Yet, contrast FEMA’s post-Katrina performance with that of the private sector. Weeks before the storm, Home Depot transferred generators, flashlights, batteries and lumber to its distribution centers near the strike area. Phone companies readied mobile cell towers and sent in generators and fuel. Insurers flew in special teams and set up claims-processing hotlines. Wal-Mart’s incredible response had even its staunchest critics praising the company.

To effectively address FEMA’s chronic problems, planners and policy makers should increase the role of the private sector while downsizing the power of the current disaster relief bureaucracy. Decentralized, market-based institutions utilize incentives and information in ways that centralized government agencies simply cannot. The result is a more rapid and more effective delivery of what is needed.

FEMA’s fundamental problem is also its most severe: coordination failure. This problem arises because FEMA uses central planning to organize economic activity after natural disasters. In essence, the U.S. government runs federal disaster relief like the Soviet Union ran its economy. Economists from Adam Smith to Nobel laureate Friedrich Hayek have critiqued the problems of central planning for more than 200 years.

FEMA’s central-planning approach requires both the demands for relief and offers of supply to be communicated first to the agency for approval and allocation. Private individuals and local governments who attempted to circumvent this process by bringing in their own supplies after Hurricane Katrina quickly found that FEMA would not allow it. FEMA actually confiscated medical supplies for Methodist Hospital and fuel purchased by Jefferson Parish.

The Invisible Helping Hand
There is a better alternative. While chances are slim that any economic system will operate flawlessly following a major disaster, the basic fact remains that a decentralized approach performs better than a centrally planned one. Prices and profits rise most precisely on those goods in the highest demand, and in those areas where needs are greatest. Private suppliers have both the incentive and ability to respond to these market signals, and to do so rapidly. The profit and loss system provides suppliers with valuable feedback on what is working and what is not, and competition ensures that suppliers attempt new innovations.

While it is impossible to predict exactly what privatized disaster relief would look like, we know that it would be flexible. We also know markets would work better than centrally planned command and control, just as they do in providing for our desires on a daily basis. Take, for example, the Chicago Board of Trade, which coordinates millions of commodity exchanges each day. Although the trading floor seems chaotic, it works to connect those who demand things with those who can supply them. Use of such a private trading floor for a few hours would do infinitely more to coordinate relief efforts than FEMA ever could. Following Katrina, some enterprising types even used eBay to facilitate exchanges and offers of assistance, which they did more effectively than FEMA.

Real reform would enable private individuals with particular expertise to apply it in times of crisis. It would limit government’s post-disaster role to repairing transportation infrastructure, enabling private suppliers to reach people in need, and maintaining law and order by protecting the lives and property of disaster victims and relief workers alike. It would also remove the government’s temptation to interfere with the temporary price changes that markets require to function. Finally, any effective reform would make it impossible for FEMA to confiscate private property or prevent private relief suppliers from entering disaster zones as it did in the aftermath of Katrina.

Government should stick to what it does best, and creating a distribution network overnight that is superior to Wal-Mart’s is not it. After a disaster, government is (and must be) a productive part of the process—just as it is every day in our economy—by ensuring the presence of the two things decentralized markets need to work effectively: unregulated prices and secure property rights.

Russell S. Sobel is the James Clark Coffman Distinguished Chair in entrepreneurial studies at West Virginia University; Peter T. Leeson is an assistant professor of economics at WVU.