Deflection, Ideology, and Disaster: The Worst Of All Worlds

With the epic Hurricane Irma meting out destruction in Florida, Texans only just beginning to unwind the damage of Harvey, the memory of Sandy still stinging for New Yorkers, and Katrina a shameful blight on our recent history, the world is actively pressure testing our social contracts in ways that illustrate serious rifts at best and magical thinking at worst.

Meanwhile, there exists a natural temptation to broach climate change matters in the wake of a natural disaster such as Irma, but the reality is that exploring such a complex topic in the context of a single story would be irresponsible, and is best left to a numerical analysis of trends across a statistically significant collection of data points.

And yet there is a confluence of several factors that should have us scared independent of the culpability of humans in climate change on our planet:

  1. population density, especially in vulnerable coastal areas, is way up
  2. the transportation infrastructure around population centers is taxed to its limits
  3. population centers cannot operate self-sufficiently beyond a trivial time period
  4. population centers depend on fragile infrastructure to satisfy their needs
  5. a shocking proportion of people living in the most vulnerable areas are uninsured
  6. the terraforming around population centers eliminates natural weather shielding
  7. tight political and market cycles make engineering for fault tolerance difficult

The consequences of these realities could not be more palpable than for those struggling to find gasoline, water, and lodging as they flee the affected areas via jammed roads.  And the commentary from various thought leaders staking out their positions could not be less helpful, with government officials lamenting the cruelty of price gouging within the local economies and market religionists saying that allowing market-based pricing is all that is required to best allocate scarce resources.  To be blunt, the former are deflecting responsibility, the latter are making context-unaware arguments, and neither are meaningfully engaging with the reality on the ground.

When a big box store leaves pricing structures untouched in the run-up to a natural disaster, it is not doing so altruistically.  Rather, it is prioritizing optics over all else, and as consequence we see footage of hoarders carrying cartloads of regular-priced bottled water out of the stores.  Some of these purchasers are just panicked end-consumers, likely buying more product than they strictly need, doing so at the expense of other end-consumers who will find empty shelves.  Others are opportunistic re-distributors engaged in arbitrage between the storefront and the ultimate consumers who will pay huge mark-ups after finding the stores picked clean.  Both cause churn and uncertainty during a demand shock and do nothing to synchronize the supply-side with the local population’s needs.  The demand signal does not make its way usefully upstream.

But the crux of the folly of those making market-based arguments could be summed up in the one word that they are ignoring: latency.  Free markets, judiciously managed, are a great way to equilibrate the needs of producers and consumers.  But that equilibrium takes time: time for the demand signal to reach producers and time for the goods to flow from where they are produced to where they are needed.  This reality is perhaps well suited to dealing with the aftermath of a disaster, where the dramatically inflated local rates for professionals in the construction industry can serve as a nationwide draw until the crisis resolves, convincing, say, a plumber from California to spend a year living in Texas, but less well suited to sorting out a situation where the difference between life and death may be measured in hours, every manner of infrastructure is already completely overwhelmed, and the last thing affected regions need is a poorly managed inflow of people and goods just as officials are desperately reconfiguring highways to be one-way out of the area.  Allowing prices to swing during a crisis might help with the rationing of existing local supplies, but in a way that can feel capricious and cruel, and that does nothing to ameliorate the root cause of the misery, a supply shortage.

The 2008 financial crisis taught us some really painful lessons about what it means for market players to be too big to fail in the realm of banking.  We ultimately concluded that we still mostly want market forces steering things but that we also want certain safeguards in place to prevent cascading failures from spiraling out of control.  So-called “stress tests” became part of the national discourse.  We perhaps ought be drawing similar conclusions pertaining to distribution networks around our preparedness for disasters in the physical realm, natural or man-made, because when the proverbial excrement hits the fan things will be happening way too fast if we have not prepared and tested, doing so with a thoughtful blend of market forces and government planning and validation.

Unfortunately, to the extent that there is currently any interaction between government and market entities on such matters, it is just to have the former threaten criminal prosecution around “price gouging” for which there is no clear definition, and the savvy players among the latter group to take a hands-off approach that catalyzes situational anarchy.  With a continuation of this approach in the face of increasingly extreme environmental conditions we can only expect worsening outcomes.

Acquiring resources quickly in an emergency can be fantastically expensive and dangerously unreliable.  Helicopters to send in relief ain’t cheap or highly available.  Preparing proactively for an emergency, meanwhile, is not without its costs, and entails less resourcing for fun things during sunny days, which requires a certain degree of discipline.  Locating warehouses full of critical supplies near population centers means ponying up for the use of scarce real estate and maintaining inventory every day as a form of insurance payment.  Somebody always has to pay.  The main questions are who and when which will ultimately govern how much.

The situation we’ve currently got is one in which politicians engage in grandstanding and face-saving, established wholesalers and retailers are by and large helpless or indifferent, opportunistic profiteers make a quick buck without improving the ecosystem, and the masses suffer.  By the time a case of water is going for $100 we have really screwed up.  We could do a lot better in future situations by taking a more proactive stance.

Imagine a public-private partnership that harnesses the strengths of each sector by doing  things like the following:

  1. incentivize private sector distributors to maintain larger warehousing and distribution footprints in the vicinity of disaster prone areas to absorb demand shocks
  2. incentivize disaster zone residents to leave their homes in a more proactive and orderly fashion to smooth the load shocks on transportation infrastructure
  3. perform regular stress tests that posit certain scenarios, query the present availability of resources, simulate the outcomes, and phase in performance penalties
  4. establish data anonymization and aggregation procedures that allow for the fusion of public and private data sets to both predict and manage the play-out of disasters
  5. begin pulling the levers that will require those who choose to live in high-risk areas to bear fuller costs for their decisions so as to encourage rational risk-taking, to include meaningfully enforced requirements on insurance that ultimately cause either changes in behavior or fair passing-along of costs

Consider one of the specific things that happens during mass exoduses from disaster areas, specifically that highway toll collection halts and traffic streams through unmonitored.  That’s pretty reasonable given the hand the government agencies have at the moment.  But imagine what we could do if over time we completely phased out the acceptance of cash tolls, had the corresponding expectation that every vehicle transiting a toll station could be tracked to an owner, and implemented some manner of “toll” that incentivized people to leave more proactively.  This wouldn’t necessarily be easy, because the people most likely to procrastinate are probably the ones least able to take time off from work, but with some cleverness it could be done, perhaps using a progressively-structured income-linked tax credit as well as emplacing laws that prevent retribution by employers against employees who take advantage of the arrangement.  The trade-off relative to having to perform expensive and risky rescue and relief operations in disaster areas would likely be worth it.

It is probably not particularly controversial to say that $100 cases of water in disaster zones is icky and heart-breaking.  Making sure that those kind of things are less likely to happen in the future is going to take some serious thinking, hard work, and proactive sacrifice.  Harsher times are coming.  For now, the system we’ve got is the system we’ve got, and people need help.

 

 

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