With floodwaters swamping Rouseau and a wildfire converging on Denver, it is hard for an economist to avoid thinking about how our government and our society respond to natural disasters.
Specifically, do the government programs that absorb risk and offer generous disaster relief provide perverse incentives for people to waste resources by accepting greater risks? Economists think this occurs, but to draw a line between being compassionate and motivating folly is not easy.
Some readers may dismiss the question out of hand as hard-hearted. I understand the impulse.
I was a young deacon 30 years ago when a fire in a rented ramshackle farmhouse destroyed all the possessions of a widow with two high-school children. She had no fire insurance. Someone asked our rural church if we would help with a community charity drive to help the family. A gruff older colleague retorted, “And why should the rest of us buy insurance if the whole town is expected to help you if you don’t.”
I was happy when his view did not prevail.
But harsh as his question was, it did contain a valid policy issue. Economic history shows that when government policies insulate individuals from risk, these individuals are apt to make decisions that are bad for society as a whole. It is a challenge to design policies that combine compassionate aid with incentives for prudence.
Consider the homes lost to wildfires in Colorado. Such destruction occurs year after year as arid forest areas in the West become more densely populated, and more people decide to build houses directly amid mature stands of timber.
Until recently, people who lived in fire-prone rural areas knew that fire was a risk and that it was prudent to build only where there was some natural firebreak of a stream or open space. Most were born and raised in rural areas and were used to austere levels of public services. Few expected urban levels of fire protection.
That has changed as more urban-raised, white-collar professionals have moved out of growing urban centers, such as Denver and Seattle, and into the foothills. Many of these new rural residents have great love for the wilderness, but they lack experience living in remote areas. Getting close to nature is important, but they expect the levels of public services, including fire protection, to which they have become accustomed.
Fire is a natural part of many ecosystems in western states. Building housing in such ecosystems guarantees that more housing and personal property will be lost to fire. Should the nation as a whole kick in to pick up the tab? This seems like a reasonable question to many in the Midwest and the East.
We faced essentially the same question with recreational development on barrier islands off the coasts of Texas, the Carolinas and Florida. The federal government initially subsidized flood insurance coverage for beach cottages there. However, scientists and environmentalists eventually convinced elected officials that to provide federal flood insurance for homes on these shifting barrier islands was to encourage people to pour resources into housing that was doomed to be washed away sooner or later.
Federal subsidies for unwise shoreline development have since been curtailed. Is home building in the forested Bitterroot mountains of western Montana any less folly than building on an impermanent sand island in the Gulf? Many think not, though great political pressure persists for the federal government to pick up larger and larger amounts of firefighting costs in the West.
Before we Midwesterners get all hoity-toity about moral hazards in Colorado or North Carolina, we need to think about towns in the Red River Valley basin of Minnesota and North Dakota that seem to get hit by floods every few years.
If it is imprudent to build homes in timber to the west of Denver and Colorado Springs, is it wise to build towns in one of the flattest flood plains of North America? Don’t repeated state and federal disaster grants and private charity fund drives simply encourage people to perpetuate mistakes made by settlers 12 decades ago?
What about tornado damage on the plains? A tornado hit my hometown of Chandler, Minnesota, 10 years ago and its residents, including my mother, got cash and in-kind help from FEMA and private agencies. Does such assistance encourage people to live in tornado-prone areas? Some would argue that tornado vulnerability covers broad stretches of the nation, and even the most prudent and responsible people could not discern that a particular location was dangerous. This is not true for specific flood-prone locations such as Nags Head on Cape Hatteras or the confluence of the Red Lake and Red Rivers.
Private flood insurance has never been available in the Red River Valley or on the Outer Banks. And if private insurance is available, why should the government step in to help those who were so improvident as to neglect full coverage?
The point of this rhetorical question is merely to emphasize that while it is easy to identify some moral hazards in disaster relief, deciding where to draw the line is seldom easy. One person’s tough-minded decision to deny support for imprudent decisions may be seen as callous ruthlessness by another person.
Lines eventually have to be drawn, but the democratic process — rather than an economist’s model — is the best way to determine where the line should go.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.