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Fri Sep 23 11:09:50 PDT 2005

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WHOAAAH
Sep 15th 2005  

Mr Bush is doing better, but throwing money at the problem may make a
bad mess worse

THIS week saw something of a turning point for both New Orleans and
George Bush. Down on the Gulf coast, some sense of order returned to
the flooded city (see article[1]). Meanwhile, the president began to
act presidentially. Mr Bush belatedly took "responsibility" for the
failures of the federal government in the aftermath of Hurricane
Katrina. He also belatedly pushed out Michael Brown, a horse expert
whom he had foolishly appointed to run the Federal Emergency Management
Agency. 

The arguments about who got what wrong will have a big impact on
American politics (see article[2]). But the main priority for Mr Bush
should be avoiding any further mistakes--and there are worrying signs.
"Nothing can salve the wounds like money," a White House official told
TIME magazine last week. That is the prevailing wisdom in Washington,
DC, as politicians rush to atone for their earlier incompetence. Some
$60 billion has been pledged for post-hurricane relief and
reconstruction (with far, far more to come) and some contracting rules
about competitive bidding have been loosened.

When it comes to immediate relief, this is understandable. Some of the
cash will no doubt be wasted through cronyism and fraud, but America
has been shamed by its inability to look after the destitute. The
bigger problem lies ahead with the money that is supposed to go to
reconstruction. That is partly because the numbers are far larger. But
it is also because throwing money at the Gulf coast now may set America
up for an even bigger mess when the next natural disaster strikes. 

 Consider the question of how to rebuild New Orleans. Dennis Hastert,
the Republican speaker of the House of Representatives, recently
suggested that some areas of the city could be bulldozed; so great was
the outcry at this cruelty that he had to issue an apologetic
clarification. This is nonsense. Many of the worst-hit areas were not
just unusually vulnerable to flood; they were also among the most
squalid places in the country. They should not be brought back.

Even if Mr Bush thinks he has a responsibility to rebuild a new New
Orleans, some transparent weighing of costs and benefits is needed. Too
much federal cash for reconstruction will encourage yet more
development along the hurricane- and flood-prone Gulf coast. And the
"moral hazard" extends well beyond the South: the more cash that is
spent rebuilding New Orleans, the more foolhardy Californians will be
about where they build in their earthquake-prone state, confident the
government will bail them out if the "Big One" strikes.

 A big part of the problem is America's system of insurance against
natural disasters. Hurricanes are covered by the private market but,
since 1968, the federal government has been responsible for the
provision of flood insurance. The reasoning was that, since flood
victims expected to be bailed out by the government anyway, they might
as well pay up front. 

The division between flood and hurricane now sets up the spectre of
endless lawsuits between insurers and the homeowners over whether the
damage was caused by wind or water. Meanwhile, although federal flood
insurance was both subsidised and supposedly obligatory for most
mortgage holders, remarkably few people on the Gulf had federal cover:
less than a fifth along Mississippi's coast and only 40% in New
Orleans. People bet that if a hurricane struck, the government would
bail them out. In California, for much the same reason, only one in
five homes is insured against earthquakes. 

 The cleanest approach would be to get rid of federal flood insurance
entirely and let the private market price the risks of living below sea
level or in flood-prone areas. The problem is that the inevitability of
government bail-outs will persuade many not to pay up. An alternative
would be to make natural-disaster insurance (covering floods,
earthquakes, avalanches and so on) obligatory, with premiums more
closely reflecting the risk. The system could be run for profit by the
private sector, with the government, in effect, acting only as an
insurer of last resort. This would cost homeowners money and force them
to be more careful about where they live; but that, surely, is the
point.

-----
[1] http://www.economist.com/displayStory.cfm?story_ID=4406815
[2] http://www.economist.com/displayStory.cfm?story_ID=4403361

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