Supremo vs. Invisible Hand: Battle over New Zealand earthquake recovery approach

Michael Giberson

Post-earthquake in New Zealand, a battle emerges over the best system for rebuilding: Supremo vs. the Invisible Hand.

Supremo has its backers:

[Construction economist John Jackson said:] Rebuilding should be led by a “supremo”, such as a senior military officer with engineering corps experience, as was chosen for Darwin, and New Orleans after Hurricane Katrina.

Prime Minister John Key has appointed Christchurch MP Gerry Brownlee as the minister responsible for earthquake recovery. New legislation announced this week would give ministers special powers to waive or relax existing laws.

However, Jackson said a non-political leader based in the city was needed. “We have to have someone who is on the spot to allocate resources, especially labour, and make sure there is no ripping off and price-gouging,” he said.

“They have to be able to override any petty restrictions.”

The Invisible Hand has a supporter, too:

[Economist Eric Crampton wrote:] Price gouging may be the best mechanism for ensuring a speedy recovery….

Let’s start by thinking back to the morning of the earthquake. Some of us had planned ahead and had water reserves stored in the garage; others didn’t. Some people had pressing needs for water – people who needed clean water for mixing infant formula – and others of us wanted to be able to do the dishes.

When the stores opened that morning they had only a fixed supply of bottled water available. How should they have allocated that very scarce supply among all the potential customers?

The method they chose, by and large, was first-come, first-served. But is that the method most likely to ensure that the woman needing clean water for mixing baby formula would get some while folks like me, who only needed it for doing dishes, didn’t? That seems pretty unlikely.

Instead, it went to the people who were best able to queue. …

It would be a fine world if we could rely solely on the goodness of folks’ hearts – and we’ve seen an awful lot of such goodness in response to the quake. But I didn’t see any water on any shelves of any stores we went into that morning.

Rationing the fixed supply of bottled water that happened to be available the morning after the quake might seem like a zero-sum game, but as Crampton points out with respect to skilled labor, prices both help allocate currently available resources and motivate a longer-term response:

Thinking about reconstruction, some of us have really pressing construction needs while others of us have minor property damage such that waiting for repairs isn’t overly burdensome.

If nobody raises prices, then scarce builders are allocated on a first-come, first- served basis.

If prices rise, then folks like me with minor cracking on a few interior walls will wait until prices come down again to have things fixed.

The most pressing needs get first attention when prices allocate scarce supply; that doesn’t work as well under first-come, first-served.

Price increases also draw in supply from further afield. We’ve heard a lot over the last couple of years about skilled tradespeople moving to Australia in pursuit of higher wages. Right now, their services would really be appreciated here in Christchurch.

But if the prevailing wages prior to the quake were enough to send them off to the West Island, a price freeze here is unlikely to draw them back. If they look back across the Tasman and instead see hourly rates double what they’d been earning prior to moving to Australia, they might consider spending a few months back home helping out.

John Jackson and Canterbury Employers’ Chamber of Commerce chief executive Peter Townsend argued that some grand supremo might be needed to ration out scarce tradesmen, ensuring that resources go to the most critical areas first.

… And no supremo can order Kiwi tradesmen working in Australia to come home.

While Invisible Hand is not all-powerful, I’d back it over Supremo any day.

Crampton, who blogs at Offsetting Behavior, replies to a few of his critics there.

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