Carnal Reason

The historic pattern has been that as soon as crises pass, more buildings go up and new people move in. As John Tierney, among others, pointed out last week, property owners don’t have much financial incentive to respect the risks of living in a hurricane zone. The federal government’s flood insurance stakes property owners to much of the cost of rebuilding on the site that’s been inundated. Studies show that thousands of coastal dwellers have received federal insurance payments for the same site following at least two different floods. In rare instances, homes have been restored many more times than those with federally backed insurance: A Canton, Miss., property, currently worth about $49,300, has had 25 losses in 18 years at a restoration cost of $181,279.
Slate Magazine

The state’s [Louisiana] representatives have come up with a request for $250 billion in federal reconstruction funds for Louisiana alone — more than $50,000 per person in the state. This money would come on top of payouts from businesses, national charities and insurers. And it would come on top of the $62.3 billion that Congress has already appropriated for emergency relief.
The Washington Post

Moral hazard is a term used to describe the fact that having insurance can in sometimes lead the insured to take extreme risks, even to the point of fraud. Suppose I were able to insure my $100,000 home for $1,000,000. I might be tempted to burn it in order to collect the million. This is why private insurance companies will not issue any such policy.

The US government is the most irrational insurer in history. Again and again it offers to insure against risks that ought not be taken. Federal flood insurance allows people to repeatedly build in flood zones, barrier islands, beachfront, and other high risk areas. The savings and loan crisis of the 80’s was largely due to the fact that the federal government insured savings deposits up to $100K, allowing the deregulated S. & L.s to make much riskier investments than they would have otherwise. None of this is news. Why does it happen?

A private insurance company that took the absurd and wasteful risks the government does would quickly go bankrupt. The feds simply raise taxes and inflate the currency. A private school system as ineffectual our public school system would go bankrupt. The public schools use poor performance as a reason to demand even more money: mediocrity or worse is rewarded. Imagine your were going to buy something really important (much more so than your children’s education), say a luxury car. Would you prefer a Mercedes-Benz or a car made by the state of Louisiana?

Government is miserable at almost everything. This is it because it’s power to confiscate property frees it from the economic consequences of incompetence and failure. Money is no object when it is someone else’s money. The one great exception to government incompetence is the US military. This is no accident: the military pays for incompetence with blood and lives. Its own blood, and its own lives.

Posted on September 27th, 2005 by pwyll
Filed under: General, politics