An interesting discussion has been taking place between Andrew Gelman and Craig Newmark concerning how Hurricane Katrina will shape future political competition. Neither commentator mentions that this shock will change the federal/local game of “chicken”. In this game of chicken, the local government delays important investment and the problem gets worse. The locals delay because they hope that the Feds will pay a larger share of the total bill. It would interest me if Liberal Federal leadership (say under Jimmy Carter) did provide a larger % of the financing of such investments?) As I have blogged about before, if the Feds commit to telling cities that they will pay $0 for local public goods such as levees, then metropolitan areas such as New Orleans will have to devise tax systems (such as property taxes) that collect money to be spent on local public goods improvements (such as Levee upgrades). (see http://newmarksdoor.typepad.com/mainblog/2005/09/prof_andrew_gel.html)
Some people responded to my previous comment arguing that many mayors are corrupt and that local public goods will suffer in quality if the Feds are not involved. Other people were concerned about local governance issues. The mayor of the center city is not the mayor of the metropolitan area of places such as New Orleans. If there are transaction costs for getting richer suburbanites to work with the center city Mayor, could this inhibit the “pareto optimal” provision of local public goods?
Ultimately, I think that this shock will convince people that the federal government is not always up to the job of helping them in a crisis. Trust in the federal government will continue to decline partially because of Katrina. This will probably help conservatives.
Is local government any better? Anti-sprawl groups have long desired metropolitan area governance structures to internalize externalities such as pollution and congestion. This would reduce Tiebout sorting. People who want really good public schools and really high taxes (think Scarsdale) would be unlikely to find such a bundle. But, the levees would be in better shape and coastal cities getting ready for climate change would make better investments.
The silver lining of this shock will be greater preparedness by coastal cities for future natural disasters.