Hurricane Sandy was one of the worst natural disasters the east coast has
ever seen. Clean-up 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.
