Energy & Environment

Risk and Responsibility

If the feds always pay the tab for disaster relief, there's little local incentive to halt risky development.
by | October 2005

After Hurricane Frances ripped through Florida about a year ago, the Federal Emergency Management Agency wrote checks worth $31 million to residents of Miami-Dade County. There was a big problem with the payouts, though: The storm had actually hit about 200 miles to the north. Frances gave Miami a good soaking but didn't really do much damage there.

It's an ironic tale, in light of all the finger-pointing wrought by the catastrophe of Hurricane Katrina. To be sure, state and local officials never relish having to work with FEMA's bureaucracy when disaster strikes. That's been abundantly clear this past month. But there's usually a silver--or green--lining. It's not too hard to shake millions, even billions, out of Washington after a calamity, or even a rainstorm in Miami's case. In fact, it's much easier than winning federal aid for workaday priorities such as education or public housing.

This is one of federalism's little quirks--one that some argue makes natural disasters even more disastrous. If the feds always pick up the tab, then there's no incentive for states or localities to halt risky development in areas prone to flooding, mudslides or wildfires. It's an example of what economists call a "moral hazard" problem. "The signal that's gone out over many years is that no matter what type of natural disaster it is, FEMA comes in and bails you out," says Pietro Nivola, a senior fellow with the Brookings Institution. "State and local governments become complacent."

Could a reshuffling of responsibilities have prevented flooding in New Orleans? Perhaps state and local leaders would have invested their own funds in the levees were they, rather than the feds, on the hook for any consequence of failure. On the other hand, it's inconceivable that a poor state such as Louisiana could be expected to pick up cleanup costs that may top $200 billion.

Still, aligning risk with responsibility is a fair idea. Were states (along with insurance companies) liable for disasters, the United States would probably look quite different. Eastern and Southern states might have fewer people living near the coasts--especially on sandy barrier islands that literally wash away in storms. Pacific Coast states might have fewer people living atop earthquake faults. And booming Western exurbs might approve fewer subdivisions in forests where there's a big risk of wildfires.

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