"... I received a note from Tjalling Koopmans asking whether I had really said that if Manhattan was bombed, the best way to evacuate the population would be to use the price system. I was taken aback by his letter, because I had not even thought of that problem. But I told Tjalling that the first time Manhattan was bombed any system of would be grotesquely confused and inefficient. If the bombings became repetitive, however, I thought the price system could handle the problem well. The first half of my answer was surely correct, and I believe now even more than I did then in the market system's flexibility, adaptability, and resourcefulness in finding new ways to make money." George J. Stigler, from Memoirs of an Unregulated Economist (Basic Books, 1985), p. 61.
Why FEMA Fails
(This is an extended version of my October 30, 2012 article "The Free Market Can Do a Better Job" in The New York Times)
As a survivor of Hurricane Hugo, I know the pain and devastation brought on by a major disaster, and what it's like to wake up to trees that have fallen into your house, leaving gaping holes in your roof. What disasters cause is, quite simply, a huge increase in the need (or in economist lingo, "consumer demand") for goods and services. The important question is: What is the best way to get the most help to those who need it? After a disaster, there is a great need to harness the power of ingenuity and entrepreneurship. There is a need for more people to do more things--produce more things, supply more things--a need for individuals to be entrepreneurial. After Hurricane Hugo, a man from the next neighborhood over was using a chain saw he owned and some old plywood from his garage to fix some of the fallen trees around our part of town with his son. They drove around and offered to take down the tree that had fallen into your house and put plywood over the hole for $100 cash. He said he was doing it to earn the money to buy a generator for him and his family, and his son was helping him to earn extra money to buy a new bike--his bike had been destroyed in the storm. Neither he nor his son were licensed contractors or tree removal services. They had no business license and worked for cash. They were probably breaking every license law, business code, and perhaps even child labor laws as the son looked to be 15, but when they finished, sure enough the tree was gone, and rain was no longer pouring into the house through the gaping hole in the roof. It was a necessary first step to prevent further damage to the inside of the house, and it would last until the weeks passed, insurance was processed, and the long wait was over to get a real contractor to come do the real repairs and replace the roof.
Along major highways there were people who had taken days off work without pay from neighboring states, rented U-Hauls, purchased supplies from their towns and drove them in to the area selling these goods on the side of the road. There were dozens of such individuals on every mile of the road, stiffly competing for business. The prices were higher than before the storm, but certainly not any one of them could try to set a price outside of what the current market supply and demand dictated. There were also people in town whose place of employment was shut down, and who were working around town to provide goods and services to earn money. A true display of American entrepreneurship at its finest. There were some neighborhoods in town where these entrepreneurial individuals wouldn't go, because if they did they would be mugged, their goods would have been stolen or looted--there was not sufficient police protection, nor rule of law in those areas. Even in our area of town we were somewhat worried about looters, especially at night, and I was glad some of our neighbors had guns to protect our neighborhood. What we needed was the government to step in and do a better job of protecting the life, liberty, and property of citizens in the wake of the disaster--a point I will return to later.
Not long after the storm, the government began to crack down--price controls, licensed contractors putting up a fuss about having to compete with people who were charging lower prices and not officially government licensed. The result--these enterprising entrepreneurial individuals disappeared. It now took weeks to get someone to come out and help repair damage to your house, there were now long lines for the few goods and services that did come into town at the price-controlled prices. One neighbor who needed ice to keep her insulin cold, who was previously able to find it easily prior to the price controls, could simply no longer find any at the price controlled prices. Unanswered letters and calls to politicians couldn't even get her the ice she needed. Put simply, at $10 a bag prior to the price controls you could find ice when you needed it, but after the price controls you couldn't find it. Higher prices not only gave us the incentive not to throw keg parties with the limited amount of ice around, but also brought more ice into town. Price controlled prices destroyed both of these incentives.
Do people like these help or hurt in the process of disaster recovery? Should governments help to make more or less of this activity possible after disasters? As an economist, I know the power of freedom, entrepreneurship, markets, and also understand the role of the price (and profit/loss) system in allocating resources. While calling for more freedom and use of markets after disasters may sound at odds with popular opinion, here's a video showing three Nobel Prize-winning economists agreeing with this view.
After each major disaster, FEMA is criticized as having major failures at getting the goods and services into areas that people need. This was not only true after Hurricane Katrina, but also after Hurricanes Hugo and Andrew, as well as the Northridge earthquakes. While some hope that FEMA reforms will improve disaster response, centuries of economics research suggest otherwise. Put simply, if FEMA insists on attempting to continue to both monopolize and centrally plan the economy (the goods and services supply process) of disaster areas, by inserting itself as a bottleneck through which suppliers and demanders must get permission, it is bound to fail. Economists from Adam Smith to Nobel laureates Friedrich Hayek and Milton Friedman have stressed the inherent problems in central planning. After Hurricane Katrina, rather than promoting the type of entrepreneurial activity outlined above--they actively shut it down.
FEMA's command and control
approach requires that both demands for relief and offers of supply be
communicated first to the agency for approval and allocation. Private
individuals and local governments who attempted to circumvent this process
quickly found that FEMA would not allow it after Katrina. As Louisiana
Gov. Kathleen Blanco complained, "No one ... even those at the highest level,
seems to be able to break through the bureaucracy." FEMA turned away generators
needed by hospitals, refused Amtrak's offer to evacuate victims, and wouldn't
return calls from the American Bus Association. Sheriff Dennis Randle of Carroll
County, Indiana, who had a team ready to help, was never able to navigate FEMA's
approval process to enter New Orleans. FEMA failures caused millions of pounds
of ice to be shipped mistakenly to Maine and Arizona, and firefighters and
rescue squads to be sent to areas where they were of little help. A mobile
communications unit with a chartered private plane sat in Germany for nine days
because FEMA didn't return its calls. FEMA confiscated medical supplies for
Methodist Hospital and fuel purchased by Jefferson Parish, and even prevented
the Red Cross from entering New Orleans. The day before Katrina, Coca-Cola
needed no permission to deliver Dasani bottled water to New Orleans, so why
would anyone want to erect hurdles preventing those deliveries when they were
Compare this to the private sector response to Katrina. Weeks before the storm, Home Depot transferred generators, flashlights, batteries and lumber to its distribution centers near the strike area. Phone companies readied mobile cell towers and sent in generators and fuel. Insurers flew in special teams and set up claim-processing hotlines. Wal-Mart's incredible response had even its staunchest critics praising the company. Decentralized, market-based institutions utilize information and respond in a way that a centralized government planning agency simply can't. FEMA stood in the way of enterprising individuals and companies who wanted to help bring the needed goods and services into the area. For a detailed account of these FEMA failures after Hurricane Katrina see my academic article here, or the more accessible policy version here.
Central planning as a means to allocate resources has failed across the globe. Fixing disaster relief is simple—greater use of decentralized markets, and focusing government on its proper role. Government best supports the market system in normal times by providing law and order, contract enforcement, and major public works projects (infrastructure). The proper role of government after disasters is no different.
Government disaster response should focus on: (1) restoring law and order—protecting the life and property of citizens, and enforcing contracts and liability laws; (2) providing emergency and rescue services; (3) and quickly restoring infrastructure to open the channels of trade. A FEMA that established free trade zones, in which all normal regulations, licensing, and taxes are suspended, but buyers and sellers felt secure and protected would better provide the goods and services victims need. This isn't anarchy, all normal contract and legal liability rules are enforced, people can't promise things and not live up to them or sell things that are harmful or dangerous to others. FEMA should be able to provide whatever it wants, but it should not be able to stand in the way of others providing things too. If people want, they can wait on FEMA or other help. But the victims of disasters shouldn't be actively prevented by their government form being able to contract with other private individuals for the goods and services they need, nor should entrepreneurial, enterprising Americans who want to help be actively prevented by their government from being able to offer help or to supply goods and services. By no means should individuals be forced to participate in anything. If you didn't want to go to into a free trade zone to buy ice you don't have to, but you should be allowed to if you want. After disasters, government needs to quickly repair major infrastructure, roads, bridges, etc., that allow for trade to occur--open the channels of trade. These policies EXPAND the options available to disaster victims, and EXPAND the resources flowing into the disaster areas. At a minimum any meaningful FEMA reform would make it impossible for FEMA to confiscate private property or prevent private relief suppliers from entering disaster zones.
While the trading floor of the Chicago Board of Trade, which coordinates millions of commodity exchanges a day, seems chaotic, it works to connect buyers in need with sellers who can supply. FEMA renting and employing the normal private resources of a trading floor could do more to coordinate relief efforts than FEMA internal command and control can. Such decentralized market mechanisms simply work better to make the best use of widely-dispersed local knowledge in the economy. Who around the country has the extra supplies that are needed? Where in the disaster area are they needed to be employed? These types of questions simply cannot be solved by a centrally planned government agency. The great weakness of central planning is its inability to respond quickly and adapt to changes and unforeseen circumstances. No centralized authority, no matter how well-intentioned its employees and well-functioning its internal operations, can overcome this problem. According to Nobel laureate F.A. Hayek "If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization."
In addition to private for-profit activities, the private non-profit sector should be allowed to play a greater role too. After Katrina the American Red Cross, and dozens of other non-profit providers were prevented from entering the disaster area by FEMA. But private non-profits, such as churches and other relief organizations simply deliver relief more effectively and should be allowed to do so as well. Again the claim here is that FEMA should not restrict these activities. FEMA is welcome to help as well, just not deter from the process in which enterprising and hard-working Americans want to help each other through voluntary, mutually-beneficial exchange.
Government should stick to what it does best, and creating a distribution network overnight superior to Wal-Mart’s isn’t it. After a disaster, government is and must be a productive and important part of the process—just as it is everyday in our economy—by ensuring the presence of the two things decentralized markets need to work effectively: unregulated prices and secure property rights.
During the years in which standing presidents are up for reelection, there are way more disasters declared. Is this coincidence or presidential politics? See my articles below...
Massive inflows of FEMA funding lead to increased corruption convictions for public officials and government employees. Coincidence? See my articles below...
For more information see my academic articles on FEMA:
Sobel, Russell S. and Peter T. Leeson. "The Use of Knowledge in Natural Disaster Relief Management." The Independent Review 11, No. 4 (Spring 2007), pp. 519-532. [Reprinted as Chapter 3 in Emily Chamlee Wright and Virgil Henry Storr (eds.), The Political Economy of Hurricane Katrina and Community Rebound. Cheltenham, UK: Edward Elgar, 2010.]. A more policy accessible version is available here: Sobel, Russell S. and Peter T. Leeson. "Flirting with Disaster: The Inherent Problems with FEMA." Cato Policy Analysis No. 573, July 19, 2006.
Sobel, Russell S. and Peter T. Leeson, "Government's Response to Hurricane Katrina: A Public Choice Analysis." Public Choice 127, No. 1/2 (April 2006), pp. 55-73.
Thomas A. Garrett and Russell S. Sobel. "The Political Economy of FEMA Disaster Payments." Economic Inquiry 41, No. 3 (July 2003): 496-509. [Topic of The New York Times article "Disaster Aid: The Mix Of Mercy and Politics" (November 2, 2003, Section 4; Page 1) and The New York Times article "At FEMA, Disasters and Politics Go Hand in Hand" by Alan B. Krueger (September 15, 2005, Section C; Page 2). Story and live interview also appeared on CNBC's "Closing Bell" at 4:00 p.m. on September 15, 2005].
Leeson, Peter T., and Russell S. Sobel, "Weathering Corruption," Journal of Law and Economics 51, No. 4 (November 2008): 667-681. [This paper was the topic of an article in The Economist magazine entitled "Blame the Weather" (Vol. 380, No. 8493; September 2, 2006, page 28.), of CSPAN2's "Today in Washington" broadcast (August 23, 2006, 9:30-11am), personal interview and appearance on CBS Evening News (September 1, 2006, 6:30-7pm), and was also of articles that appeared in many newspapers including the Washington Post, National Review, and Houston Chronicle.]
Sobel, Russell S., Christopher J. Coyne, and Peter T. Leeson, "The Political Economy of FEMA: Did Reorganization Matter?" Journal of Public Finance and Public Choice 17, No. 2/3 (2007), pp. 49-65.
Boettke, Peter, Emily Chamlee-Wright, Peter Gordon, Sanford Ikeda, Peter Leeson and Russell Sobel, "The Political, Economic, and Social Aspects of Katrina," Southern Economic Journal 74, No. 2 (October 2007), pp. 363-376.
|CBS Evening News (9/1/06)||CNBC Closing Bell (9/15/05)||CSPAN2 Today in Washington (8/23/06)|
I was interviewed for the CBS Evening News for a story on FEMA that was broadcast during their 6:30pm evening news on Friday, September 1, 2006, CNBC's "Closing Bell" at 4:00 p.m. on September 15, 2005, and at the National Press Club as part of their Newsmaker Media Briefing series (carried live on CSPAN2's "Today in Washington" on August 23, 2006 from 9:30-11am, and also rebroadcast that evening at 9pm).
Stories about my FEMA research have been picked up by several media outlets
including the Washington Post, The Economist Magazine, New York
Times, Worth Magazine,
The Philadelphia Inquirer, National Review, Mobile Alabama
Press-Register, Houston Chronicle, The Epoch Times, the American Urban Radio
Network, Delaware News Journal, and the Christian Science Monitor. My work on FEMA has also been the
topic of two articles by other authors in the New York Times: "At FEMA, Disasters and Politics Go
Hand in Hand" by Alan B. Krueger (September 15, 2005, Section C; Page 2), and
"Disaster Aid: The Mix Of Mercy and Politics" by David E. Rosenbaum (November 2,
2003, Section 4; Page 1), a Harvard Magazine article, "The Politics of Disaster"
by Andrew Reeves, and an article in The Christian Science
Monitor (10/26/05), "The Ties Between Disaster Aid and Politics," by Peter N. Spotts.
In addition, Knight Ridder Newspapers cleared a story by Megan O'Matz, Sally Kestin, John Maines and Jon Burstein quoting me that was picked up by newspapers nation-wide as part of a story on corruption and fraud in FEMA spending in Florida. The story was generally run either under the headline "Disaster assistance tangled up with politics - at a cost to taxpayers" or "Disaster assistance in bed with politics" or "FEMA assistance abuses are found." Among others, the article was carried in the South Florida Sun-Sentinel (originator); Rutland Herald, Montana Standard, Baltimore Sun; Kansas City Star, Tallahassee Democrat, Grand Forks Herald, Bradenton Herald, San Luis Obispo Tribune, Lexington Herald-Leader, and more. I've also been interviewed by Eileen Sullivan from Congressional Quarterly. This research was also cited in a story in Worth Magazine.
I was also interviewed on two of the leading talk/news radio stations in the Midwest, KMOX CBS Radio St. Louis (9/20/05; 3:30pm Eastern) by Paul Harris, and by Francene Cucinello on 84 WHAS Radio Knoxville (9/28/05; 9:15am). On June 15, 2006, I was interviewed by Tom Parker for KPAM in Portland, Oregon about the fraud on FEMA debit cards, and on April 14, 2007 I was interviewed by Chris Murray on "Your Financial Editor" 930 WFMD.
I have also given a presentation to FEMA management and legal staff summarizing all of my work (5/17/07).
Click here to go to Dr. Sobel's homepage.