Among many other concerns, Hurricane Sandy has raised inevitable questions about moral hazard: Could many of the negative impacts of natural disasters be averted if the federal government didn’t subsidize people living in risky places by bailing them out when disasters occur? In other words, is FEMA undermining its own goals?
The issue of moral hazard is particularly important for coastal cities which are exposed to flooding, but whose dynamism depends on safely supporting large concentrations of people and assets. Adapting to climate change, then, could mean potentially sacrificing some of the benefits of coastal agglomerations.
Incentives for policymakers to take actions to prevent or reduce the impacts of disasters are notoriously weak. For instance, a president’s decision to sign a disaster declaration is much more press-worthy than efforts to help state and local governments prevent disasters. Indeed, the number of counties with disaster declarations has climbed significantly in the last two decades.
Fully 79 percent of major disaster requests were approved between 1988 and 2009. And all but a handful of counties received a disaster declaration in the 2000s.
Finally, disaster declarations are skewed slightly towards urban counties, suggesting that disaster-related issues of moral hazard may be more severe for cities.
However, this data on presidential disaster declarations masks a trend toward more federal spending on disaster preparedness. The aftermath of September 11th brought a large increase in funding for terrorism-related preparedness, but “all-hazards” spending has since increased while terrorism-specific funding has remained about the same or declined.
The federal government has also become (a bit) more serious about preparing for the impacts of natural disasters and climate change.
Last year President Obama ordered the creation of a national preparedness goal, which emphasizes prevention, protection, mitigation and response as much as it does recovery. The goal recognizes range of potential threats — beyond terrorism — and their potentially different consequences for different parts of the country. FEMA’s Emergency Support Function #14, which promotes long-term community recovery, is a rather striking display of inclusive coordination among public sector actors and community groups to integrate protection against future hazards into the recovery process (of course, it has its flaws).
Additionally, the federal government is spending fairly substantial sums on climate change, with the American Recovery and Reinvestment Act providing a huge boost to climate change programs. Admittedly, funding is skewed toward mitigation; funding for adaptation programs is almost comically non-existent in addition to being poorly coordinated at the federal level.
Moral hazard is certainly an issue to consider when figuring out how to respond to disasters. But moral hazard isn’t sufficient justification for not preparing risky places for disaster or for not aiding them when disaster strikes.
First, as shown above, despite weak incentives politicians do seem to be able establish mechanisms for protecting people and assets from harm.
Second, the benefits of assisting disaster victims so that they “self-deport” to less-risky areas must be weighed against the benefits of having them remain in those risky locations. One environmental economist has suggested that Wall Streeters could relocate from their risky downtown Manhattan location to Westchester County and do their jobs just as effectively. But given the scale benefits of urban clusters, this is not at all clear. Moreover, lots of people seem to have chosen to live in risky areas of New Orleans not because of government subsidization, but because of low housing prices. People living in risky areas might not be a simple matter of moral hazard, but might actually reflect true preferences or even a lack of knowledge about the risks.
Decisions about protection against and recovery from disasters are complicated and highly context-specific. In fact, the most recent research emphasizes the importance of considering many different scenarios and engaging many different stakeholders in order to reach an adequate response to the challenges of climate change. Moral hazard is only a part of this discussion.