by the regulatory restraint shown in the wake of the disaster. At both the state and federal level, government waived or relaxed many regulations whose strict upholding would have imposed additional hardship on the people of the Gulf Coast and hindered recovery efforts.. . . Gasoline evaporates easily during the warm summer months and, subsequently, produces more smog. In order to remain compliant with environmental regulations, refineries produce blends of summer gasoline that, although harder to make, evaporate less easily than winter gasoline. As Hurricane Katrina was knocking out refining capacity left and right, previously refined stocks of perfectly good, but at the time illegal, winter gasoline sat waiting. The EPA . . . simply authorized the early use of winter gasoline, which instantly increased the gas supply available to the market.The early release of winter gasoline may not have been enough if inadequate supplies of diesel fuel, combined with increased demand associated with trucking relief supplies to the Gulf Coast, ended up immobilizing the heavy-duty tanker trucks needed to transport it. Worried that a diesel shortage might immobilize transportation, the EPA also lifted restrictions on high-sulfur diesel fuel . . . [used by trucks carrying relief supplies].. . . Refiners design boutique fuels for use in markets that cannot meet federal air quality standards without specialty fuel. These markets may be as small as a single city or as large as most of Southern California . . . . While boutique fuels may produce cleaner air, they have definitely fractured the national market for gasoline. If stocks of a particular boutique fuel run low in its given market, then suppliers cannot simply ship in non-conforming blends from other markets.
|. . . Following Hurricane Katrina, the EPA moved quickly to issue waivers suspending boutique fuel requirements. Not only did this make gasoline fungible again, but it opened the American market to foreign refiners, who usually do not produce EPA-mandated fuels. (Walling, 10-11)
3. A second role for which government institutions are well-suited is providing the public goods that form the infrastructure of a community. In disasters, public goods may include such activities as search-and-rescue operations and evacuation coordination.
- The non-rivalrous, non-exclusive characteristics of true public goods makes them subject to the “free-rider” problem and thus not profitable for private producers.
- Exclusivity, the ability to withhold from people the benefits of a good or service for which they have not paid, is the source of entrepreneurs’ profit and of their incentive to produce. When a good or service is non-exclusive, private firms are unlikely to produce it, because free-riders can benefit without paying the producer. Government, however, can compel payment in the form of taxes.
- The classic example of a true public good is national defense: It is non-rivalrous, meaning that the amount of national defense provided to one citizen does not reduce the amount available to others. And, national defense is non-exclusive; once it has been produced, it cannot be withheld from those “free riders” who choose not to purchase.
- It is also likely that as a practical matter, search and rescue operations are a public good. In principle, one can imagine private search and rescue firms who, for subscription fee, or payment for services rendered, could provide many of the services now provided by the Coast Guard.
- Indeed, when it comes to protection of physical property, many firms offer such services, for example private firms that tow into ports boats that have become disabled at sea.
- But when it comes to the preservation of human lives, it is unlikely to see such services on a widespread scale. Consider the owner of such a firm who receives a rescue call that happens to come from a non-subscriber or from someone who cannot afford the charges. Could the owner really bring himself to let a person die under such circumstances? And even if he could, what would be the legal (or even the public relations) ramifications of doing so? Under such circumstances, many in the community would simply refuse to subscribe, reasoning that they are likely to be rescued in any event. Thus, as with national defense, there appears to be a valid role for the government offering such services, paid for out of mandatory taxes.
News coverage of police and national guard putting their own lives in danger to rescue and protect citizens in the chaos of Hurricane Katrina vividly memorialized the important functions that government performs in times of disaster – and perhaps we need to be reminded of the value of the civil order and stable rule of law that we have the luxury of taking for granted. But we began this lesson with reference to the fury of nature being followed by the fury of citizens at their government’s ineptitude.
PART 2: WHAT WE SHOULD NOT ASK GOVERNMENT TO DO AND WHY
4. Based on the rule of rational choice, government should not undertake in disasters those activities for which the benefits do not outweigh the costs – activities like getting supplies to victims and rebuilding disaster-stricken communities.
- Government’s poor performance in disaster relief is best explained not by reference to venal and/or incompetent officials but instead by the centralized nature of government and the incentives that accompany government decision-making.
- Economic analysis of the dismal record of federal, state, and local agencies in disasters like Hurricane Katrina suggests that part of our disappointment is an inevitable result of expecting government to perform functions for which it is ill-suited. Public choice economists have identified key factors that explain why government cannot – and, perhaps, should not be expected to – perform well the growing list of relief and rebuilding tasks it has been assigned over the last century:
- Centralized institutions like governments cannot efficiently gather, process, and act upon the widely dispersed, localized information that is key to disaster response.
- Government’s difficulty harnessing knowledge is exacerbated by bureaucratic institutional structure.
- Government lacks an effective feedback mechanism for evaluating whether their disaster relief efforts are succeeding in meeting the needs of disaster victims.
- The incentives that face managers and employees in government agencies reduce effectiveness in disaster response.
- Government attempts to shelter people from disaster or to ameliorate their losses afterwards create moral hazards and perverse outcomes.
- Government disaster-relief programs are prone to unintended consequences.
5. Government agencies have difficulty providing for people’s wants and needs in disaster because they are unable to overcome what economist Friedrich von Hayek famously identified as the knowledge problem – that “. . . knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess . . . . “(Hayek, 519-20)
- Centralized disaster response thus faces two significant obstacles:
- The difficulties of gathering and communicating the fragmented, chaotic, and dispersed information from the disaster-stricken area to those responsible for responding
- People who are familiar with the local conditions, needs, and available resources will not be involved in the decision-making. (Hayek, 521-24)
- Economists Russell Sobel and Peter Leeson of the non-profit Mercatus Center at George Mason University illustrate Hayek’s contention that centralized direction cannot overcome the knowledge problem as they describe FEMA relief and recovery efforts after Hurricane Katrina.
FEMA FAILURE – MORE THAN BAD LEADERSHIP
|“. . . Information is fragmented, diverse, and often contained in inarticulate forms, held separately and locally by the many individuals who compose society. . . . [T]he foremost obstacle that every effort at social coordination must overcome is somehow tapping into this dispersed information and processing it in forms that individuals can use to mutually achieve their ends.. . . We argue that natural disaster management is no different in this regard than coordinating individuals in ‘normal’ economic contexts. Following a natural disaster there are ‘relief demanders’ – individuals who desperately need disaster relief supplies, including evacuation, food, shelter, medical attention, etc. On the other side, there are ‘relief suppliers’ – individuals ready and willing to bring their supplies and expertise to bear on the needs of relief demanders. On both sides of this ‘market’ information is decentralized, local, and often inarticulate. Relief demanders know when relief is needed, what they need, and in what quantities, but not necessarily who has the relief supplies they require or how to obtain them. Similarly, relief suppliers know what relief supplies they have and how they can help but may be largely unaware of whether relief is required and, if it is, what is needed, by whom, in what locations and quantities. (pp. 2-3). . . When government substitutes central planning for markets, essential information is generated in an untimely fashion, generated inaccurately, or not generated at all. Because of this, central planning cannot effectively coordinate decision making among numerous and dispersed individuals with different endowments, wants and needs.. . . There is no reason to think that FEMA, or any other government agency charged with FEMA’s task, is immune to the information problem.. . . Our finding that an inability to overcome the information problem is the root cause of government’s failure to effectively manage natural disaster relief casts doubt on recent explanations of FEMA’s failure following Hurricane Katrina. One strand of argument, for example, suggests that an unfortunate succession of ‘bad directors,’ culminating in the leadership of former FEMA director Michael Brown, is the reason for this failure. Our analysis suggests that although incompetent directorship may exacerbate government’s inability to effectively manage natural disasters, it is of subsidiary importance to Hayek’s knowledge problem. . . . Even the most benevolent and effective of directors cannot overcome this problem, which stems from inherent organization of government management, which is centralized.. . . [B]ad leadership does not help, but neither does it explain the core failure of the system. Replacing Stalin with Mother Theresa or Albert Einstein would have been no more help for the Soviet economy than replacing Michael Brown or the current FEMA director with one of these individuals would be.” (Sobel &Leeson, “The Use of Knowledge,” 2, 3, 21-23)
- The United States is one of many economies that have achieved high levels of well-being by choosing not to rely on central planning. We have created a system that incorporates Hayek’s insight – government is inherently incapable (not unwilling) of overcoming the obstacle of dispersed economic information. Logically, we should also recognize that the knowledge problem that restricts government effectiveness in normal times does not disappear in crisis. Instead, it escalates.
- Beyond the obvious difficulties imposed by damage to transportation and communication infrastructure, disasters exacerbate the knowledge problem by further fragmenting information. Additionally, disaster conditions vary considerably from locality to locality, increasing the volume of critical information.
6. Government’s inability to effectively harness knowledge and information is further exacerbated by bureaucratic institutional structure.
- Bureaucratic structures are characterized by detailed procedures, strict protocols, and line-of-command decision-making.
- Nobel laureate Gordon Tullock reasoned that bureaucracy is an effective (some would argue, necessary) mechanism for centrally-directed institutions where people’s choices are not constrained by competition for profit, as they would be in a market.
- One of the problems inherent in carrying out government policies is to organize subordinates so that they will behave as their superiors want them to behave – that is, by contributing to the goal that has been identified through the political process. Bureaucratic structures create incentives for employees to contribute: benefits accrue to those who follow procedures and protocols and costs are borne by those who do not.
- Nobel laureate Gordon Tullock reasoned that bureaucracy is an effective (some would argue, necessary) mechanism for centrally-directed institutions where people’s choices are not constrained by competition for profit, as they would be in a market.
- While the bureaucratic incentive structure may, indeed, be necessary to the functioning of government, it is a cumbersome method of dealing with the knowledge problem and – as was clearly evident during Hurricane Katrina – inevitably slows disaster response.
Some have seen this problem coming for a long time and changed their entire way of life by going off-grid. They have found alternative sources such as solar, wind and diesel to power their homes and machinery. A majority of us, who have not gone off-grid, are making a concerted effort to avoid dependence on this ailing infrastructure and preparing for life without it.