Chocolate and Gold Coins

Sunday, September 11, 2005

Was the New Orleans Flood a Man-Made Disaster?

I haven’t commented earlier on the New Orleans disaster, but I do have some opinions on the subject. As it turns out, another blog wrote basically what I was going to say: the city of New Orleans should have been more proactive in making sure the levees around their city were adequate. Here is an excerpt from Coyoteblog:

The only reason locals would even tolerate federal involvement in disaster preparedness is $$$. Every local politician loves federal dollars. And even a hardcore libertarian like myself is probably willing to admit that some of the preparedness investments truly are public goods. Take levees for example. I am willing to have them as public goods. However, no one can convince me that levees whose sole purpose in life is to protect New Orleans are federal public goods. Why do I need to pay for them? Why don't New Orleans people bear the full cost of their choice to live below sea level? My family chooses to live in a place that is relatively free of disasters (though if the Colorado River dries up you can come visit our bleached bones as we are consumed by the desert). Why should I subsidize people's choice to live in a location that sits in mother nature's cross-hairs?

But beyond my cantankerous libertarian desire not to subsidize you, those of you who live in disaster areas should demand to take responsibility for your own preparedness. The feds are never going to value your safety the same way you do (as evidenced in part by the 40-year ongoing fight for levee funding in New Orleans) and are never going to understand your local problems like you do. In fact, the illusion of federal responsibility for disaster preparedness is awful. It gives irresponsible local authorities an excuse to do nothing and a way to cover their ass. It creates a classic moral hazard and sense of false security.

Read the entire article.

It really comes down to the idea that it is better for people to take care of their own problem than to expect others to come in and help. I’m not a Christian but I have always liked the phrase: “The Lord helps those who help themselves.” I believe that the Federal government should act in the same way. It should help local governments that are already taking steps to solve their own problem. In this case, it would have been reasonable for the Federal government to ask either the State of Louisiana or the City of New Orleans to pay for at least half of the cost of a better levee. This way, the Federal government won’t waste money on boondoggles: if the locals don’t care enough to pay for something that is for their benefit, no one else will care.

But there is another really good question associated with the New Orleans flood: how did so many homes get built in an area that was below sea level and so vulnerable to a major flood. When my wife and I have bought homes, we had to get homeowner’s insurance to cover the risk of disaster. This was mandated by the mortgage company. Now what private insurance company in their right mind would ever insure homes like these? None did. It was the government. It turns out the notorious FEMA provides flood insurance:

Nearly 20,000 communities across the United States and its territories participate in the NFIP by adopting and enforcing floodplain management ordinances to reduce future flood damage. In exchange, the NFIP makes Federally backed flood insurance available to homeowners, renters, and business owners in these communities.

Flood damage is reduced by nearly $1 billion a year through partnerships with communities, the insurance industry, and the lending industry. Further, buildings constructed in compliance with NFIP building standards suffer approximately 80 percent less damage annually than those not built in compliance. And, every $3 paid in flood insurance claims saves $1 in disaster assistance payments.

These statistics are pre-Katrina. I wonder if they would be so brazen to pretend that they are saving money post-Katrina.

This might rank as the stupidest government program ever. They are paying people to live in a flood zone. The talk about “enforcing floodplain management ordinances” is probably little more than wishful thinking.

Without this insurance, new home construction in floodplains would stop. People couldn’t get homeowner’s insurance and therefore they couldn’t get a loan. You cannot sell homes to people who cannot get financing. Over time, the community simply dies; and this is a very good thing. People will be forced to live in safer communities.

If a really good levee were built, private insurers might take the risk of offering insurance. The market would make a much better determination of the risk associated with a levee than government would. So if the government says the levee is safe but no private insurer will take the risk, the market is sending a clear message.

But the above quote hints at the third part of humans causing a natural disaster: the role of disaster insurance. There is a classic moral hazard problem in Federal disaster relief. After the disaster, it seems nice to help those who suffered. But before the disaster, it is hard not to notice that many people chose to live in harm’s way. The insurance seems to encourage people to live exactly where they shouldn’t.

My solution to this moral hazard problem is to replace disaster insurance with a line of credit. The states would have money available in the short term to pay for disaster relief. In the long term, all of that money would have to be paid back by the state government. This would force states in high-risk areas to be more proactive in dealing with disaster preparation. Also, the high state taxes would discourage firms and people from relocating to that area, and would tend to put people in low-risk states.

I should point out that Shrikanth pointed to the moral hazard issue associated with flood insurance here. I read that post and forgot where I read it, but I meant to give Shrikanth credit.


  • I don't disagree at all that large bureaucracy's only create inefficiency. But some times, it's just difficult to look at such tragedy as a moral hazard problem.

    With regards to this tragedy, certainly, New Orleans should have had a much greater stake in its own safety, and good local efforts were essential. That was indeed a failure of the state and local governments. And indeed, more local resources should be available to counter local problems. But for large scale disasters, local resources might be devastated. So, a central, streamlined body can be extremely useful in facing any national disaster, when they clearly override other authorities. I don't know if i'm able to put my thoughts across perfectly clearly here.......

    By Blogger Sunil, at 11:58 PM  

  • Sunil
    Thanks for commenting on this post.
    First, I was careful not to say that we should not help the victims here. I was merely talking about the future. In the future, it is important that New Orleans not be rebuilt unless the levees are adequate to protect the property.

    There are three ways of approaching this problem of moral hazard and by this I mean property being built in high risk areas. First the free market approach: insist on private insurance. If no one will insure, no homes are built. We could even strengthen this by regulating what the free market would have done anyway by making a regulation that says you must have private insurance to have a home regardless - this is similar to mandatory auto insurance.
    The second approach is the regulatory approach: you cannot build in a high risk area. The government decides what is a high risk area. I don't like this approach as much but I could see some utility in having this. It would prevent some needless homes.

    The third approach is the head-in-sand approach. People build in high risk areas and the Feds come to the rescue with billions of dollars when the inevitable disaster strikes. This is how we do it and it makes no sense whatsoever. That's why I call these man-made disasters. They were preventable and the proper incentives to prevent them were destroyed.

    "But for large scale disasters, local resources might be devastated."
    This is more myth than reality. If you mean the money necessary to take care of disastors, there is plenty of tax base in Lousiana and even in New Orleans to take care of even far greater disasters.
    Of course, during a disaster, there will be two problems: coordinating the response and a serious liquidity problem funding this effort. The Federal government can help with both. The Feds have plenty of credit to extend to pay for the disaster. The locals can pay it back gradually over time, once they get back on their feet. And the Feds can help direct the relief effort in the way that FEMA is supposed to work.

    By Blogger Michael Higgins, at 2:48 AM  

  • hi micheal,
    add me to your blogroll, if you can.
    i badly need a few hits to recover my appetite for blogging.

    By Blogger shrikanth, at 10:34 AM  

  • Hi Shrikanth
    And I added a note to my post about disastor relief to point to your post like I promised.
    I hope it helps.

    By Blogger Michael Higgins, at 12:16 PM  

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