When Government Fails . . . Blame the Market!!!

When the contrast between the efficient performance of market organizations like Wal-Mart and FedEx and the incomptent performance of govertment becomes too embarrassing, what do you do? If you're Daniel Gross, you try desperately to lay the blame for some of the impact of the disaster on efficient management and logistics!

But Wal-Mart and the private sector in general are getting way too much credit for their intermittently impressive relief efforts. In fact, the economic and management trends that Wal-Mart and FedEx typify may have been responsible for some of the post-Katrina suffering.

OK. So what's are the trends?

Wal-Mart and FedEx are the platonic exemplars of the Just-in-Time economy, which prescribes keeping inventories low, maintaining the precise amount of capacity needed, and building and exploiting hyperefficient supply chains.

Great. And so what? So, Gross tells us, a privately owned hospital lost its power! Bell South and Entergy had a lot of their physical infrastructure destroyed and so couldn't provide phone service and electricity! Some refineries got badly damaged and so couldn't move gas!
Gross's painfully ill-executed attempt to connect things that aren't connected makes plain that the problem here has nothing to do with just-in-time-ism. How well did electricity, phone, and gas fare in natural disasters before the just-in-time revolution? Well, worse! Did Hospitals formerly have more backup generators? No. Gross is implying that there was a less efficient time in which these systems were at least more robust, and this lost of robustness cost us. But the less efficient but more robust age never was. He's just bullshitting us. With more efficient and thefore faster and cheaper wholesalers and shippers, stuff that gets broken is easier to fix faster, cheaper. The whole system is more robust, and heals more quickly.
Russ Roberts points out that although many of the most intense hurricanes are recent, the biggest death tolls are long in the past. We are more robust because we are wealthier. And we are wealthier because companies like Wal-Mart and FedEx contribute to the production and accumulation of wealth through their efficiency. In addition to getting stuff where it needed to go when the government couldn't, Wal-Mart and FedEx save lives by raising our standard of living.
Gross crows that oil released from the emergency reserves is keeping prices down.:

After Katrina, the federal government began to release crude oil from the Strategic Petroleum Reserve. And it came just in time. The move helped lower the price of crude, keep refineries humming, and calm panicky consumers.

There's no doubt the government could learn a great deal from the private sector about how to prepare for and respond to a natural disaster. But the private sector may have something to learn from the government, too.

But the private sector already learned its lesson from the government on this score. The lesson is that there's no benefit in stockpiling oil inventory. The existence of a government reserve is one of the very reasons that the private system is less robust than it otherwise might be, and if Gross was honest, he'd point that out. If the government is going to flood to market to keep down prices whenever there is a shortage, the potential gains from private stockpiling are dissipated, and so there are fewer private stockpiles.
So, what's the lesson for the government? No price system — no consistent, credible, clear feedback on performance — equals woeful inefficiency.
And what's the lesson for Daniel Gross? That Daniel Gross should get a clue.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center