Oh, what a tangled web we weave when first we fail to clearly define property rights. That doesn’t rhyme, but it expresses how University of Chicago economist and 1991 Nobel laureate Ronald Coase, known for his work on property rights, might react to the ‘temporary levee’ mess in Newport. If the rights and responsibilities connected with owning property are not clear, people make bad decisions that waste resources.
In case you missed the story in Monday’s Pioneer Press, here’s the situation: Newport, on the east bank of the Mississippi downriver from St. Paul, long has risked flooding. A 1965 flood caused extensive damage. In 1969, anticipating high water, the city and the Army Corps of Engineers hastily built a three-block-long “temporary” levee to protect one neighborhood.
It was not carefully engineered. No property was purchased, easements signed or maintenance planned. No one intended it as a long-term solution to an episodic but ongoing peril.
On the whole, owners of the protected houses were grateful. The 13-foot-high earthen berm harmed some views, but the owners appreciated the flood protection. Over time, many people made decisions assuming the makeshift levee was permanent.
People remodeled and added to their houses. Some owners found willing buyers who based their purchase decision on the assumption the levee was a trustworthy, permanent installation. Forty years down the road, 20 households have large sums at stake.
It is not wise to build houses where flooding is likely. Yes, if property rights are well defined and all concerned stick to their guns, then free individuals could make their own choices. They could stay away from areas at risk of flooding, or they could choose to build and absorb any eventual loss themselves.
The problem is that people don’t stick to their guns. When a flood inevitably threatens houses built where they should not have been, society’s instinctive reaction is to help out. Let’s build a temporary levee.
Homeowners, who on other issues assert government is the problem, not the solution, are quick to whine for government action when their own fortunes are threatened. Witness former Senate Republican Majority Leader Trent Lott’s calls for government largesse in the aftermath of Hurricane Katrina for people like him who built right on the Gulf of Mexico.
Once houses are remodeled, added on to or resold, the milk is thoroughly spilled. The fight becomes about who must bear the cost of mopping it up. Should all taxpayers bear the cost of bailing out those who made imprudent decisions? If the government approved building permits, does it assume permanent liability for protecting those permitted improvements?
If a neighbor informs a prospective buyer of the uncertain legal and engineering status of the neighborhood’s “temporary levee,” is she a bad neighbor or is she preventing a fraudulent sale? It is legally and ethically sticky.
Newport is a local example of a national problem. Permanent housing built behind weak farm levees near Sacramento, Calif., is thousands of times as large a problem.
As with real estate and stock market price bubbles, it is better not to let the problem develop in the first place rather than be forced to clean it up later. But, as with such financial bubbles, the decisions that cause long-term problems always seem like a good idea at the time they are made.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.