David R. Henderson  

Hayek and Hurricanes

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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."


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COMMENTS (18 to date)
Ritwik writes:

Are evacuations mandatory?

As in, what happens if someone refuses to be evacuated? Does he go to jail?

David R. Henderson writes:

@Ritwik,
The government often announces mandatory evacuations. In practice, I don't know of times when they've followed through with arrests. What I do remember a few years ago, with a fire at Big Sur just south of me, was people leaving in response to a mandatory evac, then trying to return when they assessed the situation differently, and then being forcibly prevented by Monterey County Sheriff.

Ritwik writes:

David

The ordering of mandatory evacuations is simply one that says - if you later call 911, we won't come. Which I believe is a perfectly fine risk/benefit analysis by any organisation for its employees. Government employees are people too!

people can and do stay back from mandatory evacuations. Some of them die, as we see on the news. Some must survive and thrive. Good for them.

Does the government prevent private organizations from offering disaster evacuation services? Don;t think so. Does it prevent people from organizing themselves informally to coordinate a local private rescue? I don't think so.

So, it's better to see the evacuations that actually happen as voluntary.

In which case, don't you marvel at how efficient and cheaply priced the option of 'mandatory' evacuation must be when so many rational optimizing individuals with local knowledge voluntarily choose to exercise that option?

Or is your view of local human knowledge and decision-making one where everyone is rational and beautiful and locally knowledgeable normally, and suddenly loses their marbles and vacates their houses when the governor and the president direct them to do so, without realizing that no significant coercive threat backs that directive?

David R. Henderson writes:

@Ritwik,
You wrote:
Does it prevent people from organizing themselves informally to coordinate a local private rescue? I don't think so.
I'm not sure if you read my earlier response to you. That's exactly what the Monterey Sheriff did. It was a big deal around here at the time.

Ritwik writes:

David

I did. And indeed, if the argument was being made for one specific case in Monterey, I would have accepted it without question. But the mandatory evacuation argument is being made more generally here.

And I'm just saying, it's better to see mandatory evacuations as prima-facie voluntary acts and then look at those specific cases where they aren't.

Shane L writes:

I wonder if disasters might have long-term benefits by destroying old infrastructure and provoking an upgrading of infrastructure in the rebuild. Such an upgrading might have otherwise been difficult to achieve for political reasons, e.g. inhabitants disliked the upheaval or conservationists resisted replacing old construction with new.

From the Wikipedia page on the aftermath of the Great Fire of London, 1666:

"...much of the old street plan was recreated in the new City, with improvements in hygiene and fire safety: wider streets, open and accessible wharves along the length of the Thames, with no houses obstructing access to the river, and, most importantly, buildings constructed of brick and stone, not wood."
http://en.wikipedia.org/wiki/Great_Fire_of_London#Aftermath

That won't always be the case, and the costs will be real. But perhaps there could be economic benefits in the long run of more efficient and modern infrastructure replacing the wrecked old.

David R. Henderson writes:

@Ritwik,
And indeed, if the argument was being made for one specific case in Monterey, I would have accepted it without question. But the mandatory evacuation argument is being made more generally here.
True, but it's one out of one. In other words, partly because it was local and because a guy who was charged with trying to protect his own property was on trial and could have gone to prison, I followed it closely. It's the one case I followed. I haven't followed other cases. Are you confident that when someone tries to get back in during a mandatory evacuation, the government will not block his way? Sounds as if you are.

David R. Henderson writes:

@Shane L,
You're making, essentially, the argument the late Mancur Olson made about the benefits of losing a war. There's something to it.

CC writes:

Shane wrote:

I wonder if disasters might have long-term benefits by destroying old infrastructure and provoking an upgrading of infrastructure in the rebuild. Such an upgrading might have otherwise been difficult to achieve for political reasons, e.g. inhabitants disliked the upheaval or conservationists resisted replacing old construction with new.

That's a very good point, and I had never thought of it before. When you add political constraints to your economic model, suddenly destruction can be a net good.

MingoV writes:

The claim that improvements during rebuilding can make destruction beneficial in the long run has been refuted many times. Wealth is expended to repair or replace damaged structures. A lot more wealth is expended to replace damaged structures with something much better than the original. That wealth would have been used for other purposes (possibly for planned rebuilding that would have been much less disruptive than disaster-triggered rebuilding). The bottom line is that disasters destroy wealth regardless of how the damage is fixed.

Mark Bahner writes:
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.

The problem there is that some people take ridiculous risks (like riding a jet-ski through the surf as a hurricane comes ashore). It's fine if adults want to stay in their homes even in the face of nearly certain death, but they should sign waiver that indicates that they will be allowed to die for their stupidity (rather than emergency responders risking *their* lives and taxpayer dollars). And they shouldn't be allowed to take their children down with them.

The ordering of mandatory evacuations is simply one that says - if you later call 911, we won't come. Which I believe is a perfectly fine risk/benefit analysis by any organisation for its employees. Government employees are people too!

Yes, absolutely. And children need to be protected from being needlessly endangered by their parents.

CC writes:

MingoV: I'd normally agree, but the point here is that often regulation and litigation prevent building and rebuilding altogether, so you actually need a natural disaster to get people to act (closer to) optimally.

Ted Levy writes:

Tucker asks, "Would you rather pay $5 a gallon for water or have no water available for sale at all?"

And Professor Henderson responds: "Well said. A little correction, though: it's not 'no water,' it's 'less water.'"

I have to disagree.

First, none of us know the exact supply curve. It COULD be "no water," right? Isn't that especially true in this situation if one came in to buy water on the day two when the vendor wasn't allowed to raise his price on day one to the new, equilibrium clearing price? Don't we know in such situations that demand is greater than supply? Doesn't that mean that someone who desires water at the old, fixed price will find he gets "no water."?

Empirically, in these crisis situations we always hear, as we heard this week, of hoarding by consumers. (Don B had a great piece about consumers as speculators over at Cafe Hayek.) Doesn't all this indicate that for SOMEONE the outcome will be NO water?

The other disagreement is that Tucker wasn't writing an economics article for submission to a peer-reviewed journal. He was writing a popular piece designed to rhetorically convince. Rhetorically, "no water" works (I think) FAR better than "less water," and is not, so far as I can tell, clearly false.

John Smith writes:

To David Henderson,

I agree with Ritwik. People who recklessly endanger their own lives through gross stupidity should die, rather than be saved at public expense. And the government indicates this through mandatory evacuations.

If you are confident enough that you made a well-considered decision, instead of just being stupid and stubborn, then put your life on the line. Don't put the firefighter's life on the line.

egd writes:
Would you rather pay $5 a gallon for water or have no water available for sale at all? That's the choice.
Except that often isn't the choice. Any time there is a difference between price and value you will have private actors who will act to take up that difference and resell the goods in the grey market for the actual value.

The difference is that the grey market isn't visible, so most outside sellers won't hear the signal of higher prices, and therefore won't respond to it.

Jack G writes:

We just experienced this issue of the government forcing an evacuation that clearly had bad results. Last week, while vacationing on the North Shore of Oahu, we were forced to leave our homes even though the models showed the impending tsunami would be small. We discovered the next day someone was killed along the crowded road side as people streamed out of the town into the hills.

Jeff P writes:

Prof Henderson,
You mention needing a license to perform repairs. I wanted to add on top of that the non-union workers being turned away from NJ even when they offered to ply their trade for free. Non-union linesmen were turned away because it would take away union work. Craftsmen who routinely volunteer their time in disaster recovery situations were told to go home because they were taking away work from the unions. Here is a case where unions and law/policy protecting unions are keeping people without power and without repaired homes for longer than necessary. When unions and the laws protecting them go past the reasonable man's standard for maintaining standards of safety and reasonable wages, they go too far and they do that in far too many cases these days.

mdb writes:

I think you are misreading his paragraph on GDP. As I am sure you know GDP = C + I + G + ( X - M ). So increasing G increases GDP. I think the point was the government will spend more, therefore G will increase and so will GDP. It has nothing to do with benefits or anything else, just the simple formula. Although C will probably increase short run too.

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