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09/11/2005

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KipEsquire

You're not addressing the fact that New Orleans is sui generis due to the levee system. This wasn't just a flood, this was a flood caused by an engineering failure.

Shouldn't we backtrack and begin by asking:

1. Were/are the N.O. levees public goods in the first place?

2a. If so, were/are they federal public goods, as opposed to state/local public goods?

2b. If so, were they improperly maintained, and, if so, does the government (at whatever level you answer in 2a), as a simple tortfeasor, not have an obligation to compensate those who suffer damages as a result of the tort?

Bill Korner

Posner says that emotional distress should not be "compensated" for by the government because individuals do not choose to insure against it.

But he also admits that there are cases where:

"the insurance industry refuses to insure against a particular risk (generally these are cases in which either the risk is impossible to quantify, so that an insurance premium cannot be calculated, or the aggregate risk is so great that the entire insurance industry does not have the resources to insure it)."

What evidence can anyone present to show that emotional distress is something that individuals do not want insurance for rather than something that insurance companies won't provide insurance for because of (a) unquantifiablity or (less likely but surely conceivable), (b) "aggregate risk so great..."???

This is a question that I have had since studying the economics of tort law in law school.

Sage_1776

I do not think there should be any limits to who benefits from private charity and for what. While private charity does have some subsidization by the government through tax discounts, and people are more likely to give to charities that market themselves the best rather than those who will make the best long-term use of those donations, part of the benefits of private charity are the good-feelings produced in the donor. However, governments may wish to create a system of voluntary standards for charities in order to decrease transaction costs for donors and, if the standards are well created, to increase the efficient use of the donations.
On a side note, at this point of the situation I like the idea of the debit cards instead of relief goods, although obviously the distribution system currently has bugs.

Thomas

Do you think we will see a form of the G.I. Bill here? Maybe pay for evacuees to go to college. Is that unforeseeable?

Wes

I agree with Posner's criteria for upper limits on long term rebuilding (eg. no federal funds to rebuild rich peoples' original homes).On the other hand, providing mobile homes or camping trailers to anyone whose primary residence was destroyed (including rich people) would go a long way toward alleviating medium term hardship and it would be quite cheap - at least compared to some of the Bush administration's other expenditures ($4 billion for 200,000 homes at $20,000 per home).

David

Why isn't federal flood insurance mandatory for people who live in flood plains? Of course, it's too late to change this for the victims of Katrina, but it seems to make sense as a general principle. You cannot drive a car without auto insurance; why can you live in an area with a high flood risk without flood insurance? Repeated gov't bailouts are not fair to taxpayers.

I agree with Posner that flood "insurance" should be provided by the gov't for those without the means to buy it themselves.

As to the Katrina, hopefully private charity will help most of the victims get back on their feet. Government can and should help the rest. However, the gov't compensation should be limited: it should give what is needed and not necessarily restore the full extent of everyone's belongings. A millionaire who failed to buy flood insurance can make do without the public dole.

So I guess I largely agree with Posner on this one..

John Garland

It seems possible that the problem in NO can be solved with better leves. More important long term is some limit on what property owners who re-build in hurricane prone areas such as the Gulf Shores area, the outer banks in North Carolina etc. should be able to obtain as insurance. I suggest one bite at the bullet. Require flood insurance to value and then when it is paid the property goes into a conservation trust not to be re-built.

That is a concept that I believe was discussed when flood insurance was first proposed.

Mike Sasin

I don't have anything profound to say at the moment so I'll just take care of some housekeeping stuff and add some humor.

First, I will now post under my real name rather than my standard Internet handle of "MikeTheBear." I generally use a handle "just in case," but there is certainly no shame (quite the opposite in fact) of being associated with Becker and Posner.

And now for the humor. When I tried to access the blog from work, I was denied access because of "sexual content." This had never happened before. Apparently, having the words "compensation" and "Katrina" together in the same sentence implies something else altogether.

Stay tuned - I may have something to contribute later in the week.

Paul McLellan

One thing that often gets forgotten and that I don't understand is that many of the houses destroyed are really owned by morgtage companies. Why do they not insist on flood insurance just like they insist on fire insurance. I was surprised when I moved to California from Great Britain that I was required to have fire insurance to get a mortgage but earthquake insurance was optional.

One good reason not to pay off all these mortgages with federal money would be to get mortgages to insist on higher standards of insurance. In fact it would be simple to insist that everyone have flood insurance since the cost of it would be negligible for anyone on high ground.

N.E.Hatfield

I find it intersting that there seems to be a growing attitude and trend that the Government (Federal, State, Local) is to be held accountable both in Law and Tort for all the "slings and arrows of outrageous fortune". Are we witnessing the end of individual responsibility? And if so, what does this mean for Liberty?

Thomas Brownback

"Why isn't federal flood insurance mandatory for people who live in flood plains?" -David

Really interesting question. Should we allow individuals to speculate at their peril with insurance, as we do with smoking or bungee jumping?

While insurance can be useful for dissipating the costs of risk to all the risktakers, compulsory insurance might unfairly penalize risk aversion. Consider the guy who lives in a flood prone area, but builds his home especially with that in mind, perhaps on magnificently durable stilts? In cases where it is more efficient to achieve the same protection by simply making a flood resistant home (a one time cost) rather than by insuring it against damage (a perpetual cost), compulsory insurance prevents this outcome.

This may be true with auto insurance as well, when you're forced to pay auto insurance, maybe you're buying a little more carelessness from everyone around you.

Note: Following Mike's intrepid lead, I will now also post with my full name (mainly to avoid confusion with the "Thomas" who posts above).

Mike Sasin

One good reason not to pay off all these mortgages with federal money would be to get mortgages to insist on higher standards of insurance. In fact it would be simple to insist that everyone have flood insurance since the cost of it would be negligible for anyone on high ground.

I was also wondering about this. I know that when I bought my home, one of the myriad of documents at the closing was a certification that the home was not located in a flood plain. If the mortgage companies did, in fact, fail to require flood insurance, did they assume the risk? I think so. Do they, then, fall in Posner's "case number 1" since they would be analogous to an "affluent couple?" That depends. Although the mortgage companies' underlying collateral has been destroyed, the homeowners are still personally liable on the note. My guess is that there will be a flurry of bankruptcy filings to discharge this debt, so many mortgage companies will not recover. This may sound macabre, but the mortgage companies will probably be better off if one or both of the homeowners died in the disaster, since they will be able to make claims on assets from the estate, if any, or, if only one homeowner died, the other would remain personally responsible and could pay the debt with proceeds from life insurance, if any.

Mike Sasin

What evidence can anyone present to show that emotional distress is something that individuals do not want insurance for rather than something that insurance companies won't provide insurance for because of (a) unquantifiablity or (less likely but surely conceivable), (b) "aggregate risk so great..."???

This is a question that I have had since studying the economics of tort law in law school.

Although it's been a while since I had torts, if I recall correctly, in order for emotional distress to be compensable, the victim must show some physical manifestation of the distress. If that's the case, emotional distress can be partially compensated by health insurance, assuming, of course, that the person has health insurance and it covers psychiatric care and prescription drugs such as antidepressants and sleep medications.

PD Shaw

The Federal Flood Disaster Protection Act of 1973 requires that federally-regulated lenders determine if real estate to be used to secure a loan is located in a Special Flood Hazard Area (SFHA) and if so, require flood insurance if available.

From what I can tell on FEMA's website (advisory only) most of the areas that flooded in N.O. are in an SFHA. If anything, the SFHA area appears larger than actual flooding.

Were the federal mandates avoided in New Orleans by recourse to non-federally regulated lenders? Since FEMA's website is advisory, were local surveys conducted by corrupt or negligent means?

Since the average homeowner has approximately 50% equity in their homes, it seems that the role and responsibility of the mortgage lender is of at least equal interest to that of the homeowner.

Jack

I don't know if this has been mentioned:

Requiring flood insurance in high risk areas would not only reduce the need for the public at-large to pick up the tab, but would also reduce the pre and post-disaster transactional costs over all. When the government welfare programs catch severely harmed individuals after a disastrous event, the additional cost of figuring out how to obtain benefits is imposed on those individuals. Many of them will have had no experience with government welfare programs, which can be very time consuming and frustrating. Additionally, the government agencies will be burdened with the sudden need to enroll so many people at once, and may have great trouble meeting demand.

Presumably, if insurance were required, the pre-disaster transactional cost would be much less as most people are familiar with obtaining insurance in various forms, and insurance companies compete to make that process easier. The post-disaster transactional costs would also be reduced, since insurance companies would be equipped with the money and information to respond more efficiently (enrollment after the fact would be unnecessary).

Palooka

Posner wrote:

"Just because a person loses his house in a flood that destroys hundreds of thousands of other houses, rather than in a fire that destroys just his house, is no reason for the taxpayer to reimburse him for the loss. The fact that most people do not buy flood insurance, just like the fact that most Californians don't buy earthquake insurance, is no reason for me to insure them. Only if they can't afford insurance, or if the insurance industry refuses to insure against a particular risk (generally these are cases in which either the risk is impossible to quantify, so that an insurance premium cannot be calculated, or the aggregate risk is so great that the entire insurance industry does not have the resources to insure it), is there a compelling case for government intervention."

I am shocked that Posner has decided to embrace an expansion of the welfare state. His position is bordering on incoherence. He doesn't want to subsidize carelessness, unless it's the poor or those "unable" to buy insurance. Uh, OK.

How does Posner not recognize the incoherence of his position? He correctly states, "Just because a person loses his house in a flood that destroys hundreds of thousands of other houses, rather than in a fire that destroys just his house, is no reason for the taxpayer to reimburse him for the loss."

Except, Posner thinks, when that person is poor. But Posner's exception to the poor does not follow the logic he gives for denying the non-poor. Posner does not believe that the poor should be bailed out by government whenever they experience an uninsured loss, does he? Does he really believe anybody whose house is destroyed is entitled to seek federal relief because they're poor and couldn't afford insurance? I'd think even a minority of liberals would refuse to support such nonsense.

Posner rightly believes that large-scale tragedies should be treated the same as small-scale, personal ones. But he makes an exception for those who are poor and experience losses. Yet I am quite certain he doesn't want to insure the poor and those "unable" to afford insurance as a general principle. What explains this glaring discrepancy?

Dan S.

Is it too late to sell Louisiana back to France?

Perhaps I did not read far enough into the material here, but I cringe at the use of the word "compulsory" when it comes to anything to do with insurance... or "public" money... or policy...

Have we seen benefit from compulsory insurance in the realm of the automobile? I have not. My un-scientific study has shown the costs to increase dramatically if, by law, you are required to hold a policy. Simple movie-theater economics: "You can't bring your own, so now you can pay $9 for a tiny bag of popcorn" but worse-- the movie theater does not require that you buy concessions at all. I must still insure myself against the uninsured, since there are those that operate outside of the law, so what is the point of compulsion at all?

Those who are wise will insure their property. Those who are wise will purchase property that they can afford to insure. The rest risk loss in the event of catastrophy, and I cannot justify the cost of forcing others to pay for another's lack of foresight.

It's a terrible tragedy, for certain, but let us not lose sight of liberty in all of this: we are (or should be) free to make or lose our fortunes in whatever manner suits us best, so long as we do not defraud others in their like pursuit.

michelle

What I don't understand is why so many buy flood insurance at all. In a typical case, there isn't a terrible amount to ensure. People tend to think that floods are influenced by 'forces of the sublime.' Out of control, floods are 'freak occurences.' Yes, one should not believe that there will be no two headed cows being born, but really, its very odd that one is. If an area is continually prone to being flooded, then no one in their right mind would invest in the first place.

Frankly, I think flood insurance is an excellent way of ripping most people off. The people who really need it, the McMansion sorts, they can well afford it. Most people can just as well do without it, and its not as if they'd really go calling to the government for a new house. I think something like that is really for charities to do.

Patrick R. Sullivan

'I am shocked that Posner has decided to embrace an expansion of the welfare state. His position is bordering on incoherence. He doesn't want to subsidize carelessness, unless it's the poor or those "unable" to buy insurance. Uh, OK.'

Well, it's a matter of practicality. If, after a disaster, the only people we'll make whole are the truly poor, then it won't cost us much to do so.

AND, we won't incentivize those who aren't too poor, to not insure themselves against such.

TheWinfieldEffect

I think the theory in this post is sound. The content of the theory I cannot find fault with.

The application of the theory to concrete facts is what bothers me. It is a maxim that hard cases produce bad law. Yet I am no bleeding heart and still I am irked by such a counter-intuitive result: that a family in Case 2 receives no compensation; a family in Case 4 receives compensation.

Part of the reason I am irked is that government ordinarily incentivizes home-ownership, protects the home against tort-creditors, shrouds the home in privacy protections from police intrusion, and permits families to use their homes as collateral to provide their children with higher education (i.e., home equity loans). Citizens whose conduct is rationally guided by State incentives are reasonably relying on the law (e.g., any citizen who dutifully complies with an anti-jaywalking ordinance expects not to be ticketed for jaywalking). When Person A reasonably and foreseeably relies on Person B's representations, one might say Person B has a duty to insure Person A's reasonable expectations. For the State to do nothing to assist citizens who have suffered an economic wipeout because they have put everything in their homes -- at the encouragement of the State -- has the appearance of the State disavowing its moral obligation (and invalidating its legitimate claim to authority, e.g., a cop ticketing you for jaywalking if you didn't jaywalk).

By contrast, individuals in Case 4 are owed nothing for an opportunity they missed because of a structural failure in the insurance markets. One does not have a right to government regulating a particular market into any particular shape (e.g., Social Security is not mandated by the Constitution; it is simply permitted). I do not see why the normal functioning of the political process would not adequately protect those citizens who fall into the category of Case 4.

PD Shaw

I notice on closer review of the Federal Flood Disaster Protection Act of 1973 (42 USC 4012a) that flood insurance, when required, is only required in amount "at least equal to the outstanding principle balance of the loan" In other words, the law is intended to protect lenders, not necessarily property owners.

I wonder how many people think they have flood insurance on their property, when they have only insured the bank's equity?

Wes

Fairness is relative each individual. A restaurant might, for example, charge a particular customer a fair price but pay an employee an unfair wage. The fact that the money payed by the customer was received as a wage would not mean that the transaction was either simultaneously fair or simultaneously unfair to both people.It may be fair to parents that they can choose (or choose not) to give their money to their children but it is not fair to children that some children get more than others. When a child is born into the world, all the world's resources have already been allocated out.A child is born with nothing (but the lucky children have parents who are willing to give them some of the resources that they have accumulated). A child does not choose to be born or agree to the allocation of resources that is in place when they are born. They are born into circumstances that are fundamentally unfair.What makes this sort of OK is that governments try to provide everyone with a minimal level of opportunity (food, education, etc.). Now some people would argue that opportunity should be a system where one strike means you're out - that you get the opportunity once as a child and that's it.The thing is that there is a substantial random component to life. Some people get rich because random circumstances converge in a particularly favorable manner and some people get poor because random circumstances converge in a particularly unfavorable manner. This isn't fair either. Providing a minimal level of opportunity throughout a person's life makes this sort of OK.Now, it may not be particularly fair that a government taxes certain people to provide opportunities for certain other people but the whole situation that people are born into and live through is so massively unfair that the minimal opportunities provided by taxes to mitigate this massive unfairness completely outweigh the unfairness of taxation.Governments should provide minimal levels of opportunity to everyone. A minimal level of opportunity means providing the basic necessities of life (food, shelter, safety, etc) and some level of education and job opportunities. This opportunity should be provided regardless of whether a lot of people need it all at the same time (a natural disaster) or just one person needs it (individual bad luck).Some people get hung up on the idea that the government should devote a lot of resources determining who is eligible to be provided with minimal opportunities. I don't see that this is necessary. For example, I would like to see free meals of something very cheap like rice and beans to provided anyone who wants it regardless of "eligibility". If Bill Gates wants to stop by the local "United States Opportunity Center" for a free meal of rice and beans then let him do it.On the subject of New Orleans, the government should provide basic "opportunities" (humanitarian assistance) to everyone who wants it without getting bogged down in the bureaucracy of trying to figure out who is eligible. Basic humanitarian assistance for all the people of New Orleans would cost $20 billion at most.I don't know what the Bush administration is smoking when they talk about $200 billion to rebuild New Orleans. They may very well find a way to spend (or give away) that much money but basic humanitarian assistance to the people of New Orleans would cost at most a tenth of that. The best guess seems to be that companies with close ties to the Bush administration like Haliburton and some "faith based initiatives" (churches) are going to be raking in outrageous amounts of American tax dollars.Actually it will be the tax dollars of the grandchildren of Americans alive today since this is all funded by debt (not that the grandchildren have a choice in the matter since they have not, for the most part, even been born yet).

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