Adapting to Flood Risk in Iowa: Federal Rebuilding Funds and Moral Hazard

The NY Times reports that the people of Cedar Rapids Iowa have not learned their lesson from the last big flood of 2008.

“The city has bought and demolished about 1,400 homes since the flood. But the city and private developers are spending more than a combined $200 million to build 1,311 new housing units. City officials have spent $307 million in federal, state and local money to redevelop flood-affected public facilities. In the last fiscal year, the city spent more than $150 million on capital projects related to the flood and it has allotted another $136 million for such projects in the current budget.”

Do you smell moral hazard?  Do you smell “too big to fail”?    Here is an excellent research paper that explores this broad issue.   These scholars argue that the Federal government will invest in playing defense against Mother Nature in areas where it believes people will move to but people want to move to areas where the Federal Government will invest in paying for defense. So, this is a multiple equilibrium game!   If the federal government could commit to not pay for defense, then people will be less likely to live in a risky place.

In my own research, I have documented using cross-country data that fewer people die when natural disasters strike richer nations but such nations often introduce perverse spatial subsidies that encourage people to live in risky place.  In Climatopolis, I argue that this encumbers adaptation.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

7 thoughts on “Adapting to Flood Risk in Iowa: Federal Rebuilding Funds and Moral Hazard”

  1. Matt:

    Would you support a national property tax that was risk-adjusted by area, to pay for disaster relief and property compensation? So, if one lived in a flood plain or by the ocean, one would pay more property tax, but if you lived in the central part of Michigan, you would pay much less? More or less a national program of national disaster insurnace.

    Does any OECD nation do this?

    I have thought this would be a good public policy for years but am suprised that I have never heard it vouched by even public policy anlaysts…

    Frank

    1. Frank, isn’t that called the National Flood Insurance Program (NFIP)? Here is the first paragraph of the NFIP web page on the FEMA web site. It sounds like they got there before you.

      In 2012, the U.S. Congress passed the Flood Insurance Reform Act of 2012 which calls on the Federal Emergency Management Agency (FEMA), and other agencies, to make a number of changes to the way the NFIP is run. As the law is implemented, some of these changes have already occurred, and others will be implemented in the coming months. Key provisions of the legislation will require the NFIP to raise rates to reflect true flood risk, make the program more financially stable, and change how Flood Insurance Rate Map (FIRM) updates impact policyholders. The changes will mean premium rate increases for some – but not all — policyholders over time.

      1. Curse you, anonymous blog software!

        The above anonymous is me. Only on this blog does the software allow you to proceed to the “Submit” button without even asking you if you’d like to enter your name. I note that the software, too, is anonymous.

    2. = = = Would you support a national property tax that was risk-adjusted by area, to pay for disaster relief and property compensation? = = =

      Problem is that every region of North America is subject to some form of widespread disaster, and in a climate change scenario it is going to be very difficult to assign probabilities to each region and sub-region. E.g. massive ice storms can knock out electric power for months and might become more frequent in regions that haven’t seen them prior to climate change.

      In any case, I always thought of “the federal government and my fellow citizens” as the ultimate insurance for disaster in my region. Although post-Katrina, post-Iowa floods I learned that ‘buy a pickup truck and a gun’ is what “promote the general welfare” means.

      Cranky

  2. Obvious question: what economic value to the rest of the country do those flood-prone areas have when they’re not underwater?

  3. There are horrible but truthful verses of Kipling about this:

    As it will be in the future, it was at the birth of Man
    There are only four things certain since Social Progress began.
    That the Dog returns to his Vomit and the Sow returns to her Mire,
    And the burnt Fool’s bandaged finger goes wabbling back to the Fire;”

    The fourth “thing certain” is in the next verse, in case you were thinking the old boy couldn’t count.

  4. I don’t see how subsidizing dangerous areas discourages adaptation. It might discourage economical forms of adaptation (i.e., not developing the land.) But it is still won’t discourage technological adaptation (e.g., building on stilts.) Economic and technological adaptation are two different things, just like economic and technological efficiency are two different things. Japanese agriculture, for example, can get more yield out of a given bit of land than American agriculture–technological efficiency. However, American agriculture demands far fewer costly non-land inputs–economic efficiency.

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