Big Brother Does Not Always Help, or Only at a Cost
by Pierre Lemieux
The history of Puerto Rico, its current travails, and the theories of its famous governor Rex Tugwell provide a good illustration of a simple conclusion of economic analysis.
The Economist of October 19 observes that, one month after Hurricane Maria hit Puerto Rico, 82% of the island’s residents still lacked power and that the government’s goal is 95% restoration by Christmas (Christmas 2017, of course). As of October 27, the Department of Defense says that 74% of the island’s electricity customers remain without power. Speaking about the Puerto Rico Electric Power Authority (PREPA), the government monopoly that produces and distributes electricity, The Economist explains:
The island operates a centralized electricity grid … the suffering from weeks without power have almost as much to do with mismanagement as they do with wind and rain. … Declining revenues [of PREPA] were exacerbated by political patronage, corruption, and inefficiency.
The Economist adds, a bit cryptically, that the utility was “created by a New Deal governor in 1941.”
It was not any New Deal governor who created PREPA, but Rexford Guy Tugwell himself. Tugwell owed his governorship to Franklin D. Roosevelt, to whom he had been a close advisor. A professor at Columbia University and a high-level civil servant, Tugwell was one of the most famous of the progressive economists of his time. On June 25, 1934, he made the cover of Time Magazine.
Tugwell thought that competition was a waste and should be replaced by government planning and industrial democracy. Or else, he wrote in his 1933 book, The Industrial Discipline and the Governmental Arts, “we are surely committed to revolution.” It is not clear how he reconciled central planning and industrial democracy, by which he meant that firms would be run by their workers and engineers. He was an admirer of the Soviet Union.
Tugwell professed a purely engineering and bureaucratic notion of efficiency. In an article titled published in the 1932 Papers and Proceedings of the American Economic Review, he argued that government – probably committees of bureaucrats – should decide which industries should be launched:
New industries will not just happen as the automobile industry did; they will have to be foreseen, to be argued for, to seem probably desirable features of the whole economy before they can be entered upon.
Is it surprising that, with this sort of heritage, PREPA was a floundering government bureaucracy, totally unprepared to face Maria or its consequences? Puerto Rico itself is bankrupt, and 12% of its debt is due to PREPA.
Contrary to what Tugwell thought, government is subject to bureaucratic failure and political failure. Politicians do not automatically pursue the public interest, a concept very difficult to define anyway. In a companion story, The Economist reports on research suggesting that federal assistance has depended on whether the affected areas voted for the right presidential candidate in the previous election:
For any given level of damage from a disaster, a one point increase in the vote share for the president’s party was associated with a 1% increase in federal aid.
The Economist adds:
The evidence also shows that voters reward officials for showering their regions with federal largesse, though their support does not come cheap. According to research by Neil Malhotra of Stanford Business School, it takes $27,000 of relief spending to buy just one extra vote for an incumbent party.
The history of Puerto Rico, its current travails, and the theories of its famous governor Rex Tugwell provide a good illustration of a simple conclusion of economic analysis. Natural catastrophes happen and, of course, the market is not perfect (in the sense that it does not perfectly satisfy and reconcile individual preferences). In most cases, though, political and bureaucratic processes are even more imperfect.
Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His forthcoming book, to be published by the Mercatus Center at George Mason University, will aim at answering common objections to free trade. Email: PL@pierrelemieux.com.