disaster relief — VOICES for REASON

The world’s economy functions by means of intricate, extended supply chains: raw materials are shipped to parts makers, then parts are shipped to factories, then finished products to shippers, truckloads to wholesalers, then retailers. But when the massive earthquake and tsunami rocked Japan, this supply chain was interrupted.

All of a sudden, uncertainty gripped producers around the world. But amidst the inevitable chaos was an underlying layer of certainty provided by contracts. Businesses typically plan for disaster by inserting so-called force majeure clauses in their contracts. Through such clauses, customers agree to excuse performance when a disaster like the 3/11 quake makes performance impossible. This places hardships on each customer, but it gives the company hit by disaster a chance to survive and regroup. Without such clauses, hard-hit companies could be immediately sued by customers and bankrupted.

Companies also have an option of purchasing business interruption insurance, which can reimburse profits lost when a disaster destroys company assets, and contingent business income insurance, which kicks in when a company’s supplier can’t deliver because of a disaster at its place of business. (Another beautiful aspect of global capitalism is that companies unaffected by disaster can leap into action, offering contracts aimed at picking up the slack left by temporarily incapacitated producers.)

None of these contractual devices is a cure-all. Disaster damage is still damage, not “economic stimulus,” and it must be repaired by intense effort, diverted from other tasks. But careful contracting can maximize certainty in the most uncertain of times.

Image: Wikimedia Commons

For more than a century, federal largesse has shielded people living in bad-weather areas from the economic costs of their decision to locate there. (I’ve discussed this elsewhere.)

One such area is called the “American Bottom” region, consisting of 174 square miles directly across the Mississippi River from St. Louis. Since the 1950s, a huge federally financed levee has protected American Bottom residents and businesses from the great river’s frequent floods. The levee is 52 feet high. It runs 75 miles north and south. And to maintain it costs a lot of money.

In the aftermath of Hurricane Katrina, federal funding has not kept up with the need for maintenance. As a result, the American Bottom levee is among the weather-ravaged levees that is no longer deemed capable of defying a 100-year flood. Among other things, that means everyone in American Bottom with a federal loan will have to buy federal flood insurance.

As you read the following portion of a Wall Street Journal article on these developments, notice the economic lesson that’s dawning on American Bottom’s residents:

Judy Hamilton, who owns a chemical blending and packaging business in Dupo, a village of 4,000, has already taken a hit. She was required to buy flood insurance after she expanded and refinanced the loans on her factory in 2008. She is now paying an extra $7,000 a year for the insurance.

“Every little cost factor cuts us back,” she said. “Nobody benefits but the government.”

Some local officials have complained that the remapping is intended to raise money for the National Flood Insurance Program, which is $18.5 billion in debt in the wake of Katrina and other storms. . . .

Mayor Hagnauer of Granite City says tacking more than $1,000 a year in some cases onto mortgage payments could push the city over the edge. The town of 31,000 boasts a new, $4.6 million city-built movie theater, a struggling main street and the huge US Steel Granite City Works two blocks from City Hall.

“We’d be a ghost town,” Mr. Hagnauer said.

What these people are learning firsthand is that when the costs of protecting against bad weather are borne by the property owners themselves, the economic calculation to stay or go suddenly includes some dramatic new numbers. Indeed, the cost difference may be so great as to cause entire settled areas to be abandoned.

Those who live in high-risk areas like American Bottom are counting on the rest of us—the taxpayers who fund massive levee maintenance—to keep on accepting it as our duty to spare them the risks of weather disasters. I, for one, reject that duty. I would like for situations like that in American Bottom to become a first step toward undoing decades of distortion wrought by the federally funded “weather welfare-state.” It’s high time that the taxpayers who foot the bills start thinking more seriously about the value of a free market in weather-related insurance, protection, and disaster recovery.

Image: Wikimedia Commons

In the movie “The Wizard of Oz,” a powerful tornado sends Dorothy’s house—with her in it—spinning high in the air only to deposit it safely in the land of Oz. In real life, of course, the story is different: tornadoes and hurricanes often destroy houses and sometimes kill their occupants. A below-ground shelter is good protection (remember the root cellar where Dorothy’s family huddled to ride out the storm?), but mobile homes and houses without basements often lack good protection.

Now a new manufacturing industry has emerged, offering ready-made storm shelters (also called safe rooms) to the general public, at a cost of $4,000 to $15,000. Usually made of concrete or steel, these rigid structures can be trucked to a home and bolted to a concrete slab, whether inside the house, outside, or in the garage. Increasingly, too, they are being built into newly constructed homes. According to a report in The Wall Street Journal, safe rooms are replacing danger with security:

When a powerful tornado roared through Murfreesboro, Tenn., last year, David Glass ducked into his newly installed “TornadoSafeRoom,” a $4,300 galvanized steel shelter bolted to the concrete floor of his garage. Mr. Glass waited out the storm in the shelter with his brother-in-law who was visiting and Mr. Glass’s two cats, Buggs and Lady Buggs. (His wife was at work.) They emerged to find the home battered but still standing. Five doors down, though, a neighbor’s house was flattened.

I just want to make two points about this:

1. The emergence of this market illustrates an important truth: increased safety is a product of increased wealth. It’s long been noted that natural disasters in wealthy countries like the United States are far less dangerous than similar events in underdeveloped countries overseas, where hundreds or thousands of people might die in an event that would injure far fewer people here. But the direct connection between wealth and safety is even more obvious when you think about how an intelligent investment in a safe room can provide personal safety against violent storms for many years in the future. Even owners of mobile homes, notoriously vulnerable to tornadic winds, can obtain security that would have been impossible before.

2. The rise of the safe room industry also illustrates how individualized risk assessment works on a free market. Each resident of a disaster-prone area must make his own risk/benefit calculations, involving such factors as: How likely is it that a storm will hit? How solidly built is my house? Do I have a basement or other suitable protected area? What else could I do with the funds necessary to buy and install a safe room—and would that other choice provide me a greater value than increased physical security? The individual is in charge of his own life and his own safety.

For contrast, think what a collectivist approach would look like: a multibillion-dollar program to install safe rooms in every home, funded by taxpayers who aren’t even exposed to the risks. In a world where government frequently makes disasters more disastrous, it is worthwhile to contemplate the alternative: a free market in disaster insurance, prevention, protection, and recovery.

Image: Wikimedia Commons

In the five years since Katrina devastated New Orleans, $15 billion has been spent on rebuilding infrastructure (enough to protect against a Category 3 hurricane). But, according to a recent Wall Street Journal article, “many engineers and local politicians argue it may not be good enough.”

What would be good enough? “They say the city should be steeled for a 500-year or 1,000-year storm—roughly equivalent to a Category 5 hurricane.” Estimated cost: “at least $70 billion.”

New Orleans, most of which lies below sea level, gives new meaning to the term “money pit.” Yet the tax dollars keep flowing, partly because it’s taken for granted that no matter how risky it is to live next door to a wall of water, government must ensure everyone’s safety at public expense. “We should be looking at a much higher level of protection in New Orleans,” said one college professor. “If that thing breaks, you’ve got people who are trapped in there.”

The second sentence is true, but the first doesn’t follow logically from it. There are lots of places in America where the forces of nature threaten human safety. But it’s not government’s function to protect us from natural forces, only from human force—such as that wielded by foreign enemies or criminals. By spending billions on such measures as flood protection, government lures people into building (or rebuilding) in places where they wouldn’t otherwise dare to live.

In this way, as I’ve written elsewhere, government has a way of making natural disasters more disastrous. What is to be done?

[T]he solution is not more of the market distortions and perverse incentives that have lured so many people into harm’s way. The solution is to replace the prevailing entitlement mentality with a free market in disaster prevention, insurance, and recovery.

In a free market—without tax-paid levees, government disaster relief, or subsidized insurance—anyone who contemplates building or buying property in a high-hazard area will need to face hard facts about the local history of natural disasters, the efficacy and cost of preventive measures, and the availability of insurance.

For example, the high price—or total unavailability—of private insurance will resound like a clanging alarm bell, signaling the market’s objective view that a particular building plan is abnormally risky compared to less dangerous locales.

With their own lives and wealth at stake, people will have every incentive to evaluate risks objectively. And if hardy souls still choose to occupy and fortify New Orleans, or build on an earthquake fault, or live in a tornado alley, the risk and reward will be theirs alone. No longer will government make disasters more disastrous by pretending that citizens have a right to defy the forces of nature at others’ expense.

It’s time to start planning for the day when the money spigot that keeps New Orleans awash in federal dollars can be twisted shut.

Image: Wikimedia Commons

Now that a federal court has found the U.S. liable for post-Katrina flooding in New Orleans, the federal government will be pouring tax money down yet another drain hole in the name of disaster relief. The court found that the U.S. Army Corps of Engineers was grossly negligent in maintaining a vast network of levees and flood control structures that were supposed to protect New Orleans. The court-ordered damages must be paid from tax funds along with the costs of rebuilding. Said a Los Angeles Times article: “The federal government has promised tens of billions of dollars in post-storm rebuilding aid to Louisiana. The Justice Department has estimated that the total outstanding civil claims could amount to billions more.”

This is not a shocking development. Once Uncle Sam took on the job of flood protection for a city situated in a below-sea-level bowl, it was readily foreseeable that any negligence would increase the population’s exposure to the kind of disaster that Katrina brought. Yet despite the obvious hazards, government policy continues to be formulated as if New Orleans has an unquestionable right to continue defying nature at taxpayer expense.

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