Economics and Government

Peter Leeson:

"In a paper published two years ago, my colleague at WVU, Russell Sobel, investigated the political economy FEMA. Sobel found that, like nearly all federal decisions to allocate resources, FEMA too suffered from traditional problems of government failure identified by public choice.

In particular, he documented that even after controlling for the severity of disasters, FEMA money was channeled to states more important for presidential elections. In other words, swing states get significantly more money after adjusting for other potentially contributing factors than non swing states. Congressional districts with representatives on FEMA oversight committees also receive more aid and disaster relief tends to be larger in election years.

In addition to teaching us important lessons about self-interested rulers, the recent events in New Orleans can teach us something about government failure and the emergence of private institutions to fill the void left by this failure as well.

If nothing else, government is charged with protecting private property rights. But as the vivid pictures of looters on CNN showed all too clearly, in New Orleans it seems, government was unable to perform even this basic function. In the wake of this vacuum of state-provided protection, the WSJ reported the other day that a number of residents who have not yet moved and do not plan to have hired out private protection for their property."

I'm not sure whether there are markets failures that would provide a justification for a government bureau such as FEMA (Federal Emergency Management Agency), but Leeson points out that there are also sources of government failure. As we sit around as economists, sort of pronouncing from on high, that the role of government is to correct market failures, it seems important to understand the limitations of government in achieving that goal. Government failures may indeed be more severe, perhaps of greater frequency, than market failures. Witness the market response to government failure in New Orleans.