Once again spring is heralded by swollen rivers in the Midwest. The overflowing Ohio River and its tributaries have caused heartbreak and millions of dollars of damage in several states in the region.
And once again a colossal public-policy blunder is being 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?
Politics aside, however, federal relief is a bad idea. Where the taxpayers’ money is concerned, we must look at the big picture. When government subsidizes something, more of it results. If the cost of living in a hazardous area is lowered by a promise of bailout, 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 it has been widely reported that the same people have been repeatedly paid 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 this is a legitimate function of government. But what looks benign is actually bad policy. There are two problems with government disaster assistance. First, it is an imposition on citizens who do not live in disaster-prone areas. It is one thing to ask them to donate to the victims of misfortune. Americans are very generous during disasters. But compulsion is something else.
Second, as noted, government subsidies and cheap loans encourage the very behavior that made people victims in the first place.
This argument is not unknown to policymakers. The federal flood insurance program was established ostensibly to reduce the amount of money Congress appropriates following a big disaster. 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 economic process. If people must buy insurance, government control of premiums is likely. Insurance on floodplains is expensive. Residents forced to buy policies will want the government to make the premiums “affordable.” Opportunistic politicians may respond with price controls. Even today’s voluntary program charges less than full-risk premiums.
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.
Disaster officials admit as much. Although they insist their premiums are actuarially sound, they contradict themselves by stating that an unregulated private insurance industry could not provide flood insurance. If that is true, then government insurance must be unsound.
Insurance in a free market provides a vital service: it sets a price on and therefore signals risk. Tampering with those signals is dangerous.
Another problem with government flood insurance is that, as a way to mitigate damage, it can impose land-use restrictions, which violate property rights. The environmentalist lobby has long seen disaster assistance as a means to control where land is developed. That alone is enough to keep the government out. The insurance program and the congressional power to appropriate disaster assistance should be abolished.
The proper policy is to let people live where they want but also accept the risks. A free market in insurance is most likely to come up with innovative ways to hedge against disasters. But we don’t have a free market in insurance. Insurance is one of the most regulated industries in the country. It’s time to repeal the regulations and let the creative free market do its stuff.
