Cynthia McCall
Proposal
Case Study
What can Government do when disaster strikes? Looking at Hurricane Katrina.

People respond predictably to positive and negative incentives. 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.
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. 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. 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. (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 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. 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.