Wednesday, September 07, 2005

Transfers versus tax breaks for Katrina 

As I've been thinking about rebuilding the Gulf area blown down by Katrina, I've also been working both on starting classes and getting some research projects down the road, and one of them might be instructive. I was led to The Globalist (by PSD Blog) for an article on the Millennium Challenge Corporation. MCC is designed to hand out foreign aid money outside the usual process with the State Department (via USAID), or the IMF or the World Bank. (Full disclosure: I have worked as a contractor on several USAID projects.) MCC has been the subject of a lot of carping from Congress, which continually underfunds the Administration's requests, but it uses a set of objective criteria to determine who gets funding for their projects, has loads of accountability and much less red tape.

The problem is that it has funded very few countries; three weeks ago Georgia was announced to become the fifth country to gain a Challenge Grant for an anti-poverty program. Looking at the Globalist article, drawn from this Brookings Institute paper, I wondered if the the Gulf areas now seeking aid from the federal government should be required to use a set of guidelines (like these from MCC) to justify receiving money from the government? Would it make more sense than handing out tax breaks as suggested before?

I'm thinking about this. I think the answer is no -- no matter how much accountability you put into a program, nothing gets resources to their highest-valued use better than the market unfettered by distortionary taxes. But it would be a lot better than massive transfer to state and local agencies, particularly when they don't seem to understand their own jobs. The only reason we use transfers for foreign aid is that we don't control their tax systems (though cutting tariffs on goods from countries we're trying to help would be a better idea.)

Looking at Glenn Reynolds' list of lessons from Katrina, the overwhelming impression I take is that people need to be self-responsible, and government's function is chiefly law enforcement. Too bad it takes a disaster to remember that.