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Commentary

Hurricanes Kill; So Can Hurricane Relief Efforts


     
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Economists are different. They see trade-offs everywhere and are willing to look beyond direct effects to uncover the more subtle, indirect and often “unintended” consequences of the actions people take.

Something called “moral hazard” is one of the more fruitful concepts to emerge from the economic way of thinking. The term was coined by health economist Mark Pauly to describe the behavior of people who have insured themselves against sickness and injury.

Because a large fraction of the costs of visiting the doctor, of being hospitalized or of purchasing prescription drugs is shifted to other policyholders, individuals with health insurance tend to consume more of those goods and services than they would if they had to pay their medical bills in full out of their own pockets. And so, rather than relying on home remedies for simple colds and minor injuries, they make appointments to see their doctor or go to the emergency room. This insurance-driven over-utilization of scarce health care resources raises the costs of medical care for everyone, insured and uninsured alike.

Moral hazard likewise explains why, for more than 20 years after the introduction of the designated hitter rule in Major League Baseball’s American League, batters in that league have faced a substantially greater risk of being hit by pitches than batters in the National League. Because AL pitchers no longer take their turns at bat, the DH rule insures them against retaliation if they “plunk” an opposing player, purposefully or not. Pitchers in the National League have no such insurance, and so they tend to be more careful when throwing fast balls high and inside.

Same Reasoning for Victims

The same reasoning applies to relief for the victims of Hurricane Katrina, Hurricane Rita or any other natural disaster. To be sure, neither I nor any other economist of sound mind would recommend not coming to the immediate aid of people who have lost their homes, their livelihoods and their loved ones as a result of nature’s destructive fury. The outpouring of money, emergency supplies and manpower that followed in the wake of this season’s recent storms amply demonstrates the compassion and generosity of the American people for those in dire straits. Charity begins at home, and many Mississippians mobilized quickly to offer aid and comfort to their Gulf Coast neighbors. That home-grown response to disaster should be a cause for celebration, not disparagement.

A Dark Lining

There is a dark cloud in this silver lining, though. Meeting the immediate needs of the victims of natural disaster is one thing. Providing hundreds of millions of tax dollars in the form of outright grants, low-interest loans, and other aid devoted to helping finance a return to pre-storm normalcy is quite another. Shifting a large portion of the cost of recovery to the taxpayers will encourage people to rebuild who would not have chosen to do so if they instead shouldered the full cost themselves. The prospect of receiving federal and state reconstruction assistance after the next major storm moves ashore supplies incentives for others to relocate their homes and businesses from inland areas of comparative safety to vulnerable coastal areas.

People who voluntarily put themselves in harm’s way, taking on the additional risk of living and working in disaster-prone areas, adequately insuring their lives and property against wind and flood—and paying actuarially fair premiums reflecting that greater risk—have every right to expect prompt reimbursement for the damages they have sustained and every right to rebuild if they wish. Disaster victims who merely assumed that their policies covered flood damage have no such rights. Threatening to abrogate insurance contracts may score political points for Attorney General Jim Hood and plaintiffs attoney Dickie Scruggs, but it also guarantees that fewer people will be able to insure their property against future storm damage.

This is not to say that upwards of $200 billion in federal money should not be spent to rebuild the Gulf Coast. The lesson of moral hazard is simply that, by lowering the costs of populating known hurricane pathways, disaster relief has an unintended consequence: more lives lost and a bigger price tag the next time around.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.

Taxing ChoiceFrom William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation? Learn More »»






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