Government Versus Business: Who's Better in an Emergency?

Though this article isn't really personal finance related, it does have many elements that deal with personal finance such as how the government spends our tax dollars, how companies that take our money actually provide a key service no one has really thought of, and how we'd all survive if a disaster struck us (something -- life -- that falls under my "more important than money" category.) Plus, I found this interesting, so I'm going to run it.

This story says that for-profit companies (Walmart, Home Depot, and Lowe's in this case) are better equipped to help local residents survive in a catastrophe than the federal government is. The highlights:

Examining federal and private responses to Hurricane Katrina, the study says why FEMA was destined to fail and why for-profit companies succeeded at disaster recovery.

The study says Wal-Mart, Home Depot and Lowe's made use of their local knowledge about supply chains, infrastructure, decision makers and other resources to provide emergency supplies and reopen stores well before FEMA began its response. Local knowledge enabled the big-box stores to make plans ahead of the storm and then put them into effect immediately.

"Profit-seeking firms beat most of the government to the scene and provided more effectively the supplies needed for the immediate survival of a population cut off from life's most basic necessities," Horwitz wrote in the study, which was published by the Mercatus Center at George Mason University in Fairfax, Va. "Though numerous private-sector firms played important roles in the relief operations, Wal-Mart stood out."

Also, Wal-Mart leadership gave tremendous discretion to store managers and employees to make decisions rather than waiting for instructions from upper-level management, allowing for more-agile disaster response. CEO Lee Scott passed down a guiding edict to regional, district and store managers: "A lot of you are going to have to make decisions above your level. Make the best decision that you can with the information that's available to you at the time, and, above all, do the right thing."

Score one for capitalism, huh? Now where are all the Walmart bashers? ;-)

But what about all those stores that raised prices just to make a bundle off desperate people? There aren't many of them:

He also examined the conventional wisdom that businesses take advantage of disasters through price-gouging and other unsavory business practices.

Though some price-gouging does occur during disasters, Horwitz's report details how Wal-Mart, Home Depot and Lowe's sent truckloads of free supplies to the hardest-hit areas in the aftermath of Hurricane Katrina. He noted that's good public relations, of course, to help build long-term customer loyalty.

I have to mention that one government agency did do a great job -- the Coast Guard:

Horwitz said the Coast Guard also places a strong emphasis on local knowledge. A flat organizational structure and unique agency culture allow for subordinate officers to alter the plans for a specific operation so long as they follow the commander's intent.

The Coast Guard's experience with search-and-rescue operations and marine work, and its division by geographic area, provide greater expertise for disaster response, Horwitz said.

The bottom line:

"Disaster response happens at the local level," Horwitz said. "FEMA is not local to anyone except people who live in Washington, D.C."

So it's not really a business versus a government story, it's a local versus national story. I don't see any comments on how local governments did -- perhaps they were to be commended as well. Or maybe they don't have the financial resources or skills/knowledge to direct a rescue effort? I'm not sure. But to me, this is an encouraging report about business in the US and how they can be a unique help when no one else can/will.

Thoughts?

Comments

[rwh]

I'll give Wal-Mart credit where credit is due regarding their response to Katrina. But I think you have to acknowledge FEMA performed badly because it was mismanaged (Heck of a job Brownie!!!) during the time leading up to Katrina. From all reports I read at the time and in the aftermath, FEMA's record was considerably better during the Clinton Administration.

[rwh]

Also, there shouldn't be too many businesses engaged in price gouging in the aftermath of disasters because the practice is illegal in most places. Good PR is certainly a good motivator, but so is the threat of prosecution.

[AdamCO]

I don't think the problem with FEMA is that it is government per se, I think the problem with FEMA is that it was being run under policies of the Bush administration, the land of horrible management.

[Darin H]

One of the biggest problems with Katrina was the government of Louisiana. Corrupt and inept as always (both R & D). Blanco didn't order the evacuation early enough, and didn't know what to do with the National Guard. Compare them to the response of Mississippi, who was hit harder by the actual hurricane (NO was ok until the levies broke). The new governor down in LA is a hot shot reformer and has started to turn things around, hopefully he'll be able to succeed. So yeah, it's more of a national versus local, but also a bit more of state vs state (corrupt vs competent). When Florida was hit with 4 hurricanes the year prior, the same exact FEMA was praised at how they handled it. Maybe that speaks more to the state governments of FL, MS and LA?

[Jim]

The fact that the Coast Guard performed well in the exact same situation is pretty good evidence that FEMAs failure with Katrina is not really indicative of some sort of inherent weakness in the governments ability to respond to disasters. The Coast Guard is also a national organization too so its not really just about local versus national. Is it just that FEMA itself is ineffective? Well they've been around since 1979 and I don't recall hearing of any problems in the past.

Personally I think FEMAs failure with Katrina was really more about the leadership and structure of the organization at that time.

Jim

[Brian]

FEMA actually turned away private charities and businesses that were trying to help and deliver goods. The government kicked law abiding citizens out of their homes and seized the guns of those allowed to stay. The government did the exact opposite of helping.

[Chris]

FEMA under George Bush is a joke. If you start out believing that the very organization you are in charge of is a useless relic that can be phased out - well you saw what happend.

If you start off thinking that emergency preparedness is one of the foundations for the very reason we have governments in the first place, well then things are different.

[Beth]

Two comments here - one is an agreement with previous comments. FEMA was an effective independent agency, prior to the Bush administration. The problem arose when it became just another part of the Department of Homeland Security and had to fight with all the anti-terrorism agencies to get funding. In addition, before the it had been run by experts in disaster recovery. After the move it became a place to appoint your friends to return political favors.

Second, I'd love to think that Home Depot was up and running purely out of a desire to serve the community. Unfortunately, I'm not that naive. They stood to make a HUGE profit in the aftermath of the disaster, even without inflating prices. And, in fact, the 2 Home Depots in the NOLA area were the most profitable in the country for months afterwards (this may still be the case, haven't checked lately).

As for Wal-Mart, from what I remember the store in New Orleans proper had just reopened when I moved away from the city 8 months after the storm. Not particularly efficient, as far as I'm concerned.

[Matt]

I think so-called "price gouging" is getting a bum rap here, as it does most places. In voluntary exchange, prices are supposed to be set by supply and demand. So when disaster strikes and supply goes down while demand goes up, prices are supposed to go up too! Even if that means they go way, way up.

A good example would be motel rooms. A family of five made temporarily homeless might decide to get two rooms in order to be more comfortable instead of getting by with one if prices weren't changed to reflect the higher demand and lower supply post-disaster. As more people do that, very quickly, there would be no rooms left. If I were a disaster survivor, I would much prefer the motel owner raise his prices so that I can still get a room if I really need it.

The case is even stronger for supplies that are more portable like gasoline, electric generators, potable water, ice, food and firearms. Not only do higher prices do a better job of rationing on the demand side like the example I gave above, but they also send a strong signal to suppliers that they can make a lot of money by dropping whatever they're doing and rushing their goods and services to the disasters' survivors as soon as possible. Also, the promise of high profits could convince a merchant who is already located in the disaster area to stay and sell rather than flee.

"Price gouging" literally saves lives, while laws against it prevent people who aren't motivated by altruism or a desire for publicity from bothering to help and thus exacerbate the misery of those affected by a disaster.

By definition, any transaction entered into by both parties voluntarily benefits both parties. Ugly as it may seem, that holds true even when one of the parties is vastly better off than the other one.

[AdamCO]

Matt,

I don't often read arguments in favor of price-gouging. Paying $500 for a hotel room for a week could very well bankrupt folks without much money--or drive them deep into debt. When the seller has that much power over the buyer, and the buyer has no choice but to purchase the goods, nobody's interests are being maintained but the seller's. In your example, the motel owner could just say, "one room per family." Not that hard.

Laws against price gouging are based on the idea that a free market creates certain externalities that are detrimental to health, safety, and morals. It's somewhat related to basic environmental laws...even though individual companies are better off in the short term by dumping trash in the oceans, eventually the aggregate actions of individual companies results in every company's ability to do business being severely harmed. My point is, free markets have their limits and can be devastating when not properly regulated.

[Matt]

AdamCO,

No, it is hard: even if every hotel owner tried to impose a one-room-per-family rule (which is highly unlikely to happen in the first place), it would prove unenforceable. If I knew that the hotel had that rule, I would split my family into two groups before walking into the lobby and pretend to be two different families. Or get one room at one hotel and another room at the hotel across the street. Either way, I'd get more rooms than I would if I could only afford one.

Imagine a purely altruistic world with no greed. I go to somebody selling, let's say, water. I tell him I need some water, but I'd like a little more than I really need only if there will be enough left over for other people. He knows I've been through a disaster and so, meaning well and wanting to help me, he lies and says, "sure! there's plenty! take all you want." He does this for 10 more people, and then he's out of water to give away.

In the real world, when a well-meaning merchant (or one who fears prosecution under anti-price gouging laws) tries to keep prices below the level dictated by supply and demand, he's telling the same kind of lie. As much as anything, prices are a signal about just how dear a product or service really is in a given circumstance.

You brought up the concept of negative externalities, a definition of which is bad deeds that market mechanisms alone have no means to adequately punish. The example you gave of companies dumping waste in the ocean is actually a good example of that. But price gouging isn't. It just doesn't meet the definition.

[Jared]

Read a book called The Shock Doctrine by Naomi Klein and then tell me that failures following Katrina were inherent to government behavior.

[Matt]

Jared,

I read a review of the book, and I think I'll just stop there: http://www2.nysun.com/article/63867

[David]

FEMA is run by people who should not be allowed more than $20 at one time. Teh policies are set by elected members that do not have enough insight or understanding of what emergencies are or have every participated with the aftermath on a first hand basis. Rule are to keep everyone in line but often the rule are made without the consideration of how bd it can get. The issues of Katrina belong with the state of Louisiana and the criminals that run that state. When Andrew hit Flordia there were deaths due to the storm but people heeded the warnings and left the area. Louisiana had the opportunity to help move people out of the city but they were too slow, unprepared, and unwilling to put forth the effort to save the people that elected them.