Nearly all of us will bear some of the cost of Hurricane Katrina’s destruction, so we all have a stake in minimizing future disasters. This isn’t as easy as it may sound. Decisions on how we spend now to reduce possible future damages are fraught with uncertainty and human irrationality. We are never going to get it completely right.
Let me emphasize that while most citizens will bear some cost from Katrina, these costs are not shared equally. Those who lost family members bear an enormous human cost. The lives of those who lost their homes and possessions are altered in ways unimaginable only weeks ago. Many will never regain the wealth — however limited — that they had before the storm. Many will be out of work for weeks or months.
In comparison, the tax bills and higher gas prices that affect the rest of us are small. But they are not negligible. President Bush has asked for $62.3 billion in disaster relief appropriations. That is about $566 per household and it is only a start.
Add the higher costs of gasoline and natural gas, higher insurance premiums, and the overall slowdown in the country’s production of goods and services, and it’s clear that the costs of Katrina will be considerable.
If such disasters affect most households across the nation to some degree, how can we minimize future damage? Naive Monday-morning quarterbacks make this sound simple: Just spend a little more money to construct obvious defensive measures.
Levee failures caused most of the human and property damage to New Orleans. If we had spent a couple of billion more on higher or stronger levees in past years, the argument goes, we would not be spending tens of billions now. If only incompetent politicians had not failed to see the obvious, we would not have incurred the damage we did.
The problem is more complicated than this, however. For example, what should we do to reduce the harm that earthquakes will eventually cause in Memphis, Tenn., and Charleston, S.C.? What about protecting the East Coast from tsunamis?
Most people would not identify either Memphis or Charleston as cities facing severe earthquake risk. Americans are fascinated by the possibility of a great quake in California, and we ignore dangers elsewhere.
Three of the largest earthquakes in U.S. history took place near New Madrid, Mo., in the winter of 1811-1812. No instruments measured earthquakes back then, but modern seismologists estimate that all these quakes were about 8.0 on the Richter scale, stronger than the 7.8 quake that devastated San Francisco in 1906.
Some argue that there is a 90 percent probability of a great quake near New Madrid by 2050. A single 8.0 quake might level half of Memphis, 90 miles due south. A much weaker quake in Kobe, Japan, caused $100 billion damage in 1995.
Nor is Memphis the only city facing a quake. Charleston had a devastating quake in 1886 and Boston had one in 1755. Repeats of these quakes might kill tens of thousands.
The F5 tornado that destroyed my mother’s house in Chandler, Minn., in 1992 stayed on the ground for more than 10 miles. What if its path had proceeded from densely populated Minnetonka to Mendota Heights instead of from Leota to Lake Wilson?
While it seems the stuff of disaster movies, some scientists argue that a volcanic eruption in the Canary Islands could trigger a 40-foot tsunami, devastating an arc of coastline from northeastern Brazil to Greenland. It might happen next year and it might happen in 5,000 years. What precautions should we take to protect Manhattan, Miami or points in-between?
People have a hard time making sound choices involving uncertain outcomes, particularly when one such outcome might prove disastrous but has a very low chance of actually occurring.
Experiments show that individuals overestimate the importance of unfamiliar risks with low probabilities and underestimate familiar dangers that are much more likely to affect us. We fret about mad-cow disease but ignore E. coli or Campylobacter. We worry about airplanes but think nothing of negotiating I-94 at the Lowry Tunnel. We don’t let our kids play at a house where there are guns, but we don’t worry about them going to a home with a swimming pool. In all cases the more familiar hazard is the more dangerous one.
Conversely, as a society, we collectively underestimate the importance of unfamiliar low-probability events. We place undue importance on avoiding repetition of the last shocking disaster and ignore other possible perils not recently experienced.
Scientific and economic analysis can provide some insights. But allocating resources to reduce future disaster losses is inherently an uncertain process exacerbated my human irrationality.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.