Tuesday, May 04, 2010

Gulf Oil Spill and the Role of Government

In the context of the current oil spill disaster in the Gulf, have we learned anything about disaster response since Katrina? Is one administration more to blame than the other? Are there parallels between the two scenarios?

Many of the major problems with the government’s response to Hurricane Katrina were not administration specific. In the journal Public Choice, Russel Sobel and Peter Leeson point out that many of the problems that plagued the government’s response to hurricane Katrina are endemic to government in general. They pointed out 6 major issues ( summarized below)

1) The tragedy of the anti-commons ( layered bureaucracy)
2) Type II error bias (over cautiousness)
3) Political manipulation of disaster relief
4) Information Deficiencies- getting timely and accurate info about peoples preferences and needs
5) Glory seeking by government officials
6) Short sightedness effect and bias in government decision making

Public Choice theory involves the application of the tools of economic analysis to government and non-market behavior ( for a more detailed description of these problems and public choice analysis see here Government and Public Choice ) Many public choice economists would agree that these problems are not easily corrected over night, and are such a part of government- as-usual that we should not be surprised to see the same failures repeated over and over. A major problem plaguing government is lack of information. Markets take partial bits of disaggregated information, based on tradeoffs related to the knowledge and preferences of millions of individuals, and utilize that information and provide incentives for individuals to produce results.
Government on the other hand, has to rely on poor incentive structures (pointed out by items 1-6 above) and bases decisions on the limited knowledge and preferences of a few voters, elected representatives, policy ‘experts’ or appointed bureaucrats or 'czars'. Government’s capacity to make quick decisions or carry out complex non-defense related operations is severely limited by a large deficit of information compared to the private sector. This largely explains the superior response of the private sector (like Wal-Mart and Home Depot) to disaster relief after Katrina compared to government agencies.

How does this relate to the current gulf coast oil spill? Was the accident the result of negligence on the part of the privately owned company BP? There is no need to harp on this issue, because according to previous law, BP will be held responsible for any damages they are found responsible for.

More importantly, what about relief efforts? Despite well laid out response plans, why was the government so delayed in their response (see Despite plan, not a single fire boom on hand on Gulf Coast at time of oil spill - Mississippi Press) ? Can the delayed and faltered response be due to the same problems that plagued us after Katrina?

The resources that need to be brought to bear for a hurricane response are probably much more vast and broad than an oil spill. It seems likely that an oil spill would require very technical and specific knowledge to mitigate. Who possesses this knowledge and has command of the resources necessary to bring to bear relief? Typically markets solve these resource and information coordination problems every day via the price system. Are there regulatory barriers in place that would prevent a private sector response?

We have seen with the financial crisis that government actually played a major role by distorting the self correcting and disciplining signals of the market. We found that the government is pretty good at encourageing excessive risk taking and feeding corporate greed. Is it possible that we are seeing another instance of government failure in the oil spill response efforts or possibly even in the root cause of the spill?

There is some inclination that this may be true- from the coordination problem blog post 'Oil Spills, Incentives, and the Economic Way of Thinking':

"Walker's implication, and it's probably right, is that with a liability cap (beyond the clean up costs), the costs of any spill are less than they would be otherwise, giving firms reason, at least on the margin, to be willing to tolerate more risk of such a spill and reducing their expenditures on prevention measures, again at least on the margin."

These are questions to consider prior to recklessly embracing wild regulatory solutions. (already some people have begun attacking the 'Drill Baby Drill' mantra without considering all of the evidence) As we have seen with the response to the financial crisis- bailouts, financial reform, stimulus- without considering the evidence over emotional rhetoric, we are likely just setting ourselves up for 'disaster.'


Despite plan, not a single fire boom on hand on Gulf Coast at time of oil spill
By Ben Raines
May 03, 2010, 12:09PM Missisippi Press

Government’s response to Hurricane Katrina: A public choice
Public Choice (2006) 127: 55–73


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L Barlow, AIA said...

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Matt Bogard said...

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