The Economics of Disaster
Tuesday, November 06, 2012 – by Ron Paul
Ron Paul
Hurricane Sandy was one of the worst natural disasters
the East Coast has ever seen. Cleanup and recovery will take months, if not years and estimates run in the tens of billions of dollars. Parts
of New York and New Jersey will never be the same. Entire seashore
communities have been wiped out, but the determination to rebuild has
been lauded as courageous and admirable. Yet as with all natural
disasters, Sandy raises uncomfortable questions about the extent to
which taxpayers should fund the cleanup and the extent to which
government programs create moral hazards.
For example, FEMA and the National Flood Insurance Program (NFIP) are expected to pick up the tab for much of the flood damage caused by the hurricane. Of
course, this will mean more federal debt and inflation for the rest of
us, since the program only has about $4 billion to work with and is
already $18 billion in debt from hurricanes Katrina and Rita. Many
think there is a need for the government to provide flood insurance of
this kind. After all, the market would never provide insurance in flood prone areas at an affordable price. But shouldn't that tell us
something?
Shouldn't that tell us that it is a losing proposition to insure
homes in coastal areas and flood plains often threatened by severe and
destructive weather patterns? And if it's a losing proposition, should
taxpayers subsidize the inevitable losses arising from federal flood
insurance?
The NFIP disguises the real cost of flood insurance in flood prone
areas, which influences homebuilding and sales in such areas.
Recklessly taking unwise risks when risk is underpriced is known as
moral hazard. When politicians decide that private insurance premiums
are too high, as with houses built in flood plains, the solution is to
under-price the risk through federal subsidies. The obvious and
expected outcome is more danger to life and limb when disaster strikes.
Even NFIP has been forced to raise rates significantly in coastal
areas, and is now dropping second homes from coverage altogether.
Many assume it is compassionate to entrust government central
planners with disaster recovery. However, the greatest compassion
brings results, not just good intentions. And we've seen how
bureaucratic organizations like FEMA mismanaged recovery and relief in
the wake of hurricanes Katrina and Ike. Organizations such as the Red
Cross and private companies like Home Depot and Duracell have already
stepped in admirably to help those in need, and we can only hope FEMA
has learned this time not to impede and frustrate private efforts as
they have in the past.
Above all, my thoughts and prayers are with the victims of Hurricane
Sandy in this tremendously difficult time and hope they can get their
lives put back together as quickly and seamlessly as possible.