I am currently engaged in a project that has afforded me the opportunity to ask a variety of economists the following question: If, by magic, you could deposit one lesson from economics into everyone's knowledge bank, what would it be?
I've had a specific answer to that question in my own mind, but the aftermath of Katrina has moved one alternative up near the top of the list. Here it is: Bad outcomes do not mean that the decisions leading to them were irrational, neglectful, or otherwise mistaken.
The truth of that statement does not, of course, mean that the converse is false. Sometimes bad outcomes are indeed the fruits of stupidity, sloth, and wrongheadedness. But it seems to me that starting with the latter assumption is a sure guarantee that things will not be better the next time around, for it assumes that better choices will be made if only we have better people in charge. This is rarely so. Better to understand the opportunity costs of particular decisions, and the incentive structures in which social decisions are made.
Here's an example of what I have in mind, courtesy of Micky Kaus:
Federalism Strikes Again: As long as we're apportioning blame in the Katrina fiasco, here's another culprit: federalism, by which I mean a) the U.S.'s interpolation of an unnecessary level of government (states) between cities and the national government and b) the non-hierarchical, "sovereign" nature of this unnecessary level, so that the national government can't just give its Louisiana subdivision orders the way, say, General Motors can give its Pontiac division orders. This gratuitous complication of authority clearly crippled effective planning for a New Orleans catastrophe, as each level seems to have assumed that the other level would have a workable plan. ... And federalism is still bolixing up the relief operation, which now seems to have two bristling, competing centers of authority (the Louisiana governor and the Bush administration).
That has the ring of truth to me. But then what are we to conclude? Let's take the premise as true. Is the right conclusion that a federalist system is an unworkable or undesirable way for a people to organize themselves? Kaus asks:
Wouldn't it be better to have a system with one chain of command? Or is it desirable to have officials working through the night, not to provide help but to defend their turf?
The answer to the second question may seem obvious, but it is not. A good answer will have to add what we forsake in our efforts to make it not so.
Here's another example. In this week's Becker-Posner blog, Gary Becker takes note of the "Good Samaritan" problem:
... public and private assistance in the event of disasters make it more likely for persons, companies, and public activities to locate in high-risk areas because they will often be spared much of the losses. They also may not take out insurance against risks that would inflict large losses; for example, rather few New Orleans homeowners had flood insurance. Studies have shown a small propensity to insure against low probability natural disasters that cause great damage- see "Paying the Price: The status and Role of Insurance Against Natural Disasters In the U.S.", Ed. by Kunreuter and Roth). So private and public generosity to victims of disasters help distort many pre-disaster decisions.
Becker provides the example of parents providing unconditional support for their children, and there are many more examples that most of us confront in our daily lives. Suppose I give a panhandler a couple of bucks to get a warm meal, only to see him an hour later swilling from a bottle of Thunderbird? Should I conclude that, despite my best intentions, I had inadvertently contributed to the affliction that has likely put this person in their unfortunate state in the first place? Yes. Should I infer that my original decision was wrong? I'm unwilling to automatically concede. There is a cost, to be sure, in subsidizing behavior that is objectionable and harmful to the people we are trying to help. But balancing that cost is the possibility of feeding someone who would otherwise go hungry.
If I think about it hard, of course, there may be better ways to meet my objective. Giving my money to a mobile soup kitchen, for example. Or carrying around gift certificates from local restaurants to pass along. The point is that the discussion never starts without a clear-eyed willingness to attach a benefit to every cost, and vice versa.
One last point. In January, Richard Posner wrote on the tragedy that followed the Indian ocean tsunami late last year. It deserves to be re-read in its entirety, but here is a taste:
Why, then, weren’t such measures taken in anticipation of a tsunami on the scale that occurred? Tsunamis are a common consequence of earthquakes, which themselves are common; and tsunamis can have other causes besides earthquakes—a major asteroid strike in an ocean would create a tsunami that would dwarf the Indian Ocean one...
There are a number of reasons for such neglect. First, although a once-in-a-century event is as likely to occur at the beginning of the century as at any other time, it is much less likely to occur in the first decade of the century than later. Politicians with limited terms of office and thus foreshortened political horizons are likely to discount low-risk disaster possibilities, since the risk of damage to their careers from failing to take precautionary measures is truncated. Second, to the extent that effective precautions require governmental action, the fact that government is a centralized system of control makes it difficult for officials to respond to the full spectrum of possible risks against which cost-justified measures might be taken. The officials, given the variety of matters to which they must attend, are likely to have a high threshold of attention below which risks are simply ignored. Third, where risks are regional or global rather than local, many national governments, especially in the poorer and smaller countries, may drag their heels in the hope of taking a free ride on the larger and richer countries. Knowing this, the latter countries may be reluctant to take precautionary measures and by doing so reward and thus encourage free riding. Fourth, countries are poor often because of weak, inefficient, or corrupt government, characteristics that may disable poor nations from taking cost-justified precautions. Fifth, people have difficulty thinking in terms of probabilities, especially very low probabilities, which they tend therefore to write off. This weakens political support for incurring the costs of taking precautionary measures against low-probability disasters.
With a few word changes, that paragraph could have been written about United States this morning. If we did not know this two weeks ago, we surely know it now. We need to recognize that what is being described is nothing less than the characteristics of human beings and the political institutions we create. There will always be flaws, and sometimes things will go horribly wrong. But there is no progress possible if we let "horribly wrong" divert our attention to finding the right person to blame.