Tuesday, November 13, 2007

Disaster Response

The Freakanomics Blog hosted a "Disaster Response Quorom" and I found this bit from Lee Parrow particularly trenchant:

"What we need to do is reduce our vulnerabilities by downsizing the targets that have catastrophic potential. At one third of its pre-Katrina size, New Orleans could be protected from hurricanes and still serve its vital economic functions as a major port and oil and gas facility. By removing federal subsidies for wind and water insurance, and insisting upon appropriate building standards and land use policies (for example, those as good as Holland’s, which is mostly below sea level), huge cities in vulnerable areas such as Miami, Tampa, or Galveston would slowly shrink to manageable sizes. If we don’t limit their size, hurricanes such as Katrina will do it for us, and at enormous costs to human lives and property."

I think this is spot on. The FEMA flood insurance is a complete racket from a distributional sense but it also creates some horrible incentives. You have to step back and actually think of what it means to qualify for FEMA flood insurance. You are moving into an area that a private insurer has decided is uninsurable or to the extent that they offer an insurance policy, it is obscenely expensive. Are these folks really strong claimants for federal assistance? But beyond the merits of their claim, there is the question of incentives. To the extent you provide subsidized insurance you incentivize a tremendous exposure to risk, one that compounds as you are also incentivizing further development which is likely to harm the natural resources in place to mitigate the impact of a natural disaster (think of the wetlands surrounding New Orleans).

From a political perspective, my preferred policy is entirely unpalatable. I think it is morally unconscionable to build up this type of dependence, but once it's there, what do you do? We find the same situation with regards to our farm policy which harvests dependence at home and poverty abroad all the while making us fatter and spoiling nature. The best you can hope for is to slowly ease people off the dependence. But the question is how, I think in the case of people living in Disaster areas you could start to means test flood and wind insurance and then freeze reimbursement levels but index premiums.

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