Down with municipal government
Forgive me if this post isn’t particularly timely — I just started blogging, so I’m still clearing out my cognitive backlog.
A month ago, the economist Steven Landsburg wrote a Slate column arguing that we shouldn’t help Hurricane Katrina victims too much. His reasoning? Presumably, the hurricane risk in New Orleans and surrounding areas was already reflected in property values being lower than what they would have been were there no such risk. So if the US spends federal tax dollars on hurricane relief, then it’s artificially subsidizing people who choose to live in hurricane-prone areas — thereby
- raising taxes for everyone, including those who live in “safe” areas, and
- raising property values in the hurricane-prone areas, which limits people’s freedom to select cheap but risky housing over expensive but safer housing.
I’d had some pleasant correspondence with Landsburg in the past, so I emailed him to say that, while I could find no flaw in his logic, I was confused as to why he didn’t take the argument even further. For example, what are fire departments, if not an artificial subsidy for people who choose to live in wooden houses rather than stone ones? And police departments? Clearly a lose-lose proposition. If you have a personal bodyguard, then you’re forced to pay for protection you don’t need. And if you don’t have a bodyguard, then you’re deprived of the freedom to choose lower taxes in exchange for having no one to call if you get stabbed.
See, in my view, if you’re going to be a radical libertarian, then you might as well go all the way. For — just like the denial of relief to hurricane victims — such consistency makes all parties better off than otherwise. Those willing to follow you all the way into Galt’s Gulch get the genuine Ayn Rand experience, with no wussy collectivist compromises. And for others, you’re all the more valuable as a walking, talking reductio ad absurdum.
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Comment #1 October 10th, 2005 at 12:57 pm
What exactly is the Ayn Rand experience? I’ve never read any of her novels nor studied her philosophy so I don’t really grok it.
Comment #2 October 10th, 2005 at 2:08 pm
Congratulations on having escaped the Ayn Rand phase! (Somehow I imagined that everyone goes through it around age 14.) Basically, Rand started a cult of individualism and reason — something you’d think was impossible if it didn’t actually happen. Here‘s a wikipedia article to get you started, and here‘s a hilarious send-up of Rand by Murray Rothbard (though you probably won’t get all the jokes).
Comment #3 October 10th, 2005 at 2:18 pm
Well, I do’nt know what Landsburg’s reply is, but a good reason for fire and police departments is negative externalities. If your house burns down, there’s a good chance it’ll burn the neighbor’s house down too and that you won’t properly internalize that cost because you don’t have enough moeny to cover it. So you can accept municipal government and oppose disaster relief.
I think there are good arguments against disaster relief on efficiency grounds. Some compelling evidence of this is from New Zealand
http://www.maf.govt.nz/mafnet/rural-nz/sustainable-resource-use/resource-management/environmental-effects-of-removing-subsidies/agref004.htm#E11E4
I think the best arguments for helping Katrina victims are based on equity, which would mean the government should be careful not to compensate rich hurricane victims very much.
Comment #4 October 10th, 2005 at 2:19 pm
Erm, here’s the New Zealand link.
Scroll down to “3.7 Disaster relief policy” or just read the first paragraph here:
The New Zealand Government has in the past played a significant role in providing relief to farmers affected by climatic disasters. It is now recognised that disaster relief can itself encourage environmental degradation if it removes the incentive for land managers to plan for such disasters. For example, livestock farmers need to de-stock when drought becomes a real possibility, and also need to keep grazing pressure down to a level that will better enable hill country pasture to sustain heavy rainfall.
Comment #5 October 10th, 2005 at 3:33 pm
Aram: Thanks! Landsburg’s reply was basically that I overlooked his main point, that disaster relief amounts to involuntary insurance. (In fact, that’s exactly what I latched onto.) He didn’t give me any example of a difference between disaster relief and municipal fire departments, as you did. (Though aren’t there also huge negative externalities in the case of disaster relief? E.g. if one city is destroyed, that can disrupt a national economy.) (Incidentally, I despise the word “externalities.”)
I agree that the moral situation is completely different for ranchers who repeatedly overgraze their land and then go crying to the government for disaster relief, than for people whose homes were destroyed in a flood in a city that’s been around since 1718. That’s exactly my point: that in ethical questions, we should never let abstract principles blind us to the obvious facts of the actual situation.
Comment #6 October 10th, 2005 at 4:23 pm
Before turning from abstract principles to the facts on the ground, I think that there is an important difference between strict insurance and wealth redistribution. Which is not to say that either one is necessarily good or bad in any situation; it just irritates me when people freely conflate the two.
Insurance is when you prepay the cost of a financial disaster times the probability that it will take place, plus an operating margin for the insurance company. The more accurately you and the company can measure the risk, the more efficient the arrangement will be.
Wealth redistribution is when you give to needy or unlucky people even though they may not have paid proportionate insurance. If wealth redistribution is the point, then it may or may not be fair to blame or charge the recipients for known risk. For example, society could pay for hemophilia treatment even for patients who have always known that they have hemophilia and could never have afforded the 100% “insurance” rate for it.
Turning to the actual facts of Hurricane Katrina, it does seem unfair not to allow any wealth redistribution even for the poorest residents of New Orleans. It may well be that it subsidizes risky behavior, but these people have never had much economic control and it just doesn’t look like either Louisiana or the US has ever treated them very well.
But another fact on the ground is the size of the government response to the hurricane, which seems to me to defy all proportion, and to render the record-setting private aid effort trivial and distracting. They already approved $60 billion in spending for this hurricane, and they say that it could eventually rise to $200 billion. Now divide that by the roughly half million serious hurricane victims and see what you get. To be sure, much of the money will go to regional infrastructure and not directly to the victims, but still.
If this hurricane really merits $200 billion in spending, why did they only approve $8 million or so per year in levee work for New Orleans? Washington behaves as if this hurricane was a 10,000 year event, when it was actually a 40-year event. They papers explain that the hurricane was category 4, but in fact it missed and was only equivalent to about category 3, which is what the levees should have been designed for. But they still broke.
In the future, they should either spend much more money on these levees (and similar structures in other places), or they should have very high property taxes for areas at risk, or both.
As for private aid, the best thing to do is to write the check that you were going to write for the hurricane victims, then send it to an international charity instead. There are more than a billion people in the world who would gladly trade places with the survivors of the hurricane, even if there were no government aid at all.
Comment #7 October 10th, 2005 at 4:40 pm
“Congratulations on having escaped the Ayn Rand phase!”
Thanks for the link. I still find it hard to grok what this “Objectivism” is about (sounds vaguely libertarian/anarchist). I imagine that I would have to read her books in order to completely understand it though I am unwillingly to do that! 🙂 Objectivism and Ayn Rand though has always seemed “cultish” to me.
Comment #8 October 10th, 2005 at 6:56 pm
“If this hurricane really merits $200 billion in spending, why did they only approve $8 million or so per year in levee work for New Orleans?”
Excellent question! One possibility that springs to mind is that “they” are idiots. But now that the city is destroyed, it needs to be rebuilt. I agree that $200 billion seems like a lot for that; maybe a smaller amount would suffice.
PS. I think Landsburg was saying that disaster relief involves both wealth redistribution from the rich and involuntary insurance premiums from the poor (which it does).
Comment #9 October 10th, 2005 at 8:28 pm
I think Landsburg has a valid-in-theory point, and is suitably careful to acknowledge that many factors render it imperfectly applicable (i.e., kinda offensive) here. I just want to note two more which seem not to have been discussed fully.
The first concerns present-case applicability. Landsburg understands but it has to be made clearer that the social allocation of risk was made in the past. Its efficiency/inefficiency was relative to an uncertain future that has since resolved itself (badly). Being stingy with the victims now won’t cause them to retroactively become more risk-tolerant as a population (not that it’d matter much now anyway..).
The only efficiency consideration in providing or not providing disaster relief in the present case (excepting macroeconomic effects) is how government action will function as a policy signal.
Landsburg tends towards the idea that withholding aid now will induce rational allocation of risk in expectation of a more aid-free (hence more efficient) future.
But it’s unclear why a less-aid-from-now-on policy can’t be announced without a display of hostile indifference to those who hardly saw it coming (and who paid insurance in various forms). The only signal that’s really important to make is that the government will stand by its clearly stated policies; there’s hardly a chance to do so now when the level of aid this time clearly was not predefined but is a matter of political prerogative.
In other words (and this is sort of nice), since the event clearly demands some response but we are not as of yet bound to any dire efficiency policies (even if they’d be a good idea), we can actually be directly responsive to human suffering.
So much for applicability-in-present. Regarding in-future, I just want to throw out a note of pessimism (with empirical backing) about our ability to rationally bear risks involving either very low probabilities or very catastrophic outcomes. Both fixation/amplification (fear of sharks, lottery tickets) and denial (my living on the san andreas fault) are possible. Granted, it’s thorny to prove someone is not maximizing some expected-utility function or other; but sometimes it can be damn obvious. Thus I think there are cases in which we can safely ignore the economists and make paternalistic decisions for people about their risk-bearing.
Comment #10 October 10th, 2005 at 11:31 pm
I haven’t read the Landsburg article, but I did read another article which made the point that if the government reimburses Katrina victims who had *not* purchased flood insurance, then it makes it less likely that people will see the need to buy flood insurance in the future. That sounds similar to one of Landsburg’s points (about not encouraging people to move back to flood-prone areas).
There is a risk of sentimentalizing to the extent that rational thought goes out the window. An example of this are those who argue that *no matter what* New Orleans must be rebuilt. Now, I don’t have the data one way or the other, but it seems to me that if New Orleans is continually going to be ravaged by floods/hurricanes, etc. it makes little sense to encourage rebuilding there. (PS: I would say the same for Venice, unless the cost-benefit calculation shows that the cost of saving Venice is outweighed by the value received by the tourists who go there and/or whatever taxes residents of Venice are willing to pay.)
Comment #11 October 10th, 2005 at 11:47 pm
The people in this model have a choice: They can live cheaply in Gog, where they risk intermittent devastation, or they can pay higher rents in Magog, where they’re relatively safe. Because different people have different risk tolerances, some prefer Gog and some prefer Magog.
If he wanted to be intellectually honest, he need not go to abolishing police. He could start by including different starting configurations in his model (which perhaps could explain some people’s choices better than “risk tolerance”).
Comment #12 October 11th, 2005 at 12:43 am
I don’t think he’s out to explain why everybody lives where they do, just to say that differing levels of risk tolerance provide a further dimension along which we can geographically distribute ourselves, to mutual perceived advantage, and that mandatory insurance flattens this possibility.
Comment #13 October 11th, 2005 at 2:08 am
Thanks, Andy! What you write makes a lot of sense.
Anonymous: I agree that, once New Orleans is destroyed, there’s a legitimate question of whether to rebuild it more safely or just resettle the victims elsewhere (perhaps by founding a “New New Orleans,” like “New New York” in Futurama). But one needs to consider the city’s historic value, and how much of its economy depends on tourism. If I understand correctly, what they’re doing seems about right: rebuilding the French Quarter and the historic areas where Mardi Gras parades take place, and not rebuilding the low-lying slum areas that were hit hardest by the flood.
Comment #14 October 12th, 2005 at 4:59 am
Of course, the elephant in the room is class. Or maybe race is a second elephant.
If we only criticize hurricane relief when it’s poor blacks who are affected, then “theoretical” arguments about efficiency take on an ugly tone. Similarly, compare the amount of attention given to the efficiency loss from welfare (reducing incentives to work) to the amount of attention given to corporate welfare and other gov’t programs that cause much larger inefficiencies by favoring some corporation or district.
So perhaps a more relevant Katrina criticism would be that the “reconstruction” is being handled by KBR/Halliburton, that cronyism/corruption are still rampant in DHS/FEMA and that it’s the poor who will likely be screwed by not rebuilding the “low-lying slum areas.”
Comment #15 October 12th, 2005 at 11:14 am
Aram: Of course I was talking about Landsburg’s “theoretical” arguments, not the actual bungled response of Bush and his Arabian horse judge friends.
Hopefully, refugees from slum areas will at least be given the *choice* to move somewhere else with government aid, which is what many of them want (and who could blame them?).
Comment #16 October 13th, 2005 at 12:07 am
I can’t quite agree with Aram’s formulaic scandal-mongering. There is some truth in it, but it is not the whole truth or even most of the truth.
It not true that reconstruction “is being handled” by Halliburton or its subsidiary, KBR. What is true is that the first $1.5 billion, which is to say the first 1/40 of the money authorized so far, was granted to contractors without competitive bidding; and of that money, $60 million or 1/25 went to KBR.
Obviously contracts without competitive bidding look bad, especially when they go to Halliburton, for which Cheney served as vice president. But that does not necessarily mean that any of the hurricane victims will be screwed. In fact, the bureaucracy of competitive bidding can escalate costs by ignoring the obvious market value of common services in favor of special-case contracts. The public largely doesn’t understand that what passes for competitive bidding in Washington often amounts to the worst of all fiscal worlds.
In any case, the real waste of the hurricane relief is not that any evacueew ill be underserved, but that a lot of problems are going to be insanely oversolved. It would make no sense for a contractor or anyone at FEMA to be rude to any hurricane victims. On the contrary, when Washington is in the mood to write blank checks, the easy way to get ahead is to pull out all the stops.
For example, if you wanted a brainless, expensive way to house 600,000 evacuees, you could hardly do better than to book them indefinitely in hotels. Why bother with apartments when you’ve got Travelodges and Ramadas. Crazy as that may seem, it is only $4 billion per year or so, a tiny fraction of the total federal relief effort.
Comment #17 October 20th, 2005 at 2:55 pm
His argument, as you’ve summarized it, is that property values already incorporated the risk of hurricane. Therefore, property values were lower, so people living in New Orleans were effectively saving money by accepting higher risk. Everyone else shouldn’t now eliminate that risk factor, or New Orleans residents will have gotten their lower housing prices with no cost — this is unfair.
However, while it is true that property values incorporated the risk of major hurricane, I don’t think they were as much lower as the author supposes. For property values also included the assumption of a federal response to any hurricane. Pretending otherwise is what is actually unfair.
The question of whether the federal response is appropriate, corrupt, too much, or whatever else is entirely separate. In a free market, New Orleans property values presumably also included an optimal estimation of the future federal response, and of its uncertainties/variabilities.
Comment #18 December 21st, 2006 at 8:29 pm
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