09/16/2005: "Why We Need Government—A Lesson from Katrina"
For many writers, talk show hosts, and other pundits, a favorite pastime is railing against government and all that it stands for and does. I must admit that our esteemed elected officials often give us more than ample cause to question their effectiveness, though my experience by and large over the past quarter-century has been that they work hard and try to get it right.
I would also be remiss if I didn’t quickly add that, like most economists, I have a deep and abiding passion for the power of incentives and the remarkable contrivance known as markets. As mechanisms to price and allocate resources in an efficient and invisible manner, they are without peer in human history. As the marvels of modern technology and information access surge ever forward, the performance of markets is perpetually enhanced. There is no doubt that the inexorable forces of supply and demand generate faster, better, and cheaper solutions to most things than those that can be fashioned by the public sector.
Having said all of that, however, government is nonetheless a vital and essential part of our economy. The basic failings of the market, for all its virtue, are that (1) it only performs its magic on those things that make their way into its purview, and (2) it does its thing with amazing consistency, but with no regard for the consequences.
The first of these factors means that anything which benefits or harms all of us as a group more than any individual suppliers or demanders will not be properly accounted for in the machinations of the market. For example, left to its own devices, the market will produce less education and highways than we need (because the benefits to society exceed the private benefits captured so efficiently by the market). By the same token, it will produce too much pollution (because the harms are not fully reflected in prices).
The second factor occurs because the market makes no allowance for those who, for whatever reason, cannot take care of their own needs. It is a cruel taskmaster. Although conservatives, liberals, Republicans, Democrats, and others may vigorously debate the best way to provide healthcare, shelter, and basic necessities for the indigent, no one wants to see people starving in the streets.
Both of these factors came into sharp focus during the tragedy that occurred in the aftermath of Hurricane Katrina. While the private sector has been enormously helpful in the rescue efforts, it cannot handle a massive, multi-billion dollar effort that doesn’t produce substantial returns to investors. We will no doubt examine the nature of the governmental response and its shortcomings (and we well should). The lesson there, however, is likely that we need more available resources for such efforts, not less. Whatever happens at the end of the day, such an enormous humanitarian task will, of necessity, be largely a public function.
Similarly, we are about to be in the midst of a massive cleanup and rebuilding effort. Much of the basic infrastructure of the area has been destroyed or severely damaged. The public gains from these efforts far outweigh individual private interests, so once again there will have to be large governmental outlays to move things forward. Without such initiatives, the much-needed private infusion to rebuild business and residential property cannot occur. As with the relief efforts, we can question why the levees had not been expanded to accommodate a storm of this nature. With the advantage of hindsight, everyone wishes that governmental priorities had been different. Politics often gets in the way of policy. Once again, however, the issue is not one of whether we need the public sector, but rather one of do we need more resources for critical facilities. Markets don’t build levees.
All of that to say that the hallmark of our strong and vibrant American economy is its remarkable record of innovation fashioned by a well organized market system. Private risk-taking in response to incentives is paramount to our future prosperity. Nonetheless, this legacy of achievement can only be sustained within a proper framework of public safety, public investment, and public participation in humanitarian efforts. We can properly quibble over the size and extent of the role of government in the economy, but we can’t quibble with its essential nature.