In the Rubble of Disasters, Politicians Find Economic Incentives

By Castelazo, Molly D.; Garrett, Thomas A. | Regional Economist, July 2003 | Go to article overview

In the Rubble of Disasters, Politicians Find Economic Incentives


Castelazo, Molly D., Garrett, Thomas A., Regional Economist


Taxpayers spend an average of $3 billion each year to help victims of natural disasters rebuild their lives. The public expects that the money the federal government spends on disaster relief goes to those people who need it most and that the amount of disaster relief doesn't go beyond the actual cost imposed by the natural disaster. As with any compassionate public policy-such as food stamps, welfare and unemployment insurance-the public has the right to expect that elected officials carry out disaster-relief policies to improve social welfare without regard to their own political agendas and self-interests.

However, public choice, a discipline that applies economic theory to political science, demonstrates that political agents behave just as private agents do; that is, they act in their self-interest and change their behavior in response to economic incentives. Recent studies applying this doctrine to disaster relief reveal that we may be paying for politicians to build their political capital as well as for families to rebuild their homes.

Private vs. Public Self-interest

The private sector consists of firms and consumers. A firm's self-interested goal is to maximize profit, and a consumer's goal is to maximize well-being. A firm will produce the level of output that maximizes its profit. Any change in input prices or product demand gives a firm an incentive to change production levels. Consumers, faced with certain prices and a fixed budget, purchase various quantities of goods and services that maximize consumers' well-being. Price or income changes provide consumers the incentive to change their bundle of consumption goods.

Elected officials in the public sector are also motivated by self-interests. These include maximizing political support, campaign contributions and, ultimately, votes. As with private agents, the fact that public actors are motivated by self-interest does not imply that they are not altruistic-self-interested behavior is different from selfish behavior. A firm that earns profit provides a benefit to society because the firm is producing what society wants at the lowest cost possible. For consumers, self-interest can take shape as charity, concern for others and a desire to increase public welfare. Public actors often promote policies such as unemployment compensation, minimum wage legislation and food stamps. These policies are designed to improve people's lives, while at the same time the policies increase the support that politicians receive from those people who benefit from such policies.

Private vs. Public Cost

Public officials can enact policies that are in their self-interest without regard to the social cost of such policy. The primary reason political agents can conduct such policy is that, unlike private agents, political agents often do not incur the cost of their decisions. A firm will affect its profit when it changes production levels or input mix. Consumers who choose to consume one good over another will incur the opportunity cost of foregone consumption. The actions of political agents, however, are often hidden from the public, thus allowing a disconnect between the cost and benefit of any policy. In addition, the cost of any policy is often spread across thousands or millions of taxpayers, making it unlikely that the cost per taxpayer is high enough to incite taxpayers to come together and oppose the policy. These facts provide political agents an incentive to conduct policy that provides benefits to them, but generates excessive cost to society as a whole.

Such politically motivated decisions are especially common where regulation and strict guidelines are absent. In support of this idea, one public choice model suggests that the executive branch behaves as an electoral vote maximizer and that congressional oversight committees make sure that bureaucrats implement the policy preferences of legislators on these oversight committees.

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In the Rubble of Disasters, Politicians Find Economic Incentives
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