The role of government

A funny thing has happened on the way to an election that seems to have largely become a direct referendum on the role and size of government more than any specific policies - we got reminded just how much we all depend on government in a crisis and of the power and necessity of collective action and risk pooling.  Personal Responsibility and Job Creators can only carry us so far when mother nature decides to decimate everything in her path, it seems. 

As someone who spends a good portion of his life teaching students about the benefits and drawbacks and the efficiencies and inefficiencies of markets, one of the things that has frustrated me most about politics in recent years is the false dichotomy that is presented between "big government" vs. "limited government."  In reality, neither is a good idea.  Like the three bears, the goal we should be striving for is "Just right" government. 

A number of good op-eds have been written over the last few days that I encourage everyone to read, specifically about the hurricane including this NY Times editorial.

I try to avoid taking political sides in these blog posts, but when a statement is simply out and out wrong from an economic public policy standpoint, I have no problem calling it out. Romney has been under attack, and deservedly so, for his approach to disaster relief - The NY Times sums it up as follows:

Disaster coordination is one of the most vital functions of “big government,” which is why Mitt Romney wants to eliminate it. At a Republican primary debate last year, Mr. Romney was asked whether emergency management was a function that should be returned to the states. He not only agreed, he went further:

“Absolutely,” he said. “Every time you have an occasion to take something from the federal government and send it back to the states, that’s the right direction. And if you can go even further and send it back to the private sector, that’s even better.”

Mr. Romney not only believes that states acting independently can handle the response to a vast East Coast storm better than Washington, but that profit-making companies can do an even better job. He said it was “immoral” for the federal government to do all these things if it means increasing the debt.
 

The video for this statement can be seen here:



This new prevailing idea that everything should automatically be done at the state level is in complete opposition to good economic policy.  The level of government that is appropriate (local, state, or federal) should be determined by a combination of factors including economies of scale, the scope of externalities and spillovers, and the degree to which individual preferences vary across regions.  [Any students wanting to know more about this, take my ECON 445 Public Finance course this spring!] So, the idea that either direction is the "right direction" is just flatly wrong.  There are some things that should be done at the local level and some things that should be done at the federal level.  As usual from an economist, "It depends" is the right answer for how centralized any particular policy should be. 

And the idea that the private sector is automatically better is also blatantly wrong.  I encourage Mr. Romney to pick up literally ANY economics textbook and turn to the chapter on Externalities and Public Goods and review the types of situations in which a private market will fail.  Again "It depends" on the type of good or service you're considering - often the private market IS the most efficient, however this is not always the case.  Insurance markets, of particular importance in disaster recovery, are a textbook example of a market that can collapse without regulatory guidance or mandatory participation.  [A topic I discussed in the context of health insurance for those at Constitution Day earlier this semester - google "moral hazard and adverse selection" for more info]

Finally, specific to hurricanes and natural disasters, this is a completely impossible problem for states to tackle - the cost of the damage from Hurricane Sandy is estimated to be somewhere between $80-100 Billion dollars.  New Jersey, which bore some of the worst of that damage has an entire state budget of roughly $30 Billion.  So, particularly because state budgets must be balanced annually, there is no way any single state could realistically absorb the costs of disaster recovery and relief on this scale without cutting every dime of their spending and also doubling their taxes - in order to do so, a "rainy day" fund would need to be maintained on a gigantic and inefficient scale.  This is why we have a federal government.  One year, Mississippi gets ravaged by tornadoes.  The next year, Louisiana is hit by a hurricane.  Then an earthquake hits California, or the upper Midwest faces terrible flooding from the Mississippi River.  Or maybe the plains states are hit by a crushing dust-bowl-like drought.  No one single region can handle their own disasters and still maintain basic functioning, which is precisely the reason to come together and pool our risks. 

Incidentally, my wife's family has a house on the coast in Delaware about 500 yards south of the bridge in this picture below, very near where the picture of this state trooper's car is.  We don't know what the damage is yet.  I've been there many times and can tell you that usually there is not a giant sand-dune in the middle of Route 1, nor should there 4 feet of water across the road - this is truly disaster-level stuff.  Many people would make the argument that individuals should have private flood or disaster insurance and this isn't a government issue, to which I would respond that most people do, in fact, have insurance however your insurance policy doesn't cover the cost of building a new bridge or road to get to your house, and so even when people are taking "personal responsibility" there is still the need for collective action in cleaning up public infrastructure to allow the private markets to operate.      

As pointed out by a surprisingly good op-ed from Ariana Huffington:

Ironically, in New Jersey Chris Christie, the same governor who gave the keynote speech on the night of the RNC devoted to slamming Obama's statement that government has a role to play in helping people build businesses, praised President Obama for his readiness to send aid to New Jersey.
 

It seems even the staunchest opponents of "big government" can get a wake-up call when it comes with emergency sirens and a swath of unimaginable destruction.

On a lighter note: at least Snooki's house survived the storm.  Then again, if it survived six seasons of those jokers living there, it's probably indestructible.