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
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.