Again this year, spring was heralded by swollen rivers in the Midwest. The overflowing Ohio River and Red River have caused heartbreak and millions of dollars of damage in several states in the region.
And once again a colossal public policy blunder was committed: the handing out of millions of taxpayer dollars in relief assistance. It would be too much to expect President Clinton to abstain from doing that. How could a politician resist playing Santa Claus? As James Bovard has written, the purpose of the Federal Emergency Management Agency is to make it possible for presidents to help themselves by helping others. By dispatching Vice President Gore to Cincinnati, Clinton tried to give a boost to his friend’s faltering chances in 2000. That’s politics for you.
Politics aside, however, government disaster relief is improper. Obviously, any government relief to victims of natural disasters comes from money collected at the point of a gun. My hunch is that the people forced to surrender their money had important things to do with it. Of course, nothing stopped them from donating it directly if they so wished.
Sound economics teaches that when government subsidizes something, more of it results. If the cost of living in a hazardous area is lowered by a promise of bailout or artificially cheap insurance, more people will live in those areas, they will take fewer precautions, and the amount of damage will rise.
People respond to incentives. Recent history bears this out. In past years, government has paid out billions in such aid. It has been widely reported that some of the same people have been paid repeatedly by the federal government to rebuild their homes and businesses precisely where they had been wiped out. Is it fair to compel the taxpayers annually to help the victims of disasters, when those victims could avoid or mitigate the damage themselves?
Many people will respond that disaster relief is a legitimate function of government. That’s not what the Founders thought. They included no such function in the short list of powers delegated to the Congress. When James Madison was a member of Congress, he voted against a relief bill, saying he couldn’t find the constitutional provision that permitted it.
What might look benign is actually bad policy. The imposition on citizens who do not live in disaster-prone areas is obvious. It is one thing for private organizations such as the Red Cross to ask Americans to donate to the victims of misfortune. Americans are very generous during disasters. But compulsion is something else. Spectacular floods get much attention. But people have less-telegenic disasters and emergencies in their personal and professional lives all the time. They would be better able to cope with life’s contingencies were the government not taking their money for “good works” like disaster relief. Maybe the amount each citizen pays for that relief is small, but if the government is dispensing money in one way, it will surely dispense it in many other ways too. That’s how politics works. The result is a $1.6 trillion budget that leaves Americans and their families with far fewer resources than they would have if the government would butt out.
As noted, government subsidies and cheap loans encourage the very behavior that made people victims in the first place. How could it not? This argument is not unknown to policymakers. In 1968, the National Flood Insurance Program was established ostensibly to reduce the amount of money Congress appropriates following a big disaster. The theory was that if potential flood victims were paying premiums, Congress wouldn’t have to appropriate so much money after a flood. (The Department of Agriculture runs a similar insurance program for farmers.) But it hasn’t worked that way. For one thing, most people who are eligible for federal insurance don’t buy it. Yet they can still get help from the government.
That has prompted some people to advocate making insurance mandatory. But in a free society, force should be employed only against those who initiate its use. Compulsory insurance is an illegitimate exercise of government power. Moreover, it would set in motion a perverse process. If people must buy insurance, government control of premiums is likely. Insurance on floodplains might be expensive. Residents forced to buy policies will want the government to make the premiums “affordable.” Opportunistic politicians may respond with price controls. But insurance that is priced artificially low is a subsidy to people in hazardous areas. Government can get away with that because it has the taxpayers to fall back on. But if people aren’t paying the full price of the risks they face, they will take more risks than they would have otherwise. Since a bureaucracy won’t run the insurance program according to sound business practice — it has neither the knowledge nor the incentive to do so — the taxpayers will still be on the hook. Despite collecting hundreds of millions of dollars in insurance premiums, the program has still needed money from Congress. Ironically, the flood program has been awash in red ink.
Disaster officials implicitly concede that they do not operate the program like real insurance. They insist their premiums are actuarially sound. But then they state that the government must be involved because flood is not an insurable risk. Both statements cannot be true. If private companies could not insure against flood (or earthquakes or other disasters), then the government’s rates cannot be sound. If the rates are sound, there is no reason why private firms could not do the insuring. The truth is that the government’s rates are not sound. A former FEMA chief conceded that the flood program would have to charge an extra $10,000 for the price of a policy to reflect the real risk. But that would mean even fewer participants. Besides, officials know the taxpayers are the insurers of last resort.
In a free market, insurance provides a vital service: it sets a price on risk and therefore signals it. Tampering with these price signals is dangerous. But that is precisely what the government does. The result is a disaster for the taxpayers.
Another strike against government flood insurance is that officials will be tempted to use it as a pretext to impose land-use restrictions. There will be a surface logic to the argument that if government is providing flood insurance, it should be able to discourage and even prohibit development in flood-prone areas in order to minimize damage and the pay-out. The environmentalist lobby has long seen disaster assistance as a means to control where land is developed. That alone is enough for us to keep the government out of the insurance business. Dictating the location of development is a clear violation of property rights. It is bad enough that state and local governments fail to respect private property in land. A national land-use policy would be abominable.
The proper policy is to let people live where they want and do what they wish with their own land. But they must also be willing to accept the risks without counting on the taxpayers to help them. The truth is, we don’t know how insurance in the free market would contend with large risks such as floods. That’s because we don’t have a free market in insurance. It is one of the most regulated industries in the country. A free market in insurance is most likely to come up with innovative ways to hedge against disasters. The market is a discovery process. Through it we learn things that we would never have learned without it. Entrepreneurs seeking profit would be driven to find creative ways for people to hedge against great losses. The market for futures and options came about through just such a search for security. Risk-averse farmers wanted shelter from fluctuating prices. Risk-embracing speculators were willing to bet on the direction of prices. Their complementary interests brought them together. It has been suggested that something similar could be devised for disaster insurance. But state insurance commissions are unlikely to bless such a new and “radical” practice. We don’t know what the market will come up with to solve problems. But we do know that because government controls the market, we are deprived of valuable ideas.
It’s time to clear away all those regulations and insurance commissions and free the entrepreneur to solve serious problems and be rewarded with profits for doing so. All the government needs to do is get out of the way.
