https://. lesson 3: institutions: the rule of law public goods incentives & information

https://www.youtube.com/watch?v=bnjQ3cV4x1I

When Disaster Strikes, What Can Government Do?

Lesson 3:

• Institutions: the rule of law

• Public Goods

• Incentives & Information

Presidio Refugee Camp, 1906

Gov. George Pardee

Mayor Eugene Schmitz

1906, Congress: $2.5 million for San Francisco 1950, Congress: Presidential declaration of “disaster area”

(made at the request of state governor) triggers eligibility for federal funds to be used to repair and reconstruct infrastructure and public buildings

1969, Congress: Disaster Relief Act made federal aid available to individuals buildings.

1979, Executive Order: President Jimmy Carter created FEMA, the Federal Emergency Management Administration

2008 FEMA budget = $8.2 billion. 2015 FEMA budget request $10.38 billion

Federal Disaster Spending

Select the alternative with the greatest excess of benefits over costs

The rule applies in the public sector just as it does in the private sector.

Review/Reminder: Rule of Rational Choice?

Question:

For what activities do the benefits of government action in disasters outweigh the costs, and why?

For what types of activities are governmental institutions well-

suited?1. Maintaining and

enforcing the rule of law

Looting Isn’t New

Maintaining Law & Order in Chicago

Law & Order key to quick recovery. . .

Chicago 1872

Chicago 1890

Chicago, 1907

. . . Or not:

Law & Order Facilitates Disaster Recovery

Reducing uncertainty facilitates individual decision-making.

Businesses are less likely to return and rebuild if instability and uncertainty persist.

Law & Order Facilitates Disaster Recovery

Civic order and dependable rule of law attract other social institutions to return to the community.

Law & Order Facilitates Disaster Recovery

Government Shapes the Rules of the Game

Changing the rules of the game can aid disaster recovery when those changes facilitate adaptation to specific conditions created by the disaster and when there is a reasonable expectation that the changes are temporary accommodations that will speed up the return to normalcy.

When disaster strikes, what can government do?

1. Re-establish order, maintain and enforce the rule of law

2. Provide public goods

◦ Public goods Non-exclusive Non-rivalrous

For what types of activities are governmental institutions well-suited?

Publicly-provided goods Paid for by tax

revenue

◦ Public goods Non-exclusive Non-rivalrous

For what types of activities are governmental institutions well-suited?

Publicly-provided goods Paid for by tax

revenue

2. Providing public goods

Non-exclusive Non-rivalrous

For what types of activities are governmental institutions well-suited?

◦ Public goods & services Non-exclusive Non-rivalrous

◦ (Publicly-provided goods are not always public goods Paid for with tax

revenue)

For what types of activities are governmental institutions well-suited?

• emergency rescue

• debris clean-up

• bridge & highway repair

• public order & safety

• protecting property

• housing victims

• feeding victims

• recovery planning

Public or Publicly-Provided ?

The Disaster of Government Disaster Mitigation

“The slow and seemingly inept responses of government at all levels both in preparation for and recovery from [Hurricane Katrina] infuriated Americans.”

Emily Chamlee-Wright & Daniel Rothschild: “Disastrous Uncertainty. . . “

Questions:

• Is someone to blame?

• The problem of expected benefits and expected costs

• Perhaps our expectations should be re-examined

Information & Incentives

Proposition:

Governments’ poor performance in disaster relief is best explained not by reference to lack of compassion or to venal and/or incompetent officials, but instead by the centralized nature and the incentives that accompany government decision-making.

What we shouldn’t ask government to do, and why.

Note to Self:

Check the incentives

created by the

rules of the game

Problem: Information Transfer in Centralized Institutions

1. No effective mechanism (like price in markets) to gather and transmit fragmented, chaotic, and dispersed information from the disaster area to the decision-makers

2. People familiar with local conditions, needs, and available resources are not likely to be involved in the decision-making

FEMA Note to Self:

When Disaster

Strikes,

Turn On TV ! ! !

Problem: Information Transfer in Centralized Institutions

3. Bureaucratic institutional structure is characterized by detailed procedures, strict protocols, and line-of-command decision-making.

• effective mechanism for institutions without the motivating incentive of profit.

• create incentives for employees to contribute to the task of the agency.

• Those who follow procedures accrue benefits and those who do not bear costs.

(James Buchanan, Public Choice Theory)

Problem: Information Transfer in Centralized Institutions

4. The political process lacks a feedback loop from the victims to the decision-makers responsible for allocating resources in disasters.

• FEMA trailers

• the Ice fiasco . . .

goes on and on and on . . .

HERE!

Problem: IncentivesIncentives for elected and appointed government workers encourage poor resource use

Moral Hazard • Exists when people are shielded

from the full costs of risk

• Exists in both the private and public sectors

• Insurance, for example

• Private sector has incentive to mitigate; public sector does not

Example:

• 1998 Am Geophysical Union study: from 1970-98 drastic rise in disaster relief costs : people moving into high risk regions

Problem: Incentives5. Incentives for elected and appointed government workers

encourage poor resource use

Good Samaritan Effects• The distortion in decision-

making that occurs when people come to expect generous disaster assistance

• Exists in both public and private (non-profit charities) sector (charity hazard)

• NFIP – National Flood Insurance Program – federal program for homeowners in river flood-plains or flood-prone coastal areas

• Voluntary, 13% purchase

• Can buy after the fact

• 1/3 total payments to 3% claimants

Debbie

When Disaster Strikes, What Can We Do?

Lesson 4:

• Comparative advantage• Competition & non-profits• Institutions:

personal v. impersonal (commercial) interactions• Money

• Role of banks and the FED

Non-profits: Comparative Advantage• Decentralized: Effective transmitter of signals between interested 3rd parties who want to help and individuals and small groups wanting assistance

• Evidence:

• For profit companies channel their charitable

contributions through established relief organizations

• Indonesian Tsunami relief: $700 million private-sector corporate donations funneled through Red Cross, UNICEF & other established organizations

• Wal-Mart: $20m to Red Cross & Salvation Army, in-kind donations through established shelters

• Salvation Army representative of advantages:

• Already present in communities

• Daily experience with people in distress

• Premium on training people in advance

card

A Tale of Two Debit Cards

Non-profits Operate in a Market-Like Atmosphere

• Charities compete for donations

• Not as strong as pure profit & loss, but stronger than gov’t

• Competition is facilitated by feedback similar to markets

• Donors’ self-interest: I want my money to be used well

• Competition for donations is heightened by modern communication technology,

• BBB Wise Giving Alliance

• CharityWatch.org

• Charity Navigator

The Best Way for Individuals to Help• Channel assistance through established organizations with good

records

• Send money !

$$$ The Power of Money $$$

1. Relief professionals can purchase the “right stuff”

Remember:

• You didn’t know about the elephants and the turkey roasting pans. The local culture and environment matters.

• Money is a magnet; it will draw in goods and services

2. Money donations don’t use resources like transportation and storage

3. Pumping cash back into disaster-stricken areas facilitates economic recovery

4. Yes, money is impersonal – and that’s its chief virtue!