Roseau is getting a raw deal from the state of Minnesota.
But since the term “raw deal” is not in the dictionary of standard economist’s jargon, let me phrase it another way: Minnesota’s failure to provide substantial state aid to flood victims in Roseau violates the “principle of horizontal equity.”
This is a philosopher’s way of saying that Roseau is not getting the same help that other disaster-hit municipalities have gotten recently and this is unfair.
Roseau, a far northern Minnesota community of 2,750, was devastated by a June flood that damaged nearly all the homes and more than 100 businesses.
The federal government declared Roseau County a national disaster area, with losses estimated at more than $90 million in the city alone. Residents say additional state help is needed right away to rescue them from financial ruin. Gov. Jesse Ventura, however, has rejected requests for a special legislative session to consider additional aid.
Forget for now the debate over whether the governments should aid disaster-stricken communities.
I’m going to take as a given that most Minnesotans’ values are such that they believe the state should help those hurt by natural disaster, but should stop well short of absorbing all losses. I personally agree with that, but if we are going to have state disaster assistance, we should do it as fairly and as effectively as possible.
The discipline of economics provides no magic formula for how to structure disaster relief programs. But the introductory chapters of any general economics text provide us with a few useful concepts: “horizontal equity,” “vertical equity,” “efficiency,” and “moral hazard.”
The principle of horizontal equity essentially is “treat equals equally.” In the home, if you have two children of about the same age, they should have to obey about the same rules and do about the same amount of chores. If two towns of similar size suffer equal amounts of disaster damage, the amount of help should not depend on whether the state has a timely “boatload of money” in its budget.
This is the principle that is being violated by stiffing Roseau this year. If we allocated substantial state funds to help rebuild East Grand Forks, Comfrey, St. Peter and Chandler when they were hit by disasters, we ought to extend similar assistance to Roseau.
“Vertical equity” refers to treating unequals unequally. Being fair with children does not mean that you make your 4-year-old and 15-year-old children go to bed at exactly the same time. Treating children of different ages fairly may mean quite different daily rules for each.
In disaster relief situations, it implies that if a tornado destroys 40 houses in a town of 700 that municipality should get proportionately more aid than a city of 400,000 that loses an identical 40 houses. And a town that loses 40 houses, all insured against wind damage, to a tornado might merit less help than another that loses 40 uninsured homes to flooding.
“Efficiency” simply means achieving the greatest amount of useful assistance with a given amount of resources. In disaster recovery, acting in a timely manner often gives more bang for the buck. The current situation where each disaster is treated on a case-by-case basis by the Legislature seldom results in timely aid.
“Moral hazard” is something to be avoided. You don’t want some disaster assistance policy to motivate people to be careless or imprudent. The national flood insurance program, which at one time highly subsidized building and rebuilding on barrier islands and flood plains, was a classic example of moral hazard.
Designing disaster assistance programs that embody these four principles is not necessarily easy. But we could do a better job than we have. What could Minnesota do to incorporate these four concepts in a restructured disaster assistance program?
One approach might be for the Legislature to create a non-partisan board, modeled on the Federal Reserve board, which would develop and administer a set of standardized disaster assistance programs. The state could establish a revolving trust fund of money to be disbursed by the new board. Other funds might come from surcharges on future real estate taxes or income taxes paid on property or by individuals who receive assistance.
It is clear that, if we want to be fair, Roseau should get more help. Minnesota needs to put disaster assistance on a more equitable and effective long-term basis.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.