Free Market

Government and the Katrina Crisis

The Free Market

The Free Market 26, no. 10 (October 2005)


Katrina gave the Gulf region of the United States a lesson in government failure, and how. In the weeks following the hurricane, it became clear that most of the destruction was not the work of Mother Nature but those who are charged with preventing precisely such disasters as this.

To begin on a personal note, I am a professor of economics at Loyola University New Orleans. The university is currently shut down. Many students have gone elsewhere, and my colleagues and I have worked to find other places to live and work until the university reopens. I escaped the disaster in time, and was safely ensconced in western Canada when the floods came. My heart goes out to those who were very much less fortunate.

Now to the lessons.

The levees that were breached by the hurricane were built, owned and operated by government. Specifically, they were owned and maintained by the Army Corps of Engineers. The levees could have been erected to a greater height. They could have been stronger than they were. There might have been a better detection system. All of these factors are clear in hindsight. As to preparing for the future, that is not government’s specialty.

Similarly, the drainage system could have operated more effectively. Here, the New Orleans Sewerage and Water Board was at fault. It consists of three main operating systems: sewerage, water, and drainage. Had they been more effective, a lot of the inconvenience, fright, and even loss of life undergone in this city could have been avoided.

Then, too, these facilities may have fooled many people into thinking they were safer than they actually were. I know this applies to me. Thus, people were in effect subsidized, and encouraged to settle in the Big Easy. Without this particular bit of government mismanagement, New Orleans would likely have been settled less intensively or possibly residents might have had to bear the higher costs associated with keeping the sea at bay.

Actually, we will never know since there is no market feedback mechanism at work between the quality and functioning of the infrastructure and the costs associated with maintaining and insuring it against failure. Instead, the infrastructure on which life depended was entrusted to public officials, who are isolated agents, cut off from market oversight and accountability and impervious to change.

I am not appalled with these failures. After all, it is only human to err. Were these levee facilities put under the control of private enterprise, there is no guarantee of zero human suffering in the aftermath of Katrina. No, what enrages me is not any one mistake, or even a litany of them, but rather the fact that there is no automatic feedback mechanism that penalizes failure, and rewards success, the essence of the market system of private enterprise.

Will the New Orleans Sewerage and Water Board suffer any financial reverses as a result of the failure of their installations to prevent the horrendous conditions now being suffered by New Orleanians? To ask this question is to answer it. What about the ownership and maintenance of the levees by the Army Corps? It’s not even debated.

As Bush said in his speech: “City and parish officials in New Orleans, and state officials in Louisiana will have a large part in the engineering decisions to come. And the Army Corps of Engineers will work at their side to make the flood protection system stronger than it has ever been.”

So there you have it.

In the same speech, he summed up the creed of government that every failure should be met with ever more power and money: “The system, at every level of government, was not well-coordinated, and was overwhelmed in the first few days. It is now clear that a challenge on this scale requires greater federal authority and a broader role for the armed forces—the institution of our government most capable of massive logistical operations on a moment’s notice.”

The idea of militarizing all crisis situations is particularly disturbing. In the days following the flood, the National Guard went house to house disarming people, which can only increase the likelihood of more looting. The troops broke down doors and handcuffed people solely for the crime of living in their own homes. This is what armed forces do.

These are steps backward. A crucial step forward would be the privatization of this enterprise as part of the rebuilding process (if that indeed occurs; for more on this, see below). Perhaps a stock company could be formed; I suspect that the largest hotels, restaurants, universities, hospitals and other such ventures would have an incentive to become owners of such an enterprise.

Right now, the levees, pumps, and response teams are run by the very same types of folks responsible for the post office and the motor vehicle bureau. I take no position on whether levees are a good or bad thing; only that if they are to be built, this should be done by an economic entity that can lose funding, and thus put its very existence at risk, if it errs. This can only apply to the market, never the state.

This is not the place to examine in detail the case for private ownership of bodies of water such as the Mississippi River, Lake Pontchartrain, and, indeed, all oceans, rivers, seas, and lakes. But the same principles apply here as they do to land. Suffice it to say that this is a question that should be explored, for it is no accident that where there is private property there is safety and responsibility, and where there is not there is none.

Another government failure was overlooked in the days following the flood. Consider that many roads, highways, and bridges were washed out, collapsed, or were swept away. This makes it far more difficult for rescuers to get to the beleaguered city, and for refugees to leave. You will never guess who built, operated and maintained these facilities. Yes, it was government!

It of course cannot be denied that various oil drilling rigs also came unglued, and that these were all privately owned. One of them even collided with a bridge, greatly damaging it. However, there is a significant difference between the two types of events. The market test of profit and loss applies only to the latter, not to the former. Those oil companies that built their platforms more strongly will tend to grab market share from those that did not. No such regimen operates in the governmental sector. Imagine if the oil drilling rigs were all built by the state. They would have undoubtedly created far more damage.

We must also consider questions of population density. Ideally, under a regime of economic freedom, what determines whether a geographical area should be settled at all, and if so how intensively? It depends upon whether or not, in the eyes of the human economic actors involved, the subjective costs outweigh the benefits. The reason no one lives in the north or south poles, and that population density in Siberia, Northern Canada, and the desert areas of Nevada is very low, is that the disadvantages are vastly greater than the advantages in those places.

However, if government subsidizes building in areas people on their own would not choose to locate, then the populace can no longer allocate itself geographically in a rational manner. Similarly, if the government declares drought-stricken farmlands an emergency area, and heavily subsidizes agriculture in such locales, there is also misallocation of settlement in this regard.

The Federal Emergency Management Agency, created in 1979, became part of the US Department of Homeland Security only on March 1, 2003. The federal government has been doling out gobs of money to inhabitants of areas struck by tornados, storms, snow, and other inclement weather for years. Such declarations number in the dozens for 2005 alone. Southern Louisiana, Mississippi, and Alabama have already been declared federal disaster areas. Billions of dollars will pour into these political jurisdictions. Thus, locational decisions are and will continue to be rendered less rational than otherwise, if people had to pay the full costs of their geographical settlement decisions.

As it happens, lots of valuable capital is located in New Orleans. This fact would incline us to reinvest in that locale, storms be damned. But only private enterprise can make such a decision on a rational basis. When government muddies the waters, this cannot take place.

The best way then, to rationally determine whether or not the Big Easy should be saved, is to leave this decision entirely to free enterprise—to capitalist entrepreneurs, who, alone, can rationally make such determinations. As the Austrian side of the socialist calculation debate has demonstrated, only with market prices can this be done. Moreover, private owners make such decisions with their own money, or funds entrusted to them; if they err, they alone suffer. They do not bring the rest of us down along with them.

For anyone watching the rescue efforts after the flood, it was clear who and what was responding. It was not government, which only began getting its act together after the public-relations disaster in the first week. Private charitable organizations—which are also part of the market economy—responded heroically and quickly and well. I’m particularly proud of the role the Mises Institute played in providing a means for a lone internet company in New Orleans to broadcast from the scene of disaster to the entire world.

Katrina led to a horrible calamity. The lesson it teaches us is one that all of history teaches: private enterprise offers hope for success whereas government offers only a guarantee of failure.

Walter Block is professor of economics at Loyola University New Orleans (


Block, Walter. “Government and the Katrina Crisis.” The Free Market 26, no. 10 (October 2005).

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