Monday, September 05, 2005

FEMA and Katrina

There have been a lot of complaints that FEMA was too slow in reacting to Hurricane Katrina. Instead of discussing the merits or demerits of those claims, I’d like to share with you three quotes that seem highly relevant. After that, I want to briefly mention some things I’ve seen and heard in the past few days that seem particularly interesting in light of those quotes.

Five years ago I bought an amazingly useful book. It’s for laymen who have no background in economics, and it simply explains – in plain English, with no jargon or buzzwords – some very basic economic principles and history.

It’s not an advocacy book; it doesn’t advocate liberalism or conservatism or Marxism or anything else. It just says, “When X happens, here is how people affected by it respond, and here’s why.”

It’s fascinating to me the way it illustrates how people really are pretty much the same anywhere, anytime. Over and over we see that a given policy that had a given result in America 10 years ago had the same result in Africa 100 years ago, in Europe 1,000 years ago, and in Rome 2,000 years ago.

The quotes are in blue, and my observations are in black text. All italics were in the original text. I added other forms of emphasis. (Keep in mind that this was written two or three years before FEMA was absorbed into an even larger bureaucracy, the Dep’t of Homeland Security.)

=== QUOTE 1 ===

Monopoly is the enemy of efficiency, whether under capitalism or socialism. The difference between the two systems is that monopoly is the norm under socialism. Even in a mixed economy, with some economic activities being carried out by government and others being carried out by private industry, the government’s activities are typically monopolies, while those in the private marketplace are typically activities carried out by rival enterprises.

Thus, when a hurricane, flood, or other natural disaster strikes an area, emergency aid usually comes from both the Federal Emergency Management Agency (FEMA) and from private insurance companies whose customers’ homes and property have been damaged or destroyed. FEMA has been notoriously slower and less efficient than the private insurance companies.

Allstate cannot afford to be slower in getting money into the hands of its policy-holders than State Farm is in getting money to the people who hold its policies. Not only would existing customers in the disaster area be likely to switch insurance companies if one dragged its feet in getting money to them, while their neighbor received substantial advances from a different insurance company to tide them over, word of any such difference would spread like wildfire across the country, causing millions of people elsewhere to switch billions of dollars worth of insurance business from the less efficient company to the more efficient one.

A government agency, however, faces no such pressure. No matter how much FEMA may be criticized or ridiculed for its failure to get aid to disaster victims in a timely fashion, there is no rival government agency that these people can turn to for the same service. Moreover, the people who run these agencies are paid according to fixed salary schedules, not by how quickly or how well they serve people hit by disaster.

=== END QUOTE 1 ===

Quote 2 is from a discussion of insurance, and the various ways in which people reduce economic and other risks.

=== QUOTE 2 ===

…Government programs that deal with risk are often analogized to insurance, or may even be officially called “insurance” without in fact being insurance. Federal disaster relief helps victims of floods, hurricanes and other natural disasters to recover and rebuild but, unlike insurance, it does not reduce over-all risk. Often people rebuild homes and businesses in the well-known paths of hurricanes and floods, often to the applause of the media for their “courage.” But the financial risks created are not paid by those who create them, as with insurance, but are instead paid by the taxpayers.

In short, there is now more risk than if there were no disaster relief available and more risk than if private insurance companies were charging people premiums which cover the full cost of their risky behavior. Sometimes the government subsidizes insurance for earthquakes or other disasters for which private insurance would be “prohibitively expensive.” What that means is that the government makes it less expensive for people to live in risky places – and more costly to the society as a whole, when people distribute themselves in more risky ways than they would do if they had to bear the costs themselves, either in high insurance premiums or in financial losses and anxieties.

There is an almost politically irresistible inclination to help people struck by earthquakes, wildfires, tornadoes and other natural disasters. The tragic pictures on television over-ride any consideration of what the situation was when they decided to live where they did. But government-subsidized insurance is, in effect, disaster relief provided for them beforehand, and is therefore a factor in people’s choices of where to live and what risks to take with other people’s money…

…The lengths to which some (private) insurance companies go to avoid being later than the competition was indicated by a New York Times story: “Prepared for the worst, some insurers had cars equipped with GPS to help navigate neighborhoods with downed street signs and missing landmarks, and many claims adjusters carried computer-produced maps identifying the precise location of every customer.”

The kind of market competition which forces such extraordinary efforts is of course lacking in government emergency programs, which have no competitors. They may be analogized to insurance but do not have the same incentives.

=== END QUOTE 2 ===

=== QUOTE 3 ===

…Perhaps more than anything else, an understanding of basic economics can enable us to consider policy issues in terms of the incentives they create and the consequences that follow, rather then simply the goals they proclaim and how wonderful it would be the achieve such goals. Both within the government and in the private sector, individuals and organizations then to respond to the particular incentives facing them by trying to promote their own wellbeing.

When this adversely affects others, it need not be due to “bureaucratic bungling” within the government or to “greed” in the private sector. Perfectly rational and decent people tend to respond to the incentives confronting them. These incentives may need re-consideration more than the individuals need denouncing. (NOTE FROM BOB: more on this in my comments and observations below.)

While critics of various programs often point out “unintended consequences” that did more harm than good, many of those consequences were predictable from the outset if people had looked at the incentives created, rather than the goals proclaimed.

Very often either history or economics could have told us what to expect, but neither was consulted. It does not matter that a law or policy proclaims its goal to be “affordable housing,” “fair trade,” or “a living wage.” What matters is what incentives are created by the specifics of these laws and how people react to such incentives. These are dry empirical questions which are seldom as exciting as political crusades or moral pronouncements. But they are questions which must be asked, if we are truly interested in the wellbeing of others, rather than in excitement or a sense of moral superiority for ourselves.

As historian Paul Johnson has said:

“The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false.”

We have seen some of those great human costs – people going hungry in Russia, despite some of the richest farmland on the continent of Europe, people sleeping on cold sidewalks on winter nights in Manhattan, despite far more boarded-up (due to rent control) housing units than it would take to shelter them all. A desperate government in 18th-century France decreed the death penalty for anyone who refused to accept the money that the revolutionary leaders had issued, in ignorance or disregard of economics. After the astronomical inflation in Germany in the 1920s had destroyed millions of families’ life savings, many who were bitterly disappointed with their traditional leaders and institutions eventually turned toward someone who had just been a fringe fanatic before: Adolf Hitler.

No complex or esoteric economic principles would have been required to avoid these and other human tragedies around the world. But it would have required people to stop and think, instead of being swept along by emotions, rhetoric or the political pressures of the moment. For those who are willing to stop and think, basic economics provides the tools for evaluating policies and proposals in terms of logical implications and empirical evidence.

===END QUOTE 3 ===

In light of the above, here are three things I’ve noticed…

1) On Saturday September 3rd, President Bush said, “We will not let bureaucracy get in the way of saving lives.” I may be wrong, but as soon as he said that it struck me very strongly that this was a tacit admission that that had already happened and/or was currently happening.

2) On the same day, Homeland Security Director Chertoff said, “This…perfect storm…exceeded the imagination of the planners…” When the levees broke, Chertoff indicated, it was a “second disaster” that was outside the box in which the planners had operated. Fair enough – let’s give the benefit of the doubt and recognize that it is simply not possible to plan for every possible contingency. That’s why they call it an “emergency.”

But a few hours later, he said that “…the Federal Government will break the mold on rescue operations.” In other words, they hadn’t “broken the mold” yet but they were going to – even though they knew that the levee breaks had “broken the mold” of their planning more than four days earlier.

3) It took the Department of Health and Human Services eight days to set up medical stations in the area, and it also took them eight days to set up a website for medical professionals who wished to volunteer their services.

Why did these things happen?

I believe that employees at FEMA and HHS, with occasional exceptions such as exist in any large organization, are absolutely dedicated to doing their jobs to the best of their ability. I want to re-iterate something quoted above: “Perfectly rational and decent people tend to respond to the incentives confronting them. These incentives may need re-consideration more than the individuals need denouncing. “

The question is, what exactly does “doing their jobs” mean?

Let’s start by recognizing that every large organization has bureaucrats, people who deal with paperwork and accounting and correspondence and compliance and personnel and all those sorts of things. There’s nothing wrong with any of that; those are necessary functions if the organization isn’t to descend into utter chaos.

Private companies also have producers. I’ll use a manufacturer of widgets as an example, but the same thing applies to a company selling services rather than physical goods.

Producers design the widget. Other producers build it. Others transport it. Others sell it – whether the customer is another manufacturer, a wholesaler, a retailer, or the general public. The ultimate result of all these producers’ activities is that at the end of the line, the customers trade their money for the company’s widgets. If that doesn’t happen, the company ceases to exist.

Therefore, within that company, even the non-producers understand that “doing their job” ultimately means supporting the producers in their efforts to satisfy the customer. And that shapes (to return to that quote) how they tend to respond to the incentives confronting them.Their incentive is to keep their job, and the way they do it is by contributing to the production and sale of widgets.

They understand that a failure to serve the customer well can very easily mean that the company shrinks or goes bankrupt, because there are other widget companies working every day to take those customers away.

But what of an organization to whom that last sentence does not apply? What does “doing their job” mean to FEMA employees? What is the job description?

FEMA’s revenue does not come from the people they serve, it comes from taxpayers via Congressional authorizations. So when we think about how they might “tend to respond to the incentives confronting them,” a very different picture emerges. The one overriding incentive is to do whatever is required to keep that Congressional funding coming. That’s the one task – rather than providing satisfactory service to the people they serve – that keeps the doors open and the paychecks coming.

If the only way I could maintain my paycheck was by satisfying Congress, believe me, I’d work HARD to satisfy Congress – which means doing my job exactly as they have specified that they want it done. Other considerations, if any, would be secondary to that.

So what does that mean? It means documenting everything in triplicate. Keeping the files up-to-date. Scheduling meetings, being on time for them, and writing memos about them. Complying with all existing rules and plans – which certainly doesn’t include “breaking the mold,” as Secretary Chertoff described it. It means following procedures in the exact way Congress wants them followed. Generating an endless stream of memos to document that you’ve done all these things. Submitting proposals. Keeping the files up-do-date, especially your CYA file.

It means accepting that nothing else can be done because “we don’t have a form for that.”

I want to re-emphasize that it is entirely rational for FEMA employees to behave this way, because that’s the job description. That’s precisely what they are paid to do. They want to keep their jobs just as much as you and I do, and they are in a situation and a system where providing good service to, for instance, hurricane victims, has absolutely nothing to do with keeping their jobs or with keeping the revenue flowing in. The way they keep jobs and revenue is by never, ever, ever going “outside the box.” And once again, if I were in that situation (assuming I wanted to keep my job) I’d do exactly the same thing.

I might wish that I could do more. But I would also realize that if I get fired for not following procedure, I won’t be able to do anything for anyone – not for hurricane victims, and not even for my own kids.

Think back to our widget company, where supporting the producers is Job One, because they serve the customers who provide the funds that keep the doors open and the paychecks flowing. Compare that with FEMA (or the Dep’t of Motor Vehicles, or any other government agency), where the people who serve the “customers” are NOT the producers of revenue. From an institutional perspective, the incentives and the constraints are completely different – so why should anyone be surprised that the activities and priorities of the employees are likewise completely different?

At FEMA, the “producers” are the people who create the reports and charts and graphs and all the other paperwork that gets presented to Congress, in order to keep the funding going. Clearly, those kinds of activities are unrelated to getting food and water and medicine to people in New Orleans who may well die without it.

Yet those producers – as in any other organization – are the most important people at FEMA. If they fail, the organization dies. So it is entirely rational for everyone to do their job in such a way as to maximize their chances of success, by following procedure to the letter and by never, ever going outside the box.

So let me get back to my original questions. Why did President Bush seem to tacitly admit that bureaucracy had gotten in the way of saving lives? Why did Director Chertoff admit that FEMA had not “broken the mold” (i.e., gone “outside the box”) more than four days after Katrina broke it? Why did HHS take eight days to set up medical stations? Why did they take eight days to set up a website for medical pros wishing to volunteer? Why did so many other things that I haven’t even mentioned take so long?

I have no solution to offer, because I believe that the problem is built in to very nature of FEMA or HHS. That's why the first six words I quoted in Quote One were, "Monopoly is the enemy of efficiency." That's equally true whether the monopoly is owned by private investors or by the Federal Government.

In regard to this problem, I don’t think that it makes any difference at all who the director of FEMA is, who the mayor of New Orleans is, who the President of the United States is, or who the governor of Louisiana is. This problem with institutional incentives and constraints existed long before any of them were elected and will continue to exist long after they’re gone.

That’s why, earlier, I didn’t ask “What is the solution?” Instead I asked “Why did these things happen?” I’m sure that I haven’t provided the full answer, but I think that the things discussed here are an important part of it.