Disaster relief as bad public policy.

Author:Shughart, William F., II

There are classes of problems that free markets simply do not deal with well.

--Thomas Schelling (1)

At first blush, disaster relief belongs to a class of problems ill suited for private-market solution. It seems obvious that coordinated emergency responses on a scale and scope far beyond the capacities of individual actors, charitable organizations, and even local and state governments are indispensable when Mother Nature strikes with the wrath of a Hurricane Camille, Andrew, or Katrina, when levee breeches cause massive flooding of towns and farmland along the upper Mississippi Valley, or when tornadoes and earthquakes shatter lives and wreck property in the blink of an eye. Disaster relief arguably is, in short, something of a public good that would be undersupplied if responsibility for providing it were left in the hands of the private sector. If this line of reasoning is sound, the activity of the Federal Emergency Management Agency (FEMA) or something like it is a proper function of the national government.

But I don't think that it is. A pure public good is both nonrival in consumption (that is, one person can consume the good without reducing the amount available for others to consume) and nonexcludable (that is, access to the good cannot be denied to anyone, including individuals who have not contributed to financing its provision). Weather forecasts (Ewing, Kruse, and Sutter 2007, 319), national defense, and some types of intellectual property qualify by that definition; other examples are difficult to come by. Indeed, the private sector in fact successfully supplied the stereotypical pure public good--the coastal lighthouse (see, for example, Sidgwick 1901, 406)--for decades (Coase 1974).

In this article, I argue that even if disaster relief is thought of as a public good--a form of "social insurance" against fire, flood, earthquake, and other natural catastrophes-it does not follow that government provision is the only or necessarily the best option. Indeed, I show that both economic theory and the historical record point to the conclusion that the public sector predictably fails to supply disaster relief in socially optimal quantities. Moreover, because it facilitates corruption, creates incentives for populating disaster-prone areas, and crowds out self-help and other local means of coping with disaster, government provision of assistance to disaster's victims actually threatens to make matters worse.

Disaster relief is a bad public good for several reasons. First, the immediate task required of first responders is to supply what are essentially private goods. Rescuing survivors from the rooftops of flooded homes and businesses or digging them out of the rubble are rivalrous activities. Everyone in immediate danger cannot be moved to safety simultaneously; when a rescue crew is working to locate survivors at one disaster scene, others necessarily must wait their turns. Emergency-relief supplies, such as drinking water, meals ready to eat, blankets, and temporary housing likewise are fully private goods, whose consumption by one victim reduces the amount available for all. The critical responsibility of first responders to natural disaster is to mobilize and distribute such aid rapidly, but the mass distribution of private goods is not an activity in which government has a distinct comparative advantage.

Second, both the modern theory of property rights (De Alessi 2001) and public-choice reasoning emphasize that governments, like markets, can fail to produce ideal results and, moreover, that government failure occurs not because of differences in the motives of the actors in the public and private sectors--all are assumed to pursue their self-interests rationally--but rather because the institutions that govern collective action differ in important ways from the ones that organize private action. Several implications for disaster preparedness and disaster relief follow directly from recognition of the differences in the incentives and constraints that face private-market participants, on the one hand, and public officials, on the other. The first implication is that the democratic process provides a larger political payoff to new public-works projects and real estate development initiatives than to maintenance of existing infrastructure. The second implication is that the absence of well-defined property rights in the government sphere produces an aversion to risk taking: better for public officials to do nothing than to take actions that in hindsight might expose them to criticism.

Third, disaster relief breeds public corruption. Drawing an analogy to the so-called natural-resource curse or the Dutch disease, Peter Boettke and associates (2007) as well as Peter Leeson and Russell Sobel (2008) argue that the "windfall" of money and other resources that pours into a disaster's impact area, the chaotic atmosphere in which relief is distributed, and the public-relations imperative to be seen "doing something" quickly to alleviate the suffering creates circumstances ripe for corruption and waste. In fact, the evidence suggests that because responses to emergencies typically are conducted with little attention to oversight or personal accountability, other things being equal, public officials are more likely to be indicted and convicted of corruption in disaster-prone states. (2)

Fourth, disaster relief is a bad public good owing to another of its "unintended" consequences. No matter how well meant, the measures taken to provide "relief"--generous injections of public money and in-kind assistance to succor a disaster's victims; commitments to spend billions of tax dollars to rebuild the areas laid waste by Mother Nature; promises of grants, tax breaks, and low-interest loans for property owners, including those who failed to obtain private or federally subsidized hazard insurance; and lawsuits against private insurers aimed at forcing them to pay for losses not explicitly covered by the policies they sold--reduce the cost of living in disaster-prone regions and hence create incentives for individuals and businesses to put themselves in harm's way. Publicly financed disaster relief, in short, creates moral hazard (Pauly 1968), ensuring that the next natural catastrophe will produce more fatalities and more property damage than the previous one did.

In the remainder of this article, I flesh out the foregoing arguments. In doing so, I update and extend my earlier study of the public and private responses to Hurricane Katrina, which slammed into the Gulf of Mexico coast on Monday, August 29, 2005 (Shughart 2006).

Prelude to Disaster

Hurricane Katrina formed in the Bahamas on Thursday, August 25, 2005, and soon thereafter reached Category 3 strength (Ripley 2005b, 56). Two days later storm-surge models run at Louisiana State University's (LSU) Center for the Study of the Public Health Impacts of Hurricanes predicted that Katrina would hit New Orleans hard enough to inundate the city (Ripley 2005b, 56). Indeed, LSU's Katrina simulations generated results eerily similar to those of a training exercise staged by FEMA the previous summer. In that July 2004 drill, "Hurricane Pam," a hypothetical Category 3 storm assumed to make landfall at New Orleans, produced catastrophic flooding (Block, Schatz, and Fields 2005; National Broadcasting Co. [NBC] 2005, 7). Although some of FEMA's own officials and the U.S. Army Corps of Engineers greeted the results of that exercise with skepticism (Block, Schatz, and Fields 2005; NBC 2005, 7), the threat posed by "Pam" (and by Katrina) was all too real.

Because New Orleans lies almost entirely below sea level, the city "is uniquely vulnerable to flooding" (NBC 2005, 3). "Nowhere is [the city] higher than the river's natural bank.... Every drop of rain that falls on New Orleans evaporates or is pumped out" (McPhee 1989, 59). The city went under in 1735 and again in 1785 (McPhee 1989, 33) and 1849 (Barry 1997, 34). Hurricane Betsy flooded 20 percent of New Orleans in 1965 (Thomas 2005a). The city narrowly avoided similar fates in 1973, 1997, and, most famously, 1927, when it was saved at the eleventh hour by levee breaches upriver that diverted rising floodwaters produced by months of heavy rains to low-lying areas farther north (Barry 1997, 257-58, 2005). (3)

FEMA's mock "Hurricane Pam" exercise had not been the first harbinger of the Big Easy's vulnerability. As a matter of fact, "scenarios projecting a major hurricane making landfall near New Orleans have been studied for the last 20 years" (Ewing, Kruse, and Sutter 2007, 315). In 2002, yet another publicly funded study also concluded that a slow-moving Category 3 storm would cause major flooding "in the bowl of New Orleans north of the Mississippi River" (Carrns et al. 2005). Although the 350-mile-long levee system protecting the city had supposedly been designed to withstand storms of that strength, the Corps of Engineers had repeatedly warned state and local officials that soil erosion and subsidence had caused long stretches of the flood barrier to sink as much as three feet below the original grade and that the barrier urgently needed to be "lifted" (Carrns 2005b).

After a last-minute course change caused Katrina to veer east of New Orleans, local officials may have congratulated themselves on being as lucky as they had been in 1988, when Hurricane Georges narrowly missed hitting the city head on, but their luck soon ran out. Pushed by winds between 125 and 140 miles per hour (Pain 2005), Katrina's powerful storm surge caused the first of three major levee breaches, allowing the Mississippi River and Lake Pontchartrain to flood the city. The levee system sprang leaks in dozens of other locations (Carrns 2005a, b). Nearly 80 percent of New Orleans was soon under water, in some places as deep as twenty feet (Carrns et al. 2005).

Although Katrina was on the National Hurricane Center's radar screen for days...

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