Hayek and Hurricanes
By David Henderson
In a natural disaster like Hurricane Sandy, the only thing people should fear more than the storm is the government’s response.
Let us count the ways.
Mandatory evacuations presume that politicians know the risks better than property owners themselves. That can’t possibly be true. In an information age, we all have access to the same data. Especially these days. We should be able to make our own risk assessments, coming and going from our property as we choose.
This is the opening of Jeffrey Tucker’s article, “Storm Economics in One Lesson.” He goes on to discuss the various ways that governments often mess up responses to natural disasters.
He is mainly right. I’ll highlight a few important things he says and then criticize two. You’ll see at the end why I have this title.
But the whole thing is well worth reading.
Then there’s the anti-gouging mania that hits every government executive. They warn with great bravado that no private seller can raise prices more than 10% in the event of an emergency. This defies reality. Storms and impending storms send existing supply and demand matrices into total upheaval.
Prices change, and that’s a good thing. It should go without saying that when things and services are in shorter supply, the price of them goes up. This serves two purposes. It provides a signaling device and incentive for new sellers to jump into the market. It also signals the need for more and alerting consumers to conserve until more arrives. This is good for everyone. Would you rather pay $5 a gallon for water or have no water available for sale at all? That’s the choice.
When government threatens people not to profiteer, it discourages producers from entering the market. And yet this is what they do. One North Carolina paper even editorialized for people to rat out any gougers by turning them in. “It’s a good law, and is made better when the public reports profiteering incidents to authorities.”
Well said. A little correction, though: it’s not “no water,” it’s “less water.”
And a good shout out to the private sector:
Given the torrent of criticism over the last disaster, FEMA did its best to spin opinion in its direction this time. They have the National Response Coordination Center, which, as the New York Times says, decides “where officials gather to decide where rescuers should go, where drinking water should be shipped, and how to assist hospitals that have to evacuate.”
In other words, they tell people what to do. But who is actually doing the thing itself? The Wall Street Journal reports that WalMart “staffed up an emergency operations center at its headquarters last Thursday and began routing shipments of goods to 10 disaster distribution centers along the storm’s projected path. As the storm clears, Wal-Mart will dispatch trucks from the disaster warehouses to stores in the areas hit by the storm.”
And a shout out to the newest part of the private sector:
As well, how about a respectful nod to new commercial technologies. Even when the power failed, the cell towers still functioned. 3G connections were going full blast while the lights were out. Youtube’s live streaming technology allowed anyone to watch live reports on their smart phones. Instagram permitted live documentation of the entire storm, with 10 images per second being posted. Reporters filed reports from their ipads even with massive power outages. This was the most documented storm in the history of the world, all thanks to the market economy.
How government messes up the recovery with regulation:
Another tendency is for government to enforce licenses on all service professionals. Want someone to cut down the tree or fix your plumbing or rewire your home? You had better choose someone with a license to do business or you will be in big trouble. Of course, this only discourages an influx of new service providers just when they are needed most.
Where he’s a little off:
For the umpteeth time, there is no upside to wealth destruction. But try telling that to the folks who calculate GDP. It is very likely the Sandy will be given credit for any fourth quarter fake economic growth. After all, that’s how government affects the GDP. The more it spends, the higher economic growth appears to be.
The first sentence is right. The last part not so much. It’s entirely possible that some unused resources will be used to make up for the wealth loss and that would boost GDP. GDP measures economic activity and, to the extent that the activity is privately and voluntarily chosen, it measures value added. So not only could GDP be higher but also it could really reflect value added. Think about how badly people would want to replace cars, houses, etc. Again, I emphasize, wealth is destroyed and that’s bad. Any boost to GDP can’t totally make up for that because those resources could have been used elsewhere. But GDP could really be measuring value added. See my “GDP Fetishism” for a more careful statement of what’s wrong with GDP.
My second criticism? He actually understates his case at the start. Recall that Tucker writes, “In an information age, we all have access to the same data.” Not true. As Hayek pointed out, each of us has our own “local knowledge,” (although this was not Hayek’s term) and so the people in the actual houses probably have better knowledge than the government because they have the centralized weather information that the government has plus their own specific information. We see this time and time again: government generalizing from averages rather than allowing for specifics. The average person could well be better off evacuating a house. But there could be people who have specific information about their house, their elevation, the probability of a burglar getting in, etc. that, combined with their own attitude to various risks, tells them to stay.
By the way, one of the underappreciated pieces in the Encyclopedia is by the late Jack Hirshleifer, “Disaster and Recovery.”