Economics and policy after natural disasters

Just curious about what the various economic theories and models and schools say about the aftermath of natural disasters. Do they say that the government should pump money into the areas affected, or hold back, or other?

Can you point to a disaster where the promoted economic theory was to not pump money into the area?

Shouldn’t economic policy after natural disasters discourage people from rebuilding on flood prone areas? How many times should emerg services rescue homeowners and pay to rebuild the houses and other infrastructure?

I’m always curious why this isn’t the case. If I was an insurer I’d have issue with paying out to rebuild your house more than once, I think.

No, I’m just curious about what the various theories advocate.

Private insurers do adjust premiums to reflect risks. It is the federal government which charges no premiums, and allows political considerations to affect its payouts.

The fed government charges plenty of premiums, they’re just called taxes :slight_smile:

You missed the point. It would be as sensical to say that Coca Cola charges plenty for bread; it just calls it Coke.

ETA: In case this still isn’t clear, a home buyer may factor insurance premiums into his decision of whether to buy in a floodable area. He doesn’t factor in his (constant) tax rate.

Yeah, what economics would say, without any categorical variation among ‘theories or models’, within reason, is that subsidized flood insurance and ‘free’ funds to cover uninsured disaster damage encourages people at the margin to take those risks again without seeing and paying the market cost upfront, in relatively high insurance premiums. The exact degree of that effect might be debated. Obviously it’s terrible to have your house and stuff destroyed even if replaced, and that is a partial deterrent to building/rebuilding on land that’s really too low and/or close to shore in high hurricane risk areas. And in some cases damage was actually unlikely, ex ante as far as the insurance market was concerned.

But the ‘free’ money is a perverse incentive, and in most cases flows to places where big storm damage time to time is predictable. And a lot of ‘unprecedented damage’ is due to a lot more places having been built in known high risk areas since the last comparable storm. With every hope that Irma turns out less bad than expected, and building code changes since Andrew make a significant positive difference, look up maps of increased building density between Andrew and Irma in a lot of low lying coastal areas of FL now in the cross hairs. Public insurance subsidies and ‘free’ money for uninsured losses is one reason for that, inescapably.

And I agree the fact that the money has to come from somewhere eventually (tax revenue now, repayment of extra govt debt or a ‘hair cut’ taken by US govt bond holders someday) doesn’t mean the price signal is correct to the particular people greatly adding over time to the housing stock in those areas.

It depends on whether the govt has a compelling interest in maintaining economic activity in flood prone areas.

Many places where it floods are important areas for economic activity. Being close to water is useful for agriculture, transport, and industry, not to mention tourism. This means that there are a number of businesses that need to be near the water, in flood prone areas, in order to function. If you need businesses there, you need employees there. If employees cannot live near where there is work because they cannot afford flood insurance on a house within 50 miles of the coast (or in the current case, anywhere in the state of florida), then there are fewer businesses operating, and fewer employees working.

And this is no minor thing, either. An enormous amount of the economic activity of this country comes from areas within a 100 year flood plain, if you go to 500 years, while I cannot find a decent map, I would venture to say that it is approaching half, though if someone has a better cite I wouldn’t mind updating my estimate.

So, it really comes down to whether the cost of rebuilding these communities once or so a generation is worth the benefits that living and working in these flood prone areas give to the country. I would say the answer to that is “yes”, for the most part, but that does not mean that there can not be looked into methods of reducing this at risk population by a reasonable amount.
Full disclosure, I live in ohio, many hundreds of miles away from any hurricanes, and live about 30 feet above the water level of the nearest creek. I turned down a house I really liked when I was shopping because it was within the 100 year flood plain.

Rebuild stick houses so they can be blown down again within 10 years.

Exactly! From a perspective of decades you’ll see the hurricanes, earthquakes, and other disasters will just keep coming. Rebuilding everything the way it was is stupid. You can make small incremental changes to your existing models, but what if there is a more efficient model than the one you’re trying to improve?

We need to start building domes. Domes are infrastructurally superior to cube shaped buildings. We can build cities that can resist hurricanes, flooding, and earthquakes. The world is going to keep getting worst, so we need to improve our technology before shit hits the fan.

It’s not a binary ‘compelling interest’ or not. Rebuilding to a given standard (or resistance to future storms, let’s say it is) is either economically viable at the real cost, ie including the market cost of insurance, or it isn’t. If you don’t let that real price signal through, by subsidizing insurance or letting it be known people will get loads of govt grants to rebuild, then you can’t say the rebuilding really makes any sense.

IOW the economic argument for constantly funding free (to the specific area) rebuilds would have to start with the proposition that the insurance market doesn’t work. And a lot of people are reflexively opposed to market mechanisms. But better to start there if so. :slight_smile: ‘Compelling interest’ doesn’t get you anywhere meaningful.

The newly Republican (ex Democrat, ex Republican) governor of WV recently proposed that Appalachian coal be directly subsidized by the federal govt so many $'s a ton. He claims the govt has a ‘compelling interest’ to insure the security of coal supplies to eastern utilities if somehow rail links to Wyoming get cut by terrorists or something (the mines are all within a relatively few miles of one another, 40% of US production, interesting area Campbell County WY). Besides the jobs saved, communities sustained etc. Compelling interest is a political term.

But granted and as others said, the repeated decisions to appropriate big ‘emergency’ appropriations to cover uninsured losses in predictable storm zones, where lots more stuff has been built in recent decades, it’s not some static situation, is purely political anyway. Given generally prevailing attitudes virtually no elected official can oppose it. Reforming insurance is theoretically more possible, but to the extent that raises premiums, and people who forego insurance get rebuilt anyway, that’s a pretty limited tool.

Yeah, that’s a key issue. If you’re a homeowner faced with a choice to get flood insurance or not get flood insurance, your decision will surely be affected by the knowledge that, if the disaster is big enough to leave your home under water, the government will help you out even if you don’t have insurance.

Just out of interest, does anyone have any idea of how large the premiums are for flood insurance through the National Flood Insurance Program? I can’t seem to find any numbers. I live on top of a mesa, and flooding is about the last thing we need to worry about. One person in this New York Times articlesays that “It’s a pretty cheap buy,” and that “the premiums are far lower than the cost of potential claims.” But that’s not very specific. If you owned, say, a $250,000 or a $500,000 house in Houston, how much (per month, or per year) would it likely cost you to get flood insurance?

Also, does anyone know if disaster relief treats homeowners (who live in their own home) the same way that it treats landlords, regarding the property? Because it’s one thing to keep someone in a house so they have somewhere to live. But if you’re a landlord whose income comes from your investment in real estate, and you’re too cheap to get flood insurance, i don’t see why the taxpayer should fork over money to, basically, put your business back on its feet again. Of course, disaster relief for rental property does help the renters themselves get back into their places, and have somewhere to live. But it’s also a handout to landlords who should have bought the insurance in the first place. I think that disaster aid to landlords should also be conditional on them getting the property fixed as quickly as possible, and offering it to the pre-disaster tenants at pre-disaster rents.

I think that the government needs to put the NFIP on a more secure footing. First, it should deal with the Program’s current debt level. It also probably needs to raise the caps for payouts, which are currently $250K for a house (the $100K contents limit might be too low for some people, but is probably good enough).

Then it should get much more serious about requiring flood insurance, and not just for people in 100-year flood plains. It should be 500-year places, at least. Spread the risk further, and at the same time increase the pool of people paying in so that the program itself has a larger income base. There was a policy expert on NPR the other morning who noted that, if you live in a hundred-year flood plain, there’s a much better than 50% chance that you will, in your lifetime, experience a disastrous flood. He also noted that most countries are far more strict than the US, requiring 500- or even 1000-year assessments, where the US only requires 100-year places to have insurance. And they need to make much clearer, possibly through a series of targeted media campaigns, that if you don’t buy flood insurance, and a big hurricane hits your area, then you’re on your own.

How one views government spending ought to impact how one votes though. People continue to reward politicians that don’t care about wasteful or counterproductive spending. Should they? Good luck bringing reason into an argument that impacts whether or not someone gets a dollar.

Unfortunately the cause-effect relationship between politicians’ spending and voter behavior tends to be opposite to your description. :frowning:

Voters in state X may be delighted with wasteful spending in state X, cf. the “Bridge to Nowhere.” Productive spending, e.g. on science or environmental regulations, will be treated as wasteful by many voters depending on which #FakeNews source they get their #FakeFacts from.

For example, many citizens name specifically foreign aid as a major “waste” even though foreign aid spending is less than 1% of federal spending. Afghanistan is near the top of the list of aid recipients; citizens who seek out #RealNews might feel that aid spending to be more productive dollar-for-dollar than the much larger military spending in that country.

I think the relevant economic theories might include freeriding, moral hazard, and externalities.

Wow, thanks for that sparkling insight, Adam Smith! The simple naming of three economic principles has surely solved the whole problem, and no further discussion is necessary.

Some landlords apparently want the best of both worlds. Here’s a story from Beaumont, TX, about a bunch of renters who were hit with two notices in two days from their landlords. The first told them that September rent is now due; the second was an eviction notice telling them that “the damage to your unit is so extensive that your unit has become totally unusable as a practical matter for residential purposes.”

So, the place you are renting from us in uninhabitable, but please pay your rent.

I would have thought those three economic principles would lead to the conclusion that any form of subsidized insurance is a bad idea. When the people engaging in the risk are not bearing the full cost of the risk (through subsidized insurance), they will engage in it more than they should. When others don’t even bother to get insurance secure in the knowledge that they will get bailed out because the country won’t sit by and let a city just collapse under the weight of a disaster, they do not plan appropriately. When insurance premiums are capped so that a large pool of people who are not subject to catastrophic risk are paying to subsidize that catastrophic risk, then we have perverse incentives once again.

Agree completely on a theoretical basis.

But if we did a thoroughgoing analysis of our entire economic system looking for examples of misplaced incentives and magically fixed them all we’d hardly recognize the result. It would look nothing like our existing economy and society.

Over a span of a few years, subsidizing rebuilding is cheaper than not. Over a span of decades the opposite probably holds. Over a span of a couple millennia not putting a high price on carbon emissions is probably the most expensive mistake humanity has made or will make.

So which perverse incentive should we tackle first? And why?