For release: June 30, 2003

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States with Greater Electoral Importance Have Better Chance of Getting Disaster Relief: St. Louis Fed Analysis

ST. LOUIS. — Studies of disaster relief suggest that taxpayers may be paying for politicians to build political capital as much as they are helping people rebuild their homes, based on analysis by two researchers at the Federal Reserve Bank of St. Louis

The researchers are Molly D. Castelazo, a research analyst at the St. Louis Fed, and Thomas A. Garrett, a senior economist for the Reserve Bank. Their comments appear in the June issue of The Regional Economist, the St. Louis Fed's quarterly publication of business and economic issues.

On average, taxpayers spend about $3 billion each year to help victims of natural disasters rebuild their lives. Of course, taxpayers expect that this money will go to people who need it most, and that the money doesn't go beyond the actual cost of the disaster. Castelazo and Garrett, however, find that politicians behave just like the rest of us—that is, they act in their self-interest and change their behavior in response to economic incentives.

"The self-interests of politicians include maximizing political support, campaign contributions and, ultimately, votes," they write, although they add that "this does not necessarily imply that they are not altruistic."

Contrasting private versus public costs, Castelazo and Garrett say that public officials can enact policies that are in their self-interest without regard to the social cost because, unlike people and firms in the private sector, they don't often incur the cost of their decisions. "The actions of politicians are often hidden from the public," they say, "and the cost of any policy is often spread across thousands or even millions of taxpayers, making it unlikely that the cost will be high enough to incite taxpayers to oppose those policies."

In addition, Castelazo and Garrett note that because legislators and the president have budget and regulatory power over federal bureaus, those bureaus will implement policies beneficial to elected officials. They cite one study, for example, which showed that IRS audit rates are lowest in states that are politically important to the next presidential election.

They also reference a recent study which revealed that those states with a higher measure of electoral importance enjoy a higher rate of presidential disaster declarations. By "electoral importance," Castelazo and Garrett mean those states that not only have a relatively large number of electoral votes, but also are considered "battleground" states in presidential elections.

"It makes sense," they conclude, "that by strengthening the guidelines for disaster declaration and aid disbursement, we can better ensure that tax dollars are used only in the public's best interest."

The Regional Economist is also available on the : St. Louis Fed's web site.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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