You Don't Save What You Don't Own

Disaster amplifies the private-public incentive divide

Now that everyone is preaching their Lessons of Katrina, let's conduct a little thought experiment with variables. The laboratory stretches from ground zero in Louisiana hundreds of miles up the East Coast, along crippled gasoline supply lines. What if the buses in New Orleans had been privately owned, and the gasoline supply had been a nationalized, government-run quasi-utility?

We know that New Orleans' infamous municipal and school buses were left to be destroyed at the very instant they were needed most. Over 400 were left idle when they should have been pulled back to higher ground for use in those tense days after Katrina hit.

Had there been a futures market on buses in New Orleans, the value of the buses would have skyrocketed as Katrina approached, signaling their increased utility in the emergency. But even without such an overt market signal, any private owner of the vehicles would have exhausted all opportunities to save his or her property. Nobody who owned such a potentially valuable product would have done what New Orleans Mayor Ray Nagin did: let it all go to waste on the assumption that drivers would be impossible to find. Greyhound, after all, did not leave hundreds of its buses to be destroyed. And, of course, this very fact caused Nagin to scream for "every doggone Greyhound bus line in the country" to come to the aid of his city. And it should go without saying that no private employer would long tolerate a workforce that, in Sen. Mary Landrieu's memorable description of New Orleans public sector workers, has trouble coming to work even on sunny days.

Now to the flip side. Gasoline prices are nothing but one big futures market, constantly transmitting both the current value and the expected replacement cost of the stuff to consumers. Would a government-run monopoly have permitted prices to zoom past $3 a gallon, reflecting both reduced refining capacity along the Gulf and, more importantly, power outages on key gasoline pipelines to the East? Or would a government decree have muted this powerful conservation signal to everyone on the supply chain? There is little question that, judging from the hys terical ravings about "price gouging," that a system of rationing and price controls would have been instituted, thereby guaranteeing long, costly lines to get gas and quite likely an exhaustion of the limited supply as consumers bought too much gas at artificially low prices.

And although craven politicians refuse to see this, the long-term profit-maximizing route for private gasoline production seems to be to try to spread out the constrained supply for as long as possible until something like full capacity is available. In other words, to raise prices enough to deter sales, not "gouge" people. As supply dwindled down to near exhaustion in some markets, wholesale "over-allocation" fees kicked in which were intended to discourage one or two distributors from buying up the remaining supply. Try to "corner" the market in gas and you'll pay an extra 50 cents a gallon. Clueless consumer groups predictably screamed bloody murder about the surcharge, heedless of how this pricing mechanism helped to save and spread out a scarce supply and ensure consumers would have some gas to buy at some price.

The motive for this policy is plain; it has little to do with being "fair" to consumers in the sense that politicians use the word. The worst of all possible worlds is for a gas station to sell out of product. Among other things, it means your door will no longer be darkened by potential customers for the other high-margin merchandise you sell—milk, beer, bread, bottled water. You'd much rather sell several thousand gallons less over a few days than eat everything on your store shelves while leaving a permanent impression on customers that you are an unreliable supplier of a vital good. All of these incentives push the private gasoline owners to try and conserve their supplies in times of crisis. How do you conserve? By raising the price.

As the public-sector tab for Katrina's cleanup climbs, fans of big government will point to the billions in loans and grants as proof of the value of a robust state. The costs of that same state—and its institutional disinclination to save billions—will be forgotten along with those soggy New Orleans' buses.