Reprinted from the Freeman
An earthquake or hurricane always generates an inspiring rush of private generosity. People are never more willing to help their neighbors than when they are casualties of nature. It’s also inspiring when, as after the Midwestern floods, the victims adapt to their terrible losses and begin to rebuild their homes and communities without a whine, even lending helping hands to others.
What Leonard Read called “the miracle of the market” is also on display. Economic conditions are radically changed by a disaster. Resources that were once in great supply go into shortage. Materials and services once desired only in limited markets are suddenly in general demand. Yet free enterprise works rapidly to absorb these shocks. Through a system of private property and free-floating prices, the market coordinates people’s needs and transforms tragedy into social cooperation.
Besides generosity and enterprise, something else seems ever-present in natural disasters: meddling government. Indeed, bureaucrats and politicians love nothing better than pretending to come to the rescue. Their usual do-goodism appears more plausible and sincere. Their favorite solution to social problems—controlling markets and pouring in other people’s money—suddenly appears to be the only way out. Of course, the “solution” creates new imbalances, slows repairs, and skews the rebuilding effort.
Prices after hurricanes, earthquakes, and floods reflect sudden changes in supply and demand. Essentials like water and gasoline soar in price as if to inform people that they should use them sparingly. What is remarkable is not the high prices—which the media always ascribe to “gouging”—but that the market works so well in the face of catastrophe. When local bureaucrats put caps on prices, they create more shortages.
After Hurricane Hugo hit Charleston, the city punished price “gouging”—that is, charging the market price—with fines up to $200 and 30 days in jail. Hurricane Andrew, which hit Dade County, Florida, inspired bureaucrats to new heights of tyranny, with fines of $500 and 60 days in jail. When that didn’t work, the state attorney general set up a Soviet-style “Economic Crimes Unit” and threatened fines of $10,000.
All this is folly. Businessmen will always charge as high a price as they can get away with, whether in the midst of disaster or not. Consumer sovereignty and competition, not fines, prevent them from “gouging.” Those market forces are always in place, and especially so after a disaster. Businessmen know there are needs to be met, and rush in, sometimes from afar, to provide them. Entrepreneurs spend their lives looking for unmet needs they can satisfy. But these providers have to compete with each other, a process which results in prices that are neither too high, which would lead to underutilization, nor too low, which would lead to waste.
If government intervenes by mandating artificially low prices, it conveys misleading information to consumers, causing them to use more than they should of scarce resources, and making existing shortages more intractable.
Is it wrong for private enterprise to make money from disasters? Is this “profiting from other people’s misfortunes”? If capitalists didn’t benefit, it wouldn’t make economic sense for them to provide people with what they want. The other beneficiaries, who seem somehow forgotten, are the people with whom the capitalists make their exchanges.
It’s not only local government that impedes market adjustment. Natural disasters are boons to the central government as well. The Los Angeles earthquake, for example, inspired the federal government to unparalleled fits of “generosity.” One high-ranking official asked that “Congress and the American people approach this situation with the same sense of compassion and concern for our fellow human beings that we’ve applied in other disasters.”
He did not offer to clean up debris or have Congressmen repair the highways. He wanted the government to transfer $8 billion from its owners and earners, to non-owners and non-earners, the government and its selected clients. By the time the transfer was finished, the total exceeded $8.6 billion. The timing worked in the government’s favor as well. The extra spending came too late to be included in the FY 1995 budget, so spending and deficit projections were even more off the mark than usual.
The central government did not route the money directly to the L.A. residents. That would have taken much of the fun and political advantage out of government compassion. Instead, much of the money went to agencies within the central government itself. The Federal Emergency Management Administration (FEMA) received $3.9 billion, the Small Business Administration $1.44 billion, the Education Department $245 million, the Transportation Department $1.4 billion, Veterans Affairs $280 million, and Housing and Urban Development $500 million.
The central government’s infusion of cash provided a new lease on life not only for FEMA but for every other bureaucratic beneficiary. They all got budget increases they couldn’t have negotiated through the usual political process. Not only did their budgets zoom, but they were offered the chance to appear essential to the commonwealth. “Good thing we didn’t cut those agencies way back when,” we are encouraged to think. “What would we do without them now?”
Most people hurt by the L.A. earthquake will never see a dime of the $8.6 billion. To get a small business loan, you would have to fill out a giant form, subject yourself to federal scrutiny, be politically correct, wait a surprising amount of time, and then rely on the discretion of bureaucrats. Even if you did get the money, you should tear up the check, since such wealth transfers are both immoral and socially damaging. Most of the money, of course, ends up in the hands of lower levels of government, who take their cut and disperse the remainder to favored contractors and other campaign contributors.
Henry Hazlitt, in his book Economics in One Lesson, encouraged us to look at the unseen consequences of government benevolence. The billions extracted from the private economy to clean up the Los Angeles earthquake could have been left in private hands to expand investment and jobs. Some of this capital would have flowed to Los Angeles, where people’s needs are the highest. The private sector could have invested at a profit in a place with high consumer demand; instead private earnings were forcefully taken by government, which empowers that institution at the expense of society, penalizes work and savings, and rewards the socially unfortunate skills necessary to get loans and grants from politicians.
Oddly, wealth destruction (through either earthquakes or taxation) does not appear in the official data. In a strange statistical anomaly, wars and natural disasters appear to increase economic growth. The reason is the manner in which the gross domestic product is calculated. It counts only spending and production of goods and services. When flood waters engulfed the Midwest, for example, the result was not a declining GDP but an expanded one. The GDP also counts government spending as wealth, when in reality it subtracts from wealth, only one of many other reasons that the construct deceives rather than informs about the economy.
Government aid also squeezes out private solutions the crisis would have generated. Consider, for example, the highway system. In Los Angeles, several crucial highways collapsed, and everyone bemoaned the failure of their “earthquake-proof” design, and screamed for roads with more reinforcement. Why not use this golden opportunity to let private companies own and build them, and charge a fee for their use? The roads would have been built much faster, and because private companies could be held responsible for a future collapse, they would have added incentive to make them as strong as possible.
An added benefit of private roads would be reduced congestion. In Los Angeles, traffic jams cause billions in lost productivity and even lead to violent fits of rage. When road service is offered at zero price, as economists point out, the inevitable result is overutilized resources. If private companies ran the roads, prices would match supply with demand. The roads would be safer, in better repair, less congested, and taxpayers all over the country would have been spared higher taxes for Los Angeles “freeways.”
Instead, Los Angeles will pay a heavy price for its reliance on federal aid. Newly built roads will be even more congested than the old ones. Schools will find themselves more subservient to Washington than ever before, since the Education Department will take credit for rebuilding classrooms. And businesses that do get money from the Small Business Administration and other agencies will shift their loyalties from customers to executive agencies.
After a crisis, the government rarely shrinks to its pre-crisis levels. This has been the pattern throughout this century, as Professor Robert Higgs has pointed out. After the Great Depression and the Second World War, for example, we never returned to normalcy. Similarly, the Cold War helped justify huge military budgets and expanded Pentagon power, but once it ended, the promised “peace dividend” turned out to be a tax increase so we could play vice squad to the world.
The only way to prevent government at all levels from taking unfair advantage of natural disasters is to keep it from intervening in the first place. Two months before the earthquake occurred, former Senate candidate Bruce Herschensohn spoke at the Claremont Institute near Los Angeles on disaster aid. In his speech, he urged that California turn down all central government aid when the next earthquake hit.
He cited the waste and unfairness of taxing people all over the country to pay for California’s ills. And he noted that nothing in the U.S. Constitution gives the central government authority to bail out earthquake-prone areas. The Tenth Amendment reserves to the states and to private enterprise the responsibility for such disasters.
If California had tried such an experiment and rejected government aid, it would have set—as Mr. Herschensohn noted—a shining example for the rest of the country. And it would have been the first major step away from leviathan. Instead, we witnessed another bad example of the government pretending to rectify every ill in society except statism, and making us all worse off in the long run.
