Moral Hazard and the Federalization of the Disaster Business

According to a graphic displayed on the “Morning Joe” show on MSNBC this morning,  Hurricane Sandy will be the second most expensive hurricane in United States history, after Katrina. The usual suspects will use information like this to argue that a bigger, stronger federal government is needed (a) to respond to natural disasters, and (b) to combat climate change. But the horrendous expense of the hurricane clean-up is better seen as an indictment against an all-intrusive Uncle Sam.

Writing in New Geography, Matthew Stevenson has this to say about the “federalization of the disaster business”:

Previously storm damage and the costs of clean up were the responsibilities of states and municipalities, who in the first place made the decisions to allow homeowners to build houses and businesses on barrier islands, sand dunes, and low-lying waterfront property.

For much of the twentieth century, insurance companies refused to write flood or hurricane policies for stilted houses perched precariously on Cape Hatteras or wherever, which angered wealthy political donors, who equate their life successes with owning beachfront property.

Enter the federal government into the realm of disaster indemnification, when Congress passed the National Flood Insurance Program in 1968, to mandate that vulnerable home owners in potential flood zones purchase adequate insurance that private companies were refusing to cover. Think of it as Obamacare for beachfront homes.

Although the legislation was designed to cover the undue risks of shore properties, it also gave the political parties a mechanism that would allow (for all those waterfront contributors) a building boom on hurricane-exposed barrier islands. …

Not only was the federal government complicit in allowing places like Myrtle Beach to become housing projects (the poet Robert Watson called it “white Harlem by the sea”), it also assumed that its job performance could be measured by the number of blankets and water bottles that reached those crazy enough to “ride out” a major storm in their seaside mobile homes.

As Stevenson observes, the local political forces — property owners, the construction lobby and the rest — are powerful enough as it is. Once state and local governments are relieved by the federal government of a significant burden of responding to and indemnifying against disasters, local authorities have even less reason to push back against those who would develop vulnerable coastlines.

If you believe that anthropogenic climate change is contributing to the increase in ferocity and frequency of hurricanes (I’ll sidestep for now the issue of whether that’s true), the last thing you should want is a bigger, stronger FEMA. You should do everything in your power to halt subsidies of lunatic development in vulnerable, flood-prone areas.


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11 responses to “Moral Hazard and the Federalization of the Disaster Business

  1. I must say, Jim … I kind of agree with you. Virginia has decided to forgo what would be extremely valuable development of the Virginia Eastern Shore on the seaside. Why should Virginia subsidize North Carolina, South Carolina, Maryland, etc?

    Of course, given that FEMA exists and the national flood insurance is a national subsidy – it’s equally hard to understand why Virginia doesn’t “join the party”.

  2. you can fix this pretty easy. Subsidized insurance is ONLY available to primary residences and only once. The land can never be rebuilt on as a condition of paying the claim and this would include businesses.

    It’s EASY to advocate getting rid of any/all subsidies and almost impossible to do it so why not limit them to people who only own primary residences and even then – only if they move?

    When you take a trip to Nags Head and other beach locales, take a look at the homes and realize that most of them are there for one reason – subsidies from the US govt – for SECOND HOMES.

    they’re only “extremely valuable” because of govt subsidies.

    how “valuable” would they be if the owners had to pay full boat for insurance instead?

  3. Don,
    Virginia did not forego seaside development on the Eastern Shore.The Nature Conservancy bought most of the islands. State wasn’t involved.

    • Peter:

      The Nature Conservancy owns all or part of 14 islands on Virginia’s Eastern Shore including Smith, Myrtle, Ship Shoal, Little Cobb, Cobb, Hog, Parramore and portions of Metompkin and Cedar Islands.

      That’s a lot, but far from all of the seaside areas of Virginia’s Eastern Shore.

  4. However, Jim is right about flood insurance. People will build anything anywhere. They should pay for it.

    In September I spent the night with friends at Rodanthe, NC. right across Rt. 12 from the oceanfront homes we all had rented years ago. Several are nearly in the water.

    We had stayed once at “Serendipity,” the house used later to film “Nights at Rodanthe,” a three-hankie movie with Richard Gere and Diana Lane. It was falling in the Atlantic so they jacked it up and moved it about a mile south where erosion isn’t as bad.

    Last I heard, the most sensitive part of the beach was again breached — this time by Sandy so Rt. 12 is closed.

    • I dearly love the Outer Banks. But I’m not sure I’d be willing to pay the rent that landlords would have to charge if they paid their full insurance costs.

      My parents own a house in Sandbridge, which my brother, sister and I will inherit some day. Between the sand-restoration subsidies and the flooding/hurricane insurance subsidies, I suppose I’ll be a big beneficiary of federal policy. But that doesn’t make it right, and I will continue to oppose these wealth transfers to the upper middle class.

      By the way, “Nights in Rodanthe” might have been a forgettable movie, but the title song by Emmie Lou Harris, sung during the credits, is one of the most haunting melodies I’ve heard in a long time.

  5. and a flaming limp wrist liberal if there ever was one…

    re: outer banks

    re: Maryland Eastern Shore

    take away insurance subsidies and what happens?

    it’s not only the insurance subsidies or even sand Army Corp subsidies, it’s bridge and highway subsidies.

    I know a house that totally pancaked in a recent hurricane.

    The “rules” say that once you bulldoze the structure – you are done – no re-building .. BUT.. you can pay to have someone jack up the structure and put new pilings under it.

    this is the kind of foolishness that tax dollars pay for.

    It’s easy to point fingers at the 47% but what about this kind of stuff?

    • “re: Maryland Eastern Shore”

      That term is most commonly used in reference to the bayside of the DelMarVa peninsula in Maryland.

      European – Americans and African – Americans have been living on the water there for 500 years. Native Americans for much longer.

      It is not particularly susceptible to flooding.

      The seaside areas of the DelMarVa peninsula in Maryland are a different matter. Places like Ocean City seem likely to wash away some day.

      Even in New Orleans the French Quarter is named the French Quarter because it was where the original French settlers built their homes, shops, hotels and restaurants. Why did they build there when they could have built anywhere? It was the highest ground in New Orleans.

  6. Larry’s suggestions are already in place, except for the primary residence. If your property is flooded more than once, you may not be allowed to rebuild it-even with your own money.

    Federal flood insuranve comes with many strings. Ot is a massive anf insidious plan to grab and protect waterfront property.

    The insurance is just s sop.

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