If there is anything that economists agree on, it is that incentives matter. In other words, people’s decisions are affected by the rewards or penalties attached to each alternative they consider. Furthermore, incentives are important whether they are monetary or not.
Media and congressional reactions to the recent fire that destroyed or damaged hundreds of homes in Los Alamos, N.M., provide an interesting example of nonmonetary incentives. They also illustrate an important idea in economic analysis, that of “moral hazard.” Moral hazard exists when a particular set of incentives unintentionally provides motivation for people to do things that are bad for society as a whole.
Let’s begin with a common-sense look at the circumstances of the fire itself. Government decisions affected at least two factors: how the fire started and why the blaze was so intense and spread so fast.
Most media reports on the fire focus on the first question, how it started. Dan Rather, with his usual arrogant pomposity, called it “bureaucratic blundering.” In other words, media reports stressed that government resource managers made a mistake when they chose to begin a “prescribed burn” under inappropriate conditions. Various congressmen tut-tutted about incompetence and threatened to hold investigative hearings.
Only a few stories noted the more salient fact that the fire burned as hotly as it did and traveled as quickly as it did because of a decades-long government policy of fire suppression. Suppressing wildfires allows large quantities of fuel to build up, practically guaranteeing that any eventual fire will be abnormally hot. It also ensures that such a fire be able to travel quickly along an unbroken train of tinder.
Government bashers will jump up in glee and say, “Yes, the government screwed up on both accounts.” But that conclusion is superficial and premature.
Fire suppression enjoyed near-universal public support for decades. Fuel buildup is as severe a problem on privately owned lands as on public ones. For decades, “protecting” forests by putting out any fires that started seemed as common sense as putting out fires in homes and businesses.
The realization that fire suppression inevitably led to much more destructive fires only developed in the last 30 years or so and met much resistance in public and private forest management sectors. When naturally occurring fires were allowed to burn in well- known public places, such as Yellowstone National Park, criticism was as sharp and immediate as the response to the Los Alamos fire.
Public and private land managers alike learned that the punishments for starting healthy fires, or even letting them burn, far outweigh the rewards for restoration of healthy ecosystems and avoidance of more catastrophic fires over the long run.
Congress’s budget priorities contribute to this asymmetry. The Forest Service and Bureau of Land Management are expected to act as if they have a blank check for fire fighting, to throw all the resources they have into putting out fires. But Congress allocates inadequate amounts for forest and range management, including people and equipment to safely carry out prescribed burning. To make matters worse, in a season when there are many fires, ongoing resource management budgets frequently are robbed to pay part firefighting costs.
The upshot is that despite strong scientific evidence that we have too few fires on federal lands, we still have a policy bias against letting fire play its natural and healthy role. We don’t appropriate enough tax dollars to carry out as many prescribed burns as we should, nor do so do so with enough people and equipment to ensure that things go according to plan.
Reactions to the Los Alamos fire are likely to accentuate that bias. Public and private foresters once again have been impressed with the fact that a badly managed prescribed burn will bring condemnation, punitive disciplinary actions for individuals and monetary liability for the agency or firm involved.
But there will be no similar penalties for allowing fuel to accumulate and forests to become armed bombs. No member of Congress has called for hearing on why excessive fuel has accumulated in many federal forests. No major newspaper or TV network has criticized chronic underfunding of the BLM and Forest Service.
So how is this “moral hazard?” A common textbook example of moral is life insurance policies without a clause limiting payment in case of immediate suicide. Such policies give depressed or financially pressed individuals an economic incentive to kill themselves.
Another is the 1980s U.S. policy of insuring deposits in savings and loans while ignoring increasingly risky loan-making. The message to the Kenneth Keatings and Hal Greenwoods was “Throw more money into the crap game. With a good roll of the dice you will get rich; if you have a poor one, the FSLIC will pay your depositors.” That eventually cost U.S. taxpayers some $200 million.
Congressional and media reactions to the Los Alamos fire involve moral hazard because they motivate resource managers to follow anti-fire policies that are almost guaranteed to result in greater losses of public forests and private property in the long run.
Incentives do matter, and the ones coming out of the Los Alamos incident are perverse.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.