NRPLUS MEMBER ARTICLE T he COVID-19 pandemic is expected to cost the U.S. government trillions of dollars in spending and lost tax revenue in the absence of any second peak. While the government response to the crisis has been less than optimal, it’s interesting to note that in 2016, the World Health Organization described the America’s ability to handle a pandemic as “outstanding.” Despite the actual U.S. capacity for managing a caseload of new infectious diseases being startlingly low, America was comparatively well-prepared.
This probably says more about the state of affairs everywhere else than it does about the U.S. In the United Kingdom, for instance, equipment in the national pandemic stockpile was allowed to expire without replacement in 2019. If this doesn’t give you pause, it should. Isn’t the idea of a stockpile that it’s ready to go when you need it? Shouldn’t an outstanding response capability be one that will, well . . . work?
The pattern of governments under-preparing and then paying the price is not one particular to a single country, ideology, or even type of disaster. It happens over and over again. When Hurricane Katrina hit New Orleans, the levees built to protect the city failed spectacularly. After some $14 billion was invested in repairing and rebuilding the system of flood defenses, with all the lessons of history still fresh, residents have started voting down tax increases to pay for their maintenance. In Australia, Deloitte estimates that the economic cost of disasters is $AU6.3 billion per year. Federal spending on relief and recovery from 2004 to 2014 came to a total of $AU8 billion, with another $AU5.7 billion lined up to be spent, and $AU5.6 billion chipped in by state and territory governments. How much did it spend on mitigation? For the federal government, about 3 percent of its spending is on relief. It’s not even as if the expected return to spending on mitigation is small. In the U.S., one paper estimates that for every dollar the government spends on preparation, it saves — in current value — roughly $15 in future damage. It’s not even the case that this is simply spread over too long a horizon to be relevant; $7 of that reduction would be expected to occur during a single election cycle.
So why don’t politicians make these investments? Blame yourself. And your neighbor. And everyone else in the electorate. But mostly, blame the Downsian tendencies of the political classes. It turns out that voters are very responsive to disaster clean-up efforts, rewarding politicians who splash the cash on repairs and restoration, but they don’t respond to spending on preparation. For our elected representatives, this poses an interesting problem. People don’t notice a disaster that doesn’t happen (or worse, they write off the initial warnings as scare stories). But they absolutely notice when their homes are under six feet of water. If you invest in disaster prevention, people won’t see the costs you averted, but they will see their tax bill. If you don’t, then maybe you can pass the buck to the next guy — or, better yet, be the white knight who rides to their rescue.
Politicians, being savvy sorts (at least when it comes to their reelection campaigns), seem to respond in a fairly rational way to this dynamic. One study found that almost half of FEMA disaster spending was driven by political motivations rather than genuine need, while another estimated that 10 percent of disaster-related spending in an election year was driven by political considerations. A third found that the more votes a politician received from a county, the more money that politician tended to direct there in relief.
This isn’t to say that politicians have an incentive to tee up disasters. While one beautifully cynical paper describes a model of a hypothetical “racket effect” that could emerge in particularly corrupt developing nations — where the government knows that international aid will come flooding in for appropriation — this dynamic seems unlikely to emerge in better-structured governments.
Instead, the problem in such governments is simply that the interests of voters and politicians are divergent. We need a mechanism to realign them. To do this, it might be worth looking at the behavior of the private sector. When a company wants to ensure that executives are taking a long-term perspective, it might compensate them with restricted shares that can’t be sold until a given time has passed. In the public sector, we could look at splitting the salary of elected officials into two components, a normal salary and a bonus vested over an extended period.
This bonus would then be linked to the performance of infrastructure in the face of disasters; should a disaster occur, then the vested sum will be lost to the degree to which the politician could be shown to have under-prepared. To avoid creating the opposite problem of over-preparation, we could mandate that prevention projects pass a standardized economic cost-benefit assessment.
Sure, this scheme might create arguments about responsibility and attribution, but it would also create a clear incentive to act responsibly in areas where there are credible threats. And the sooner we create such an incentive, the better. At the moment, myopia means that we tend to under-invest in prevention. The investments we do make are driven by salience, addressing the last problem; we put money into flood defenses after hurricanes, and into airport security once the planes have been hijacked. We will probably invest in pandemic preparedness after the COVID-19 outbreak ends. It would be better for us all if the bout of preventative spending after this is not driven by a disaster’s being allowed to unfold in full.