What went wrong, in general terms

Matthew Kahn asks:

1. How much did the people of the New Orleans metro area invest in their own levees? Given that property owners and public safety in this metro area are the main beneficiary of such investments, why wasn’t this sufficient incentive for the Mayor and the metro area’s other political leaders to tax citizens collect the money and invest in better, more modern levees?

Here is the full post, which includes three other to-the-point questions.  I am not into the blame game, but Randall Parker’s recent post also raises questions about the underfunding of New Orleans local government.  Of course the Feds messed up too.

Are democratic governments simply not very risk averse when it comes to very bad, low probability events?  The model behind this conclusion is simple.  Politicians would have to spend the money on protection no matter what, and lose the benefits of spending that cash elsewhere with p = 1.  The chance of reelection goes up only with a small probability, namely if the bad event happens and voters can tell their representatives were suitably cautious.  Why not instead spend the money with a higher chance of boosting reelection prospects?  The key stylized fact is that if a politician messes up very badly, there is no penalty worse than removal from office, which is a penalty (roughly) fixed in value.  And since the value of holding office may not fall in proportion to the suffering caused by the disaster, politicians’ utility maximization will not bring optimal spending either.

Addendum: David Bernstein has some good information on federal spending cuts.  And there is also a complicated story about overreaction ex post, although without necessarily doing much useful, read Daniel Drezner.


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