Monday, September 12, 2005

What Didn't Happen After Katrina

The seemingly disastrous response by all levels of the U.S. government to Hurricane Katrina is all over the media. The media are magnetically drawn to bad news, and so naturally if one relies on them too much one can miss important stories. One such story is, despite its disastrous localized impact, how little the storm affected the rest of us.

The storm was, in economic terms, an alteration of the production technology. Tasks that could be achieved at relatively low cost – converting resources into gasoline and then distributing them to consumers around the country, matching the wares of battery manufacturers with the desires of consumers to pay for those wares, transporting people into and out of the stricken area – suddenly became much costlier. The different ways that decentralized, property-rights based decision-making – the market – and collective decision-making – the state – responded to this disturbance are worth noting. Despite facing the same trauma, the former did an extraordinary job in reacting to the disaster, while the latter’s response left something to be desired.

Katrina apparently temporarily took out between five and ten percent of U.S. gasoline production. This raises two problems – getting production back online and deciding in the meantime who will get the gasoline that remains. Both of these problems were solved with what must be considered astonishing effectiveness. Contrary to the worst predictions (some of which were believed by drivers who, irritatingly, crowded gas stations to make sure they had a full tank at all times), there were no meaningful shortages of gasoline in most places. It is true that there were lines and empty gasoline stations in some areas of the Southeast (partly due to damage to a pipeline that served Atlanta and the surrounding areas), but it is striking how fleeting they were. Apart from the storm-stricken area itself, gasoline was available almost immediately to anyone, provided they were willing to pay the price.

And that is part of the story too. When there is less gas than people expected there to be, some way has to be found of deciding who gets it and who doesn’t. And in this country we rely on the price system and property rights to decide that question. The Energy Information Administration keeps track of gas prices. Between 8/29 and 9/5 prices rose sharply for regular, more in some places than in others:

New England2.603.23
Central Atlantic2.613.29
Lower Atlantic2.573.11
Gulf Coast2.532.91
Rocky Mountain2.582.98
West Coast2.743.03

As an aside, these data make it difficult to accept a charge of post-Katrina “gouging” by those who produce gasoline. Imagine a map of the U.S., and superimpose on it an expanding tree of lines away from the Gulf Coast, with each line representing a potential supply chain for gasoline, with each node generating two or three or four more heading in all directions. The region in the eastern half of the U.S., one supposes, is for transport-cost reasons where most gasoline from Gulf oil ends up. The Northeast is the region within that subset of the country where the path to market is most complicated, precisely because the distance from refineries and wells is greatest. It is not surprising that these regions saw very high price increases. Indeed, one might have supposed that gougers would have stuck it to Gulf residents the most, since they were the most immediately desperate, but in fact that region saw the lowest price increases. There were also relatively modest effects in the West, where more oil may come from Mexico and Alaska.

Is that what happened? I don’t know, but I don’t have to. The reworking of the gasoline supply network and the decisions on who should and shouldn’t get gasoline after a Category 4 hurricane slams into the biggest oil production and refining region of the country is a tremendously complicated task. If I, or for that matter anyone, were asked to do it alone by giving orders to various Americans the results would be comical. But oil companies, to stay in business, must provide their products to people who want them at the profit-maximizing price. If one company doesn’t, another will. This means that each company employs thousands of individuals who possess knowledge about supply routes, how demand varies by region, and all sorts of other important microeconomic information. Someone knows the things they need to know. When given some autonomy to make use of that information (and when compensated accordingly for its value), they have the proper incentives to get gas production back quickly. The only thing they require is the freedom to set the terms under which consumers will be free to buy or not buy their product. By raising their prices, they force consumers to decide which uses of gasoline – taking two cars instead of one, combining trips or not, carpooling or not, upgrading to a more fuel-efficient but more expensive truck fleet or not, buying that hybrid or not – are worth the prevailing price and which are not. By allowing producers the freedom to set prices, this reallocation of suddenly scarcer gasoline took place in the most effective manner possible. People nationwide were allowed, after making different arrangements reflecting new conditions of scarcity, to continue living their lives and relying on gasoline to do the things they find it worthwhile to do. The contrast with the 1970s, when price controls and a massive bureaucratic monster trying to make decisions from on top in lieu of profit-seeking entrepreneurs adjusting to new circumstances from the bottom, is striking.

So too with the oft-demonized Wal-Mart. The Wall Street Journal reports (subscription required) that Wal-Mart and Home Depot had batteries, generators and other items that would be of much greater value after a hurricane ready and waiting. Telecommunications companies and utilities made similar preparations. Things, after the immediate disruption was over, worked. Predictions of significant problems in the U.S. agricultural sector, based on the (true) observation that a lot of it moved through the port of New Orleans, the (possible) observation that the port will be at significantly reduced capacity for awhile, and the (unexamined but false) assumption that profit-seeking behavior will not find cost-minimizing alternatives, are not worth worrying about.

New Orleans, in contrast, generated the now-notorious photo of government-owned buses capable of evacuating thousands of people rendered useless by flooding less than two miles from the Superdome. The failures of Katrina were by and large failures of collective decision-making. To say this is not to rule out the possibility that, given the proper incentives, officials can do better. In Cancun, Mexico, where the tourist trade is vital to local standards of living, the government used buses, among other things, to orchestrate the evacuation of tends of thousands of tourists before the arrival of Hurricane Emily in 2004.

But incentives matter, and the incentives operating on politicians are simply different from those operating on public officials. When someone working for Wal-Mart or Verizon fails to investigate (in other words, to collect costly information on) how to deliver the products whose sales pay his salary after an event like this, Wal-Mart and Verizon lose money, and he is fired. When public officials fail to coordinate evacuations and the delivery of aid supplies, they very likely are not. One of the most notable themes in both the remarks of politicians and in media coverage has been whose “fault” the post-Katrina troubles are. Politicians at each level of government are eager to persuade the voters that they should be returned to office, and one way that you do this is to sell a different sort of product, that of blame. From his interview on Meet the Press, here are some of the things said by Mayor Ray Nagin of New Orleans:

MR. RUSSERT: What's the biggest mistake you made?

MAYOR NAGIN: My biggest mistake is having a fundamental assumption that in the state of Louisiana, with an $18 billion budget, in the country of the United States that can move whole fleets of aircraft carriers across the globe in 24 hours, that my fundamental assumption was get as many people to safety as possible, and that the cavalry would be coming within two to three days, and they didn't come.

MR. RUSSERT: Many people point, Mr. Mayor, that on Friday before the hurricane, President Bush declared an impending disaster. And The Houston Chronicle wrote it this way. "[Mayor Nagin's] mandatory evacuation order was issued 20 hours before the storm struck the Louisiana coast, less than half the time researchers determined would be needed to get everyone out. City officials had 550 municipal buses and hundreds of additional school buses at their disposal but made no plans to use them to get people out of New Orleans before the storm, said Chester Wilmot, a civil engineering professor at Louisiana State University and an expert in transportation planning, who helped the city put together its evacuation plan." And we've all see this photograph of these submerged school buses. Why did you not declare, order, a mandatory evacuation on Friday, when the president declared an emergency, and have utilized those buses to get people out?

MAYOR NAGIN: You know, Tim, that's one of the things that will be debated. There has never been a catastrophe in the history of New Orleans like this. There has never been any Category 5 storm of this magnitude that has hit New Orleans directly. We did the things that we thought were best based upon the information that we had. Sure, here was lots of buses out there. But guess what? You can't find drivers that would stay behind with a Category 5 hurricane, you know, pending down on New Orleans. We barely got enough drivers to move people on Sunday, or Saturday and Sunday, to move them to the Superdome. We barely had enough drivers for that. So sure, we had the assets, but the drivers just weren't available.

The Mayor’s biggest mistake, in other words, was in assuming that other people would be up to the task. As for the buses, why were there no drivers? This is precisely the sort of problem that private firms solve all the time, and indeed did solve in the run-up to the hurricane. But the incentive structure of politicians of all parties, local, state and federal, is different. Consumers are buying products whose benefits generally accrue mostly to them, and they have a correspondingly stronger incentive to amass information about those products and the firms selling them. But voters suffer from the problem of rational ignorance. Your chances of influencing the election are so small, and the costs of acquiring more information about all the things the government does are so large, that it seldom pays to be as well-informed about a politician’s behavior as it does about the terms of service for your satellite television. (Not to mention the uninformative quality of campaign advertising, the ease with which politicians can reverse their promises, etc. These tasks are much more difficult when competition occurs directly rather than through the severely attenuated mechanism of elections.)

To continue the analogy, this ultimately is one (but only one) reason why satellite television broadcasts will be up much faster than most government programs in the Katrina-affected area. That the private sector did (to little acclaim) what it was expected to do so effectively while the government failed (to great condemnation) to do what it was expected to do suggests a fundamental misunderstanding both about the value of markets in getting us what we desire and the limits of government in doing the same.


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