The comments on yesterday's post included a digression into the issue of Katrina relief, which one poster opposed for multiple good reasons. I want to add another.
You might think that disaster relief transfers wealth to disaster victims. That's not at all clear. Here's why:
There has long been an expectation that in Katrina-like circumstances, the government will step in to help. That makes disaster-prone cities like New Orleans (and, among others, San Francisco) more desirable and pushes up land prices in those cities.
So if you own a house on a flood plain, chances are the purchase price included a premium for the disaster insurance that the government insists on providing. That's a boon not to you, but to the former owner, who might live in Montana by now. The wealth transfer goes not to those who are currently in danger, but to those who owned endangered property when the policy went into effect.
By pushing up land prices, federal disaster relief denies people the opportunity to live cheaply in exchange for living dangerously. That opportunity is particularly valuable to the poor.
To put this another way, federal disaster relief essentially forces people — most of them poor people --- to buy insurance they'd rather not have. The premiums are hidden in their housing prices, but they are none the less real.
If the government forced us all to buy lottery tickets against our will, and if the news media carried big feature stories on the lottery winners, a naive viewer might think the government had done us all a favor. Currently, the government forces us all to buy (implicit) disaster insurance against our will, and the news media carry big feature stories on the people who collect that insurance. A naive viewer might think the government had done us all a favor. But surely no reader of the Volokh Conspiracy could be so naive.
Poor people, more than most, value cheap housing. A policy of disaster relief makes cheap housing hard to find. Therefore a policy of disaster relief is likely to impose a particular burden on the poor. If you want to help poor people, eliminating federal disaster relief is a good place to start.
For more in this vein (on exactly this topic) see pages 195ff. in my new book More Sex is Safer Sex: The Unconventional Wisdom of Economics.
We have cities in inconvenient and apparently silly places for some very good reasons. I know you Libertarians are oh-so-brilliant and look at New Orleans and say "what kind of idiot would build a city in a hurricane-prone, below sea-level swamp"; or worse yet Charleston, hurricane-prone and on an earthquake fault; or San Francisco with its fault lines. But their is only one mouth of the largest river system in the world that serves the most productive farmland in the world. Before you condemn New Orleans as worthless, you might want to check how much cargo passes through the Port of New Orleans each year. Large natural ports are also hard to find.
Katrina is also a horrible example because the disaster of Katrina was almost entirely man made. Eighty years of flood control and navigation improvement on the Mississippi, oil exploration onshore and off in Louisiana, and over a hundred years of logging in the Cypress swamps destroyed the wetlands that protected New Orleans from the most damaging effects of the hurricanes. One hundred years ago, New Orleans was more than forty-five miles from the Gulf of Mexico, now it is literally on its shores.
I'm not so sure about this. San Francisco is desirable and expensive because...the climate is nice and the city has great food (and of course Rice-a-Roni). NOLA was attractive because of the French Quarter and lettin' them good times roll, in addition to being at the mouth of the muddy Mississippi which only is the outlet for the production of the entire midsection of the country. Somehow I don't think that the weightier part of housing in all those parishes that got flooded and flattened by Katrina was all that expensive.
I think that you may be misreading what the poster seems to be saying. Rather, I think he is suggesting that federal flood insurance pushes the poor off this land, in preference to the rich who can afford the federal flood insurance. So, no, it isn't a subsidy for the poor, but rather hurts them.
My beef with federal flood insurance, etc. is that it is to some extent a subsidy by those who live safely to those who want to live more cheaply (but still expensively) in dangerous areas. Why should I, living between one and two miles above sea level be paying for you to live on the beach?
If that is what he is saying, then he is a complete idiot and doesn't know what the hell he is talking about. Federal flood insurance doesn't push anyone off land (it is cheap--mine is $120 on $200,000 assessed value but I am in Zone B, none mandatory, even in mandatory zones it is still in the range of $300 or so a year for a similar valuation), rather it makes it possible to build where no one would build because private insurers simply wouldn't insure construction in those zones.
People build expensive houses on the beach because they can secure flood insurance, which then allows them to secure standard homeowners policies. If they couldn't get the flood insurance, the land would simply be worthless and nobody would live on it.
Yeah, well if you are living between one and two miles above sea level, then I am sure your roads, water, electricity, heck maybe even the very land you live on is heavily subsidized by the federal government. If you live in Wyoming, Colorado or any other state that has significant gas or oil production, then I have a serious bone to pick with you. Your state to keep something like 50% of the royalties from federal oil and gas leases in your state. We in Louisiana get practically nothing from our federal leases, even though they have destroyed our wetlands. Also, If you live on the east side of the continental divide the flood control, water retention, and navigation policies in the Missouri/Mississippi/Ohio basin of the last 80 years are partially responsible for the disaster that befell New Orleans almost two years ago.
I can't believe the incredible callousness of this statement.
I have just published a paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=980996) that explores some of the themes in Professor Landsburg's post, and the comments (I haven't had a chance to, er, get "More Sex..." yet, so he may have more information there than I collect in the paper.
The paper examines flood insurance, and I have to disagree with Professor Landsburg a little. Until very recently - and most spectacularly with Katrina - federal flood disaster aid was quite modest, and typically took the form of SBA loans. Anecdotally, I understand that a disaster victim could get an SBA loan with little pretense to business, but this is a very modest amount of insurance (I believe the average is about $13,000; even adjusting for inflation, this is not going to buy you a new house, and it is only a loan).
I think this is important in considering Landsburg's suggestion of implicit disaster insurance. I'm skeptical that this implicit guarantee is substantially factored into home purchase decisions, because 1) it is very small and 2) observed behavior in the purchase of actual flood insurance suggests that many people are simply not thinking about it very clearly. Of course, the market might do some of the thinking for them, but the flood insurance market works so poorly that I hesitate to impute such rationality to it.
Also, disaster relief has not been shown to correlate with communities taking less care to avoid floods. In other words, contrary to the standard model of incentives (if you pay for something, you'll get more of it), to which I personally subscribe, the relationship between floodplain management and disaster relief is weak. Again, I have to believe that these incentives must matter in some extreme cases (e.g., mis-zoned properties facing unexpectedly huge mandated flood insurance costs), and a recurring theme of my paper, hardly unique, is that flood insurance policy drives development that would otherwise be undesirable. But, so many aspects of flood insurance do not work as one would initially imagine (I suggest that principal-agent problems constrain the rational response of the mortgage market to require much more flood insurance than exists now), that we need to think carefully about how closely our models describe the real world.
For some good references, you can't do better than Kunreuther's On Risk and Disaster, Lessons from Hurricane Katrina, as well as sources cited in my paper.
Of course, there's no other reason comparatively wealthy people would want to move to the Gulf Coast region. No major shipping or oil industry exists down there or anything. And we don't need anyone above poverty level to live in the flood plains of the midwest - none of our food is grown there or anything. And of course, even if it were perfectly acceptable and natural for disaster prone areas to consist primarily of poor people, where would they work?
Most people living in disaster prone areas are not, in fact, rich people looking for a water view. If you want to change the flood insurance and disaster relief programs so people who build beach houses have to cover more of the real cost of their decision, I'll hop on board. But if you're arguing no one should ever get disaster relief, I suggest you actually do some concrete economic analysis - you know, take the facts, crunch the actual numbers, do the math. And don't forget to take into account the human cost. People in real life, unlike the ones in your head, don't always make wise choices in response to incentives, so if disaster relief is eliminated, poor people (whose housing costs you're SO concerned about) are going to continue to be the ones to disproportionately suffer.
And by the way, since when is there federal earthquake insurance? And shouldn't an economist appreciate the difference between flood insurance and disaster relief?
J. F. Thomas - I am not defending any benefits that the mountain states may get over the Gulf as far as better oil leases on federal land, etc. A taxpayer funded subsidy is a taxpayer funded subsidy in my book, pork is portk, and two wrongs don't make a right.
And you won't see me defending it either. But realize that the vast majority of federal flood insurance is not sold to rich people with beach houses, but to working stiffs like me who live a long way from the beach. In fact, I bet there are some areas in Colorado where homeowners are required to carry federal flood insurance.
And I'm getting a bit tired of Mr. Landsburg's making some shaky economics arguments while at the same time suggesting that those who don't agree with him are "naive." Particularly when the evidence clearly contradicts his last statement. I've been to New Orleans many times; I live just up the road in Baton Rouge. Cheap housing for the poor has NEVER been hard to find down there. It had one of the highest concentrations of poverty in the country, but the number of actual homeless people was quite low. Whatever federal flood insurance did or didn't do, it didn't keep housing out of the hands of the poor or middle class.
I agree.
Ugh. I understand what you are saying but I think there is a better way to put it. By your logic then the people in N.O. are to blame for being stupid enough to stay there. I mean, come on, shouldn't they have known the history that you so aptly describe: From all media accounts of the situation in N.O. before Katrina there was nothing that should have keep the poor there if all of this was known. Also, I have heard of no valid argument that would prevent them from moving (i.e., buying a bus ticket or whatever transportation means they acquire). The same goes for the rich who should have known that they sat at the heart of a danger area.
Finally, I don't see that it matters if it is "man made" or natural in this context. I have little sympathy for the people in CA who live on an earth quake fault line. You should know the danger and weight the cost of getting killed against the benefits of a good job/life in that area.
This kinda reminds me of Rocky Flats. The land prices around it were depressed because of the relatively well known environmental hazards of refining plutonium into nuclear weapons. We all knew that, so laughed at all those people who bought the cheap land. You would think that this was a classic case of coming to the nuisance. But those people who came to the nuisance now have a huge judgment against the contractors who ran the facility, and who are, of course, totally indemnified for it by you and me and all the rest of the American taxpayers.
With that in mind, I think that the problem I see is in taxpayers subsidizing people coming to a nuisance. And, I think that it is esp. egregious when rich people are subsidized to come to very attractive nuisances. And, remember, it isn't coming to the nuisance if you reasonably didn't know of the danger before hand. We know of 100 and 500 year flood levels. We likely didn't 50 or 100 years ago.
Should they also have known that the levees were defective?
If you think the government is capable of blowing up stuff to kill you then it is not necessarily a reach to assume that the government would probably have built a defective levee as well.
Unless a person pays cash for a property in a flood-prone area, he or she will need a mortgage, and the lender will demand private flood insurance, especially if no governmental disaster relief is possible.
Wouldn't the bank's incentive to protect its collateral move the housing market in flood-prone areas to the same level of cost (purchase price + premiums for lender-mandated private insurance) as does the current system?
I think several of us have addressed the is point. Outside of beachfront property, most areas that benefit from flood insurance (which he conflates with all disaster relief) are not expensive places to live. IN fact, poor people are concentrated in these areas, in part because of low housing costs. In other words, the OP's statement is contrary to fact. Then there's Paul's point about what would happen with mortgages and insurance in the absence of federal flood insurance.
I'm still waiting for someone to tell me about the mythical federal earthquake insurance program that has driven up the cost of living in San Francisco.
Flood insurance directly transfers money from those who pay taxes to those who take risks. The post argues that since the rich have better access to information and especially capital, the are able to capture greater benefits from this insurance than the poor.
Finally, note that "flood insurance" here should not be read to mean just the specific program that goes under this name. It actually means everything the Federal Government does to assist people in flooded communities. Once it's clear they will always rescue people from their own risky behaviour, people will take greater risks -- why not make a bet if someone else will cover your losse? Of course, the more you have, the larger your can put at stake.
Welcome to America! If you need a tour I recommend stops by the Social Security, Medicare, and Medicaid offices as a nice primer.
The question whether Katrina relief aided the rich (or middle class) more than the poor, is an empirical one. Did more disaster money (or more money per capita) go to the most poor who owned no real estate, or to owners of small homes, or to owners of larger homes, or to owners of those big beautiful hotels? It would be interesting to know the answer to that question.
to quote ...
"the coldest winter i ever spent was summer in san francisco"
in regards to this topic, PJ ORourke and Kinison have both commented on the fact that if you offer govt relief to people who choose to live in areas prone to destruction (malibu cliffs, etc.) you create a perverse incentive as economists would call it
The idea that the federal government (as opposed to a private organization) would not perform such substantial functions out of a risk of being sued is absurd, even if you didn't throw in their inherent tax and printing money powers.
You can measure housing prices and associated federal disaster insurance coverage. I'm guessing you'll find little or no effect. Maybe I'm wrong. But nobody, including me, should make any sort of strong claim until this is tested. I'm not taking an untested drug based on some theory, and neither need one adopt an untested policy based on such a theory.
The problem with the assertion that the expectation that the federal government will bail out SF has made the place so much more desirable that it has priced poor people out of hte market is that the facts argue against it. There is earthquake insurance. It's private insurance that homeowners and property owners in SF buy at market rates. There are also building codes tailored to minimizing earthquake damage that drive up the costs of housing in SF. People probably aren't paying more for real estate in SF because they expect the feds to bail them out - they pay more because 1) it's a nice place to live, 2) there are lots of well paying jobs there, 3) insurance costs more because of the risk of earthquakes and 4) it costs more to build there because of the need to make buildings earthquake safe.
And you're right. Much of what the OP blithely asserts would be subject to empirical analysis. Unfortunately, he has ignored that in favor of theoretical speculation based on unsupported liberterian biases. Either that, or he's being dishonest with his concern about "poor people".
The problem with the assertion that the expectation that the federal government will bail out SF has made the place so much more desirable that it has priced poor people out of hte market is that the facts argue against it. There is earthquake insurance. It's private insurance that homeowners and property owners in SF buy at market rates. There are also building codes tailored to minimizing earthquake damage that drive up the costs of housing in SF. People probably aren't paying more for real estate in SF because they expect the feds to bail them out - they pay more because 1) it's a nice place to live, 2) there are lots of well paying jobs there, 3) insurance costs more because of the risk of earthquakes and 4) it costs more to build there because of the need to make buildings earthquake safe.
And you're right. Much of what the OP blithely asserts would be subject to empirical analysis. Unfortunately, he has ignored that in favor of theoretical speculation based on unsupported liberterian biases. Either that, or he's being dishonest with his concern about "poor people".
Incorrect: There is no such thing as absolutely worthless land. The poor are generally willing to live on flood prone land unless the law prohibits it. In mild climates, the poor put up nothing more than tents, or tin-roofed huts, but the truly poor will live on flood prone, earthquake prone, mudslide prone and lava flowing prone land. (If you don't believe this, visit a developing nation.)
If you did want to make federally subsidized flood and disaster insurance help the poor or even middle class who are directly impacted by disasters, you could change the provisions of federal disaster insurance. Change eligibility to make coverage available only to those who actually live on the property more than 6 months a year. Limit the maximum pay-out to some level that are consistent with the amount a poor or lower middle income individual or family might lose during a disaster. (Applying American standards, this might be something like $200,000 or $300,000? ) You could also insist that federally subsidized coverage for a property be limited to those who do not take a homestead tax exemption on any other property anywhere in the US.
Provisions like these would cover tenants or owners who live on their own property and consider it their homestead for tax purposes; absentee landlords would not. Those who own multiple properties would need to pick one property as a homestead and personally assume the costs of losing or insuring their other properties in the event of disasters. If a wealthy or upper-middle class person wants to risk their money building a fabulous $1,000,000 palace on the banks of a flood prone river in the midwest or on a hurricane prone shore fine: if it's hit, they assume the the financial burden. If someone builds a hotel on the shore? Banks who lend money to people who build these on these properties would assume the risk of default.
Measures like these would go a long way to ensure the subsidy associated with flood insurance and disaster relief covers the poor or at least not rich harmed by real disasters without subsidizing building by those who could select less disaster prone sites if they wished.
This is not what we do currently: the current system subsidizes wealthy owners who want to live in hazard prone locations because they are beautiful or convenient. It jacks up the price of this land because people who want fabulous views can build there with little fear of financial risk. There is really no good reason why our disaster relief system should do this.
The opposite is true; more houses are built because government-provided insurance shifts the demand curve, resulting in more housing at a higher price.
One of Mr. Thomas's many thoughtless errors is his assumption that Mr. Landsburg is arguing that the nominal cost of federal flood insurance hurts poor people. Rather, he's arguing that although that insurance subsidizes people who live in dangerous areas, it does so at the expense of the poorest, who can no longer live in the dangerous areas because the federal flood insurance (implicit or explicit) raises the property value.
You say you can't believe that callousness of his statement; that's because you haven't even understood his most basic argument. I hope I'm not fully communicating how furious this foolish response to a serious, thoughtful article makes me. Please, read it.
I was actually having that same discussion with someone the other day. She said the government (in this case, our Florida state government) had to offer property insurance in dangerous areas because no one would insure coastal land otherwise, and lenders wouldn't buy mortgages from people who didn't have insurance.
I said I didn't know the particulars of the situation, but it was impossible that at no price would insurers insure coastal land and that at no rate would lenders not lend without insurance. There has to be other regulation involved; in Florida's case, I'm pretty sure it's price controls on insurance.
See http://www.fema.gov/pdf/nfip/summary_cov.pdf and www.floodsmart.gov.
People are not perfectly rational actors, and in particular often don't accurately take into account long term risks or losses. This is especially true for poor people, who often have to satisfy an immediate need for money at the cost of long-term problems.
I would be very surprised if the promise of a federal bailout raises prices by the amount that private insurance for a similar bailout would cost.
(1) the actual provision of relief to people harmed by the disaster
(2) the increase in property cost to account for (1) (the insurance premium)
(3) the increase in property value because insurance is available that would not be provided by private companies
I believe that the original post was primarily concerned about (2). The argument only has any force to the extent that people wouldn't buy optional insurance. In addition, reversing the policy now would deprive current property owners of insurance coverage for which they have already paid.
There also remains the problem that in order to provide the recommended amount of ex ante choice, we would need to have a societal willingness to go into a disaster area, look at six people who are drowning, save the three with insurance and let the other three drown. I'm not sure how many moral systems think that the value of providing ex ante choice outweighs the ex post killing by omission.
This isn't even a particularly libertarian argument, since it applies with equal force to privately provided disaster relief. If people know that private citizens will contribute to a disaster relief fund in the event of a disaster, the value of that fund will be priced into the property...
I completely agree that insurance would be provided at some price. My suggestions apply to limitations of federally subsidized disaster insurance with the intention of helping poor or middle class people recover from bone crushing losses due to disasters. I'm sorry if that wasn't clear.
I think the higher priced private insurance market has been displaced largely by the existance of subsidized federal insurance. (Unpredictable court ruling probably also have some affect the availibility of the insurance, as do other regulations affecting insurance. )
If people who build $1,000,000 homes on flood plains can find insurance to cover their high risk properties, I have no objection-- as long as it's not subsidized by tax payers.
Thanks for that information. I'm glad to read there are already limits on the payouts. I'd like the payouts to be limited to people who actually live on the property, but if I'm reading the main blog entry correctly,that's not the case.
The insurance is available to property owners.
The point, I think, is that we'd all be better off if the risks and how we chose to address them were made explicit up front.
If an activity has a financial risk, you can either avoid engaging in the activity, get insurance, or take the risk yourself and accept the possibility of a loss.
There are some good arguments as to why we may want to treat certain types of risk as a national concern. And there are some good arguments as to why we may want to subsidize insurance for certain groups. There are no good arguments for ignoring the risk. Encouraging people to make assumptions about what insurance (whether government or private) will cover just makes the pricing less efficient (and therefore more expensive).
I don't think that is correct. The incidence of a subsidy depends on the relative elasticities of supply and demand. If, as Bruce suggests, this particular subsidy results in more housing being built, that suggests supply is elastic and the subsidy benefits the buyer.
But of course we could draw Econ 101 graphs all day with different untested assumptions. From Professor Landsburg's posts, it appears he's written Freakonomics without the evidence.
FHA/VA etc. and presumably private lenders would not finance houses in a flood prone area (in this case, expensive beachfront houses in Florida) unless they had flood insurance.
Insurers would not issue flood insurance for these, because they were not insane.
The people who wanted to build there had some political clout, ergo,
A government program was set up to underwrite the private insurers so that they would issue the policies.
So indeed taxpayer money was going to enable the relatively wealthy to do that which was undesirable, and to insulate them from risk. Since one agency demanded the insurance, another had to pay to provide it.
Well, you just happen to be wrong. The biggest block to buying a house in New Orleans right now is the unavailabilty of insurance, at any price. Insurers just don't want to take the risk. Many of the large national companies left the market after Katrina and have said they will simply not write new policies south of I-10. And by definition, only large national companies can take the risk of insuring against disasters like hurricanes.
I suspect that you could find private flood insurance, but for many properties it would be cost prohibitive. And that is why we know that we have a subsidy here. If no one can make money selling flood insurance, and the government has to step in because of that
Don't forget that the federal flood insurance program does things that no private insurance program could do. It designates flood zones and imposes building and density standards and prohibits all construction in some areas. This is all designed to mitigate the damage caused by floods while also allowing regulated construction in flood-prone areas. The program is far from perfect, but the objections to it and the negative consequences (and most of the flooded homes) are much more likely to be caused by the libertarian objections of the "why can't I do whatever the hell I want with my property" crowd, than those who think that we should impose stricter building restrictions in flood-prone areas.
One of Mr. Thomas's many thoughtless errors is his assumption that Mr. Landsburg is arguing that the nominal cost of federal flood insurance hurts poor people. Rather, he's arguing that although that insurance subsidizes people who live in dangerous areas, it does so at the expense of the poorest, who can no longer live in the dangerous areas because the federal flood insurance (implicit or explicit) raises the property value.
No, I think that is Mr. Landsburg's thoughtless error. Except for some very desirable areas (e.g., beachfront property), Mr. Landsburg's assertion is unproven and most likely untrue. He also conflates insurance and general disaster assistance. Is he really suggesting that the government provide no disaster assistance. That FEMA be disbanded and that the military provide no emergency support after a disaster? Because from the language of his post, that is what it sounds like, and that is what I reacted so strongly to.
The problem with the first of Landsburg's conclusions is that he assumes that land owners are able to extract the entire value of promised federal disaster relief when they sell their land, but this is seldom true.
Federal disaster relief certainly makes land in disaster prone areas more valuable, but sellers are still competing with land in areas that are not prone to disaster, so there is a limit to how much they can charge for the bundles of land plus promised disaster relief that they are selling.
Most of the time the price that a seller will be able to get will be considerably less than the price he could get for the land without the promise of disaster relief plus the price at which a free market would provide comparable disaster insurance. In other words, buyers will still be getting cheap disaster insurance even after accounting for the premium built into the price of the land.
As for his second conclusion, Landsburg is correct that some people who would be buyers at the bottom of the property market are priced out as a result of federal disaster relief. So federal disaster relief harms some of the poor. This group of people will probably not include the poorest of the poor (who would probably be priced out even in an entirely free market). Nor will it necessarily include all the rest of the poor. Plenty of the people who now live in disaster prone areas are poor by the standards of the US, and benefit from the provision of cheap disaster insurance.
Sorry, I was the one who wasn't clear. I was just reponding to the part of your post about how when the price got low enough, people would live on the land, and they wouldn't need insurance. It's really the same principle that applies to
(1) Whether people are willing to provide insurance.
(2) Whether people are willing to lend money.
(3) Whether people are willing to live on the land.
Price.
I was just agreeing with you and expanding a little bit in a different direction on a whim.
Surprisingly, Mr. Thomas has also failed to read and understand my posts before responding. One could wonder what satisfaction he gets from responding to posts he composes in his mind after reading the first and last lines of someone else's thought.
Re: The author's arguments would only make sense if in fact we were able to tell the poor who chose not to purchase flood insurance: sorry, your loss, suck it up.
Except of course it wouldn't be the poor who paid in the end. Instead, bank andm ortgage holders would be confornted with enormous losess when they foreclosed on badly damaged or outright destroyed homes and businesses and would necessarily pass those losses on to the rest of us.
Re: in Florida's case, I'm pretty sure it's price controls on insurance.
You have obviously not set foot in Florida in years. Claiming we had "price controls on insurance" would get you laughed out of the state on a good day (and probably shot and dumped in the Everglades on a bad one). Insurance costs in Florida in the last few years have skyrocketed-- please do some research. If there were state controls on the price of insurance then the controllers were all off in Key West boozing with Jimmy Buffet because no one stopped any of it. And there is in fact such a thing as "uninsurable risk". Ask any insurer. Not because the loss itself may be great, but because the level of uncertainty is so great as to make risk-rating impsossible.
Consider the worst case: If the land gets flooded once a year, and you want to build a $250,000 house on it, any rational insurance company operating in a free market would be happy to insure it - for about $300,000 per year, paid in advance - but maybe people would revise their building plans in the face of such an expense. Or a lender might make a loan - at an interest rate and payment schedule that ensured they had recovered their capital plus a little profit before hurricane season - but if you could make those payments, why would you need a loan in the first place?
Historically, poor people have often lived in housing that is appropriate for flood plains. E.g., wattle-and-daub huts, built in a few days by unskilled labor using free materials found nearby. Provided they get a warning in time to toss their meager possessions in a bag and head for the hills, disposable housing in a flood plain has always worked for the poor. But now it violates building codes and zoning laws - instead, we get expensive construction built to last even in areas where it is certain that hurricanes or floods will destroy it sooner or later.
So, one issue is that governments make insurance available for such areas at far lower cost than you'd calculate from the average loss and the average time between losses, and the difference in cost is transferred to the rest of us living in more appropriate conditions. Ditto for disaster relief. I don't begrudge actual rescue operations, but I think most of the money goes to months of supporting people that made no plans to take care of themselves after a not-unexpected disaster, and to rebuilding where they shouldn't have built in the first place.
A second issue is that many of the recipients of this aid are not poor. $100,000 for personal possessions sure isn't poor, although it leaves the 2 BMW family hurting if they didn't drive at least one vehicle out. $250,000 for a house can be a little or a lot depending on the area; where I live, and pay taxes to help fools who live in more dangerous areas, $250,000 gets you a mid-sized waterfront house that *won't* flood, or a mansion on a large lot without a waterfront.
Third, about all those poor people in NOLA: what were they doing there? I know about the port and the jobs that brings, but I very much doubt that many actually poor people were working those jobs. Longshoremen get very good pay, and there aren't that many of them. If NOLA was just one of the country's busiest ports, all the workers required could find space to build their houses on hill-tops, fewer levees would have been required, and the only issue after Katrina would have been how fast the docks and dock-side warehouses could be replaced. So why did all the others live there? Because living there never reflected the true costs of living there, much of which have been transferred to the rest of the country. With no government-provided low-cost insurance and no aid after a disaster except for rescue, NOLA would have been too expensive for anyone that didn't have to be there, and those that used goods transferred through NOLA would have paid a few cents more to cover the extra-sized salaries needed to get workers there, and to either hurricane-proof or provide for occasional replacement for all necessary structures. Instead, everyone in the country is now paying more.
You make conclusory statements (apparently based on your ECON 101) class like "more houses are built because government-provided insurance shifts the demand curve, resulting in more housing at a higher price" and "but it was impossible that at no price would insurers insure coastal land and that at no rate would lenders not lend without insurance" without any evidence to back up your assertions.
I am just telling you that you are wrong. You, and Mr. Landsburg, simply do not know how the real world works. Yes in theory, if I was willing to pay Statefarm double the value of my house, they would make an exception and write a policy, but that is hardly "insurance" is it? And to claim there is a shortage of affordable housing because of federal disaster programs is simply not true. True, poor people can't buy a beach house, but its not like they would be able to if the federal programs didn't exist either.
He did not say that he thinks that. He thinks that government provided insured limited their options by pricing them out of certain markets. He made that clear in his post. Of course, you know that. You are simply trolling in your normal contrarian fashion.
Actually, as I noted above, New Orleans and coastal Louisiana has been carrying much of the rest of the country for almost 100 years. Our protective buffer of wetlands has been stripped away by oil exploration, logging, navigation, and flood control that has benefited the rest (or at least the middle two-thirds) of the country. We got almost nothing in return. The levees that the federal government did build to protect us, which are inadequate but should have stood up to the glancing blow we suffered from Katrina, turned out to be poorly designed and improperly constructed.
Excuse me for reading things in plain English:
I'll just address your third point, since the others go into poverty/social welfare issues that I don't feel like fighting over. Simply, Mr. Landsburg is arguing the opposite of what you state - He asserts that poor people are being priced out of the market for housing because of the costs of the mandate for flood insurance. He could much more honestly and accurately argue, as you do, that the cost of living in disaster-prone areas is artificially deflated by the relatively low cost of flood insurance. HE could also more honestly argue that people should be expected to bear the full cost or the full risk of living in those areas. But he wants to preserve the illusion of objective economic analysis rather than engaging in an honest debate about the equities or morality of flood insurance and disaster relief. And so, he couches it in terms of flood insurance "hurting" the poor, without using any actual numbers or empirical analysis.
"federal disaster relief denies people the opportunity to live cheaply in exchange for living dangerously. That opportunity is particularly valuable to the poor."
(emphasis in the original)
Sure as hell looks to me like he is saying poor people should be glad to live in areas where they are going to be flooded out without hope of federal help.
That's a good one! You've never been to New Orleans, have you? There aren't any hills. In fact the highest point in the entire city are the Mississippi River levees (About 22 feet above sea level). Most of the year the river level, (normal level is about 17 feet) is higher than the all the built land in the City. Even the highest point off the levees is (in the French Quarter and Uptown) is about 12 feet.
Cars are another example. Take, for example, the "new" Volkswagen Beetle. Although it looks similar to the iconic old Beetle of the late 1960s, it is mechanically a totally different car. It has antilock brakes, traction control, and airbags. And the cheapest version retails for $17,000.
The old Beetle is a very, very simple car. It has no antilock brackes, no airbags, no traction control. But it could be made very cheaply. VW had to stop selling them in the US in 1978 because they did not meet the current safety regulations.
However, VW continued to make the old Beetle in Mexico until 2003. Americans just couldn't buy one and bring it to the US.
Why should poor people not be able to choose to buy a new, reliable car that is very cheap because it uses technology that is 40 years old?
Yeah, and just think of all the pesky food safety requirements and how expensive paint is since they took lead out of it and how much more expensive insulation is since they stopped using sprayed asbestos. And damn, who needs fire retardant pajamas for kids anyways!
To make this point more palatable to people on this board, federal disaster relief pushes up land prices for anyone who wishes to buy the land. That includes:
1) Businesses who might find the land well located for various uses.
2) Governments who might want to purchase the land to create wildlife or public recreational areas.
3) Universities who might want to purchase the land for research purposes.
Wouldn't it be nice to be an economist and live in a world where everyone has perfect information and is able to make perfectly rational decisions about how much to pay to avoid each risk? I think some people need to go look up the meaning of "market failure".
It is unclear whether Landsburg is referring to the general proclivity of the federal government to provide relief regardless of whether the victims of a particular disaster have federal disaster insurance or if he is referring to federal disaster insurance programs (which require recipients to actually acquire federally backed policies) in particular.
If he is referring to the latter, he is ignoring the fact that such programs are part of comprehensive programs that are designed to mitigate risk. The flood insurance program is part of the the comprehensive flood management program which includes flood control devices, (e.g., dams and levees), designated flood retention areas and flow areas where no building at all is allowed and strict building codes and density restrictions in those flood zones where building is permitted. This not only protects the people who are potentially directly affected by the flood, but prevents floods from occurring in areas that had not been previously subject to flooding because of construction in flood prone areas.
So if Landsburg had his way and poor people were able to build to their hearts' content in flood zones, when their little shacks are washed away in the next flood, the next thing you know the rich peoples' houses that were built on supposedly high and dry land will suddenly be knee deep in water because of the impediments to flow caused by the destroyed poor peoples' houses. Or their building on unsuitable land will cause mudslides that will destroy the rich peoples' houses.
"If you don't believe this, visit a developing nation."
Certainly, some of your protective wetlands are being stripped by man's activities. (Just as some are being strippled in other parts of the country.)
But much of the protective wetlands are being lost because Louisiana is sinking due to entirely natural causes. That parts of Louisiana are sinking for natural causes has been recognized for sometimes know (though there are arguments about whether the natural sinking is mostly due to soil compaction due to the weight of river sediments or mostly to a a slow landslide process). Some information is available at LSU's web site and Discover's site.
The Stafford Act, which created the FEMA Disaster Housing Program, limited emergency repair grants to $5,000.00. Even when the Disaster Supervisor authorized breaking that cap, it was $10,000.00. Obviously, that ain't squat against the value of a house. I believe post-Katrina it has risen to $20,000.00, which is still a drop in the bucket.
Furthermore, anyone who qualified for one was given an SBA Disaster Loan, which COULD cover the entire value of the home, but the previous grant? It was required to go toward paying off the loan: No free anything for the financially fit, just a super-low interest loan.
Where the fraud and waste came into the program was primarily in awards to... the poor, and that was for their personal property, of course, because they were renters, not home owners. These people viewed FEMA as just another source of free government money (Which came out of our pockets, natch). I can't tell you how many sweet looking little old ladies would simply stand flat footed in front of me an lie about their PP (Personal Property) losses. It was... amazing.
Oh, and why were all of those poor people able to rent in the ninth and tenth wards of New Orleans? Because of the SBA rental assistance program, which is basically a form of welfare. I worked in N.O. several times - once as an SBA Inspector - and I can tell you the SBA program is a racketeer's dream: Buy a house, get it SBA certified, and rent it out. Some folks had dozens of such properties and made out
like banditsquite well.I agree that disaster assistance should be curtailed or eliminated, but not for the reasons you propose. I think it is just another demeaning form of welfare, and in concert with the SBA, FEMA actually ECNOURAGES and ENABLES the poor to game the system.
Though it is not PC to say so, most poor people are poor for reasons that fall squarely on their own shoulders. I've been in thousands of homes in N.O. and have met thousands of these poor folks - any whitebread politico want to call me on that? - and I can attest to the fact that most of those folks routinely squander every oportunity offered to them through nothing other than their willful ignorance and piss-poor attitudes.
I have very little sympathy left for the poor after meeting so many of them.
Subsidizing construction in disaster prone areas is not the right approach for the US. I think it would not be wise to spend tax dollars to rebuild much of New Orleans, which is sinking and will continue to sink.
I am just telling you that you are wrong. You, and Mr. Landsburg, simply do not know how the real world works. Yes in theory, if I was willing to pay Statefarm double the value of my house, they would make an exception and write a policy, but that is hardly "insurance" is it? And to claim there is a shortage of affordable housing because of federal disaster programs is simply not true. True, poor people can't buy a beach house, but its not like they would be able to if the federal programs didn't exist either.
I'm surprised by the implication that you've taken Economics. In fact, there's no "in theory" about whether State Farm would give you insurance for double the cost of your house; they would.
In fact, I'd be glad to insure personally the houses of you and everyone in a dangerous coastal area for an annual premium of only 1/2 the value of your house. That's a high rate, but it's insurance. I'm amazed that you don't believe I'd be willing to do this. The fact that at a certain price I'm willing to provide insurance to people living on the coast will, I hope, provide some of the "real-world evidence" you demand to back up my claim that someone is willing to do it.
Shockingly, you've missed the point.
Landsburg's point has nothing to do with what the poor should prefer; in fact, some of the poor would prefer to accept the risk of making do without federal disaster relief in exchange for a lower cost of living.
I would direct people who might be tempted to take Mr. Thomas's posts seriously to his initial response to Mr. Landsburg's post, where he interprets Mr. Landsburg to say that the problem with federal disaster relief is that it transfers wealth to the poor. Ha! In one of his latest posts, he cannot discern from Mr. Landsburg's article whether he is talking about implicit insurance in the form of guaranteed distaster relief or explicit government-offered flood insurance. Breathtaking.
Well, first off there is no such thing as "guaranteed disaster relief", when a disaster occurs, the amount of, who will receive, and the nature of that relief from the federal government is very much up in the air (who and what type of relief people will get for Katrina is still very much up in the air).
Subsidizing construction in disaster prone areas is not the right approach for the US.
Again, what everyone has conveniently ignored to fit their libertarian world view, is that the flood program also defines flood zones and flood paths to lessen the impact of floods, so that less areas are subject to flooding. The flood insurance program is only a very small part of a comprehensive program to reduce the impact and damage of floods. It is far from perfect, but it is much better than no program at all.
Furthermore in the original post Landsburg states "[t]here has long been an expectation that in Katrina-like circumstances, the government will step in to help." So here is apparently talking about the expectation of help available to all victims of the disaster. But then he goes on and begins discussing flood insurance and "how chances are the purchase price included a premium for the disaster insurance that the government insists on providing" (apparently this is on top of the actual real flood insurance premium--which is a real actual separate policy--that the homeowner pays). So excuse me if I am not certain if he is discussing federal assistance in general or specific federal insurance programs in particular. He also talks about the premiums being hidden in the housing prices. This does confuse me, because the flood insurance program is an actual insurance program with real premiums paid to real insurance companies where claims are assessed by real assessors.
I am not the one being unclear.
I'd be glad to insure personally the houses of you and everyone in a dangerous coastal area for an annual premium of only 1/2 the value of your house.
Oh really, and who is going to cover your loss if there is a catastrophic hurricane this season? You have an investment that is going to double your money in five months such that you could pay for a total loss by the the end of August? And then be liquid enough to still be in business for the next claim? Remember, I might be willing to take a chance on you (not really), but do you really think my mortgage company would?
I bet if Joe had a huge pool of cash, he'd really, honestly insure these homes for the fee he offers.
However, he'd only insure properties if insurance regulations allowed him to spread his policies over a large number of different geographic locations.
Say he has $10 million, cash that he is willing to risk. I bet he'd insure $1 million worth of property in Louisiana, $1 million in Florida, $1 million in GA etc. He'd stop taking policies when he reached $10 million. Meanwhile, he'd collect $5 million in fees. At the end of the year, the worst that could happen is he'd have $5 million, the best is he'd have $15 million, and the most likely thing is he'd have some amount that exceeded $10 million.
However, if local insurance regulations required him to accept every single applicant who applied in one area, and he anticipated a too many people in one locatoin would apply, then he'd take back his offer. Or, if he didn't take back his offer, banks would not consider his insurance sufficient to cover their risk.
Heck, if I had $10 million and someone would let me do offer insurance for half the value of the maximum payout, I'd offer it. But I don't have $10 million. Insurance is regulated and banks aren't stupid. So, no one is going to let me do it!
But there are people who have $10 million, or who can collect $10 million from a pool of investors.
The fact is, in an unregulated market, there is always some price at which insurance will be available. It may be an absolutely insance price, and the insurer may structure the policy to limit the total pay out based on how much they charge for the policy, but they will offer some coverage at some price!
But what Joe apparently fails to understand is that the term "insurance" has a specific meaning. paying an annual premium of half the value of an item to insure against a loss of that item is not "insurance" by any reasonable definition of the term. In order to be insurance, it must be worth my while to pay Joe to cover my potential loss rather than just self-insure. And at half the value of my house (probably even 10%) self-insurance is the option any rational person is going to opt for. So there is a real and practical upper limit on insurance.
money-treesinsurance companies to pay out for risks they never assumed or charged for.You are quoting me and claiming "everyone" is forgetting about the rest of the program. Why do you think this?
I am forgetting about other aspects of the flood program? I am fully aware of these other aspects, have not forgotten them (conveniently or otherwise.) I still think subsidizing insurance is not the proper course for the US.
Could you make a case that based on something other than your assumption that I (or others) have forgotten this?
Well, yes I can. The flood insurance program not only lets people buy flood insurance but it prevents people from building in other areas to allow flood waters to flow freely and thus mitigate the damage caused by floods. No private insurance is going to do that. In fact the entire program grew out of the disaster of the 1927 floods (when the levees downstream of New Orleans were blown up to save the rich people). Because of the federal flood insurance program, flood plains two thousand miles upstream on the Platte River cannot be built on. If Landsburg had his way poor people would be free to build on these flood plains because it would relieve this burden on the poor. However, it would place it right back it right back in our laps.
Water is a funny thing, when it flows, it has to go somewhere. If it finds impediments in its way, then it will go somewhere else. If no one has a comprehensive plan to determine where or what to do with that water, very unpleasant things can happen.
Lucia makes my point well. The only reason insurance will not be available in high risk areas is distorting government policies, including, as Mr. Nieporent points out, baseless litigation.
in·sur·ance /ɪnˈʃʊərəns, -ˈʃɜr-/
–noun
1. the act, system, or business of insuring property, life, one's person, etc., against loss or harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in consideration of a payment proportionate to the risk involved.
There's our working specific meaning. The important part is "in consideration of a payment proportionate to the risk involved."
In order to be insurance, it must be worth my while to pay Joe to cover my potential loss rather than just self-insure. And at half the value of my house (probably even 10%) self-insurance is the option any rational person is going to opt for. So there is a real and practical upper limit on insurance.
The practical upper limit on insurance is what you're willing to pay. The problem is that you think that any insurance which requires a premium higher than the amount you're willing to pay to mitigate risk, you have arbitrarily designated "not insurance." You can redefine insurance as "insurance at a rate I'm willing to pay," and sure, maybe it won't be available in a free market in a high-risk area. But the problem isn't that insurance isn't available, it's that you're not willing to buy it.
Redefining the word to make the product exist exclusively within your price range strikes me as a particularly whiny way of pretending life can't exist without subsidies.
I am not the one being unclear.
At this point, you should simply be embarrassed not to have followed the logic. I strongly encourage you to finally go back and read each word of the original post successively. Landsburg argues that the expectation of federal bailouts reaches a degree of certainty such that its promise is an implicit form of insurance, one which raises the price of property and housing proportionately to what would otherwise be the premium for an insurance policy (which, of course, you deny could exist in any case... even though you're paying for it already. But I digress...). He never brings up explicit federal flood insurance, although the availablity of that underpriced insurance will have the similar effect of higher housing prices to correct for the artificially low premium rate.
If you're looking for specific words to help you understand his meaning, I'd suggest "hidden" or "implicit."
I'll grant you that Mr. Landsburg is fallible. The proof is in his post: "Currently, the government forces us all to buy (implicit) disaster insurance against our will, and the news media carry big feature stories on the people who collect that insurance. A naive viewer might think the government had done us all a favor. But surely no reader of the Volokh Conspiracy could be so naive." Oops.
I have to say, when I went back and read that part of the OP after this discussion, it really made me giggle inside.
Actually he does:"So if you own a house on a flood plain, chances are the purchase price included a premium for the disaster insurance that the government insists on providing." Or maybe I misread it, because I assumed Landsburg wasn't talking out his ass and did do some basic research to find out that if you live in a federally designated flood plain, you are required to carry federal flood insurance. As for the "artificially low premium", considering that only 100 year flood plains are eligible to be built on, the rates are not unreasonable.
Well, when you throw around terms like flood plains, government disaster insurance and disaster relief and conflate them to make some nonsensical and silly theoretical (and immoral and heartless) economic points in a forum where people are likely to know a hell of a lot more about real world policy and practical implications, you should be more careful discussing your academic fantasies.
Argue that regulation has gone too far or that there are other ways to combat market failure. Heck, argue that regulation in general generates more net cost than net benefit. Just don't insult our intelligence by failing to present any actual cost-benefit evidence. And don't cloak your disagreement with government policies in "concern for the poor" without any evidence that the poor are being hurt more by the policies than they would be in their absence. Just because Landsburg doesn't think he needs to provide evidence to back up his claims doesn't mean you should follow his bad example.
And by the way, the characterization of the post-Katrina insurance lawsuits is disingenuous. At least some of the plaintiffs are alleging misrepresentation about the terms of coverage. I'm not talking amorphous "you advertised yourselves as comprehensive insurance" misrepresentation - I'm talking about specific misrepresentations by agents telling policy holders they didn't need flood insurance and that the insurance would cover everything if a hurricane hit. Ultimately, the plaintiffs will probably lose. But if their allegations are true, the insurance companies aren't the hapless victims of overzealous attorneys general or private tort lawyers Nierpont portrays them as.
BTW, he never even demonstrated the "clear effects" of the policy, he just assumed it.