« Katrina, Cost-Benefit Analysis, and Terrorism--Posner | Main | Responses on Disasters and Good Samaritans-BECKER »

09/04/2005

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Ray

If the goal is to encourage people to make intelligent decisions about where to place property, infrastructure, and the like, without refusing to help them when disaster strikes, why not distinguish between property damage and humanitarian assistance?

We could give food, shelter, and medicine to people displaced by disasters, but dramatically reduce our willingness to compensate losses to property. It's harsh, but it would have the effect of encouraging people to buy insurance.

Wilfred

Af face value, Ray's idea about distinguishing between property damage and humanitarian assistance is a good one. However, it only applies to situations regarding private property as opposed to infrastructure that might be shared by society as a whole to facilitate economic activity. It is infrastructure that I primarily deal with.

Cities do not typically get their roads insured by private companies. If disaster hits, they either dip into the city coffers or higher authority comes to the rescue. So, we are still left with the Good Samaritan Problem that Becker suggests.

One way around this I think would be if the federal government began to assess the risk of natural disasters and cities. In the same way that credit companies judge between good and junk bonds, the federal government should assess how safe a city is. Then, with a preliminary evaluation, the government could certainly provide a scheme for the loss of property damages and roads for certain disasters and set a premium for cities.

An example of this might be with say a particular freeway built in an earthquake prone area. If that road is dangerous and seismologists think it is too dangerous, then it only makes sense to give the expected cost as being high if the probability of disaster is high and ask if the city wants to insure by paying the federal government a premium. If not, the city forgoes the possibility of rebuilding if it is too costly. This might sound inefficient, but given enough time, I could see how this would change the way city officials formulate policies on infrastructure.

Lihuafang

Dear Prof. Becker,

At first, I should thank you for your kindness for let me use your blog.

And in this post, Your question seems like that: how can the governments and individualsí donation be effective? And will the donation big enough to encourage the private companies build in risk-prone district?

But the reality is the help from others may not so helpful. If the help is not large enough to equalize the investment that has been put in such risk district, even not beyond, the companies will loss the motivation to locate in high-risk areas.

You also mentioned that few New Orleans homeowners had flood insurance to prove your statement, but the reason may base on the homeownersí preference of risk. They did not think the disaster would happen. And for instance, in Zhejiang province of China, it suffers the flood and typhoon almost every year, but people just rebuild their houses and companies the same place. Follow your explanations, people after the disaster there can get more than before, but itís not true. The condition after the disaster is always worse, though get a lot of helps from others, including public and private assistance.

I think a companyís location decision is based on comparing the marginal costs between rebuilding in the same place and moving to another one. A company in a certain place may have path dependence; so do others in the same district. Part reason of rebuilding but not moving may be this.

And considering the donation, to encourage moving or rebuilding, this may be the real important question. Will you agree with me?

Daniel Chapman

You perfectly framed the problem I've always had with FEMA relief. It always seems to come as a response to political pressure rather than true need. It seems more like a pork project for governors to bring in federal disaster money, especially when people build in predictable disaster areas.

And Ray also brings up a good point. While the poor were hit the hardest by Katrina in human cost, I'm sure the majority of FEMA relief money will not go to them.

touche

Sea levels are rising and will rise catastrophically during this century due to global warming. Should the inhabitants of low lying coastal areas bear the entire burden of flooding and losing their land or should this burden be shared by those who caused global warming?

Zathras

While many of Becker's policy suggestions are quite sensible, his invocation of the "Good Samaritan" problem is not on point.

The reason this is so is that the loss of life and property caused by Katrina is so far out of proportion to the likely aid available to its victims as not to constitute an invitation to again place themselves at risk of a similar disaster. Indeed, anecdotal reports in the media already suggest that many people evacuated from New Orleans have no intention of ever returning.

Where something like the "Good Samaritan" problem could well arise is in cases where people of means, who lost only property and/or income, are encouraged by government policies to try to pick up where they left off. Mississippi cotton farmers, already dependent on federal subsidies to stay in business, will surely be petitioning Washington for additional disaster aid. The New Orleans tourism and entertainment sector will seek help to rebuild, in the same place and along roughly the same lines as it existed before Katrina. The Gulf Coast gambling industry will seek help to reestablish itself.

In some cases government assistance may be justified; just because the Gulf Coast suffered a disaster doesn't mean the whole area should be abandoned. The point is that after Katrina there is no such thing as "getting back to normal." Provisions to avoid a similar disaster must be made, and the cost of these provisions counted beforehand. If that costs exceeds the value of restoring homes and businesses that can be relocated or replaced, they should not be undertaken.

Anonymous

I don't know about you all, but if the federal government provides $35,000 or more in relief to each individual whose home was destroyed or family killed, I AM MOVING TO NEW ORLEANS! Jackpot baby!

Matthew Collin

This problem won't be as pronounced if the money is directed at helping the poorest members of New Orleansís society. As we've learned time and time again, the Southern poor are highly immobile.

This liquidity constraint means that they lack the means to leave if they find themselves in the path of impending disaster because they cannot afford a trip out, a long-term stay in a hotel, etc. This also means that their extended family are more likely to be also be in the city and therefore less able to provide housing.

But note that the poor are also less able to take advantage of the good Samaritan program because they lack the funds to move to areas to take advantage of Federal aid.

So if mobility is taken into account and assistance is kept at a level low enough to make the 'start-up' costs of moving dominate, I don't see the Good Samaritan problem causing too much trouble.

Wes

...if the federal government provides $35,000 or more in relief to each individual...I AM MOVING TO NEW ORLEANS!Or you could move to Iraq. The USA has already spent $10,000 per individual over there ($200 billion for a population of 20 million).

Madge

That leads to another question: should the government provides aids to relocate people who are too poor to move themselves from the disaster-prone area and let those who chose to stay to be responsible for themselves?

Joe Merchant

"anyone who does build in designated high-risk areas should be required to carry insurance that covers most of their losses, the way many states mandate liability car insurance."

I call mandatory insurance bad juju. Insurance is an inherently inefficient system (you have to feed the agents, for one thing), and forced insurance like the Florida Windstorm / Flood pool is removed from market competition - making a bad thing worse.

I could post a liability bond and drop my auto insurance, but I choose not to because it represents a good value to me at current rates, which are determined by market competition. On the other hand, if I still owned an at-risk structure in Florida, I would choose to not carry flood and windstorm insurance if I had a choice, because the risk/benefit ratio just isn't there for the premiums they are charging.

There are distorting factors, the at-risk structures I owned were not direct waterfront, and therefore not nearly as likely to be damaged as those that are, but the insurance companies charge the same rates for all "in the zone", giving those with open water views a tremendous benefit. Most government mandated things have a "equality" basis that means that some people benefit significantly more than others while paying the same rate, and mandatory disaster insurance would surely be another of these.

So, what should we do for the Big Easy? I like Posner's suggestion of rebuilding the Quarter, and "totalling" the rest, perhaps with some State and Federal compensation to those who lose "real" property to the permanent floodwaters, especially if the compensation is enhanced for slumlords who used the money to rebuild in low risk areas.

The "Good Samaritan" effect is a fact of life, and in affluent society it only gets worse. Rather than require insurance, I'd say the disaster prone areas should be designated and separately insured in their own pool, which would presumably be quite expensive, and optional. If you can afford it, go there, but don't expect my insurance premiums to come to your rescue when the levee breaks again.

MikeTheBear

This is a good topic and I commend our blog hosts for having the intestinal fortitude (i.e., ìgutsî) to raise an issue which would otherwise be considered ìpolitically incorrect.î My only question is to what extent people actually rely on help from Good Samaritans to essentially insure them from the effects of a disaster. I can only speak from personal experience, and notwithstanding the outpouring of assistance after both Katrina and the tsunamis I tend to be a bit cynical, but I do not take Good Samaritans into account AT ALL when making personal decisions. I think Dr. Beckerís example of the parent-child relationship overstates reality a bit simply because the parent-child relationship has an emotional bond not present among strangers. Iím not saying that the Good Samaritan paradox plays no role in decision-making, I just donít think it plays that significant a role.

I feel that irrational thinking places a bigger role here. For instance, too many people do not understand the concept of sunk costs, no pun intended. While I feel that a rigorous analysis of the costs and benefits of abandoning a disaster-prone area is very rational, many people would say thatís just crazy talk. After all, look how much money has already been invested in the area ñ you canít just throw that away. And so, good money gets thrown after bad. There is also the problem of a misunderstanding of statistics. The reasoning here is that a particular area has just suffered a major disaster ñ what are the ìoddsî that another disaster will happen in the near future? This is like saying I just flipped a coin ten times and they all came up heads. What are the odds that the 11th flip will come up heads? Assuming the coin is fair, itís 50%. Itís ALWAYS 50%.

I think the government is partly responsible for businesses relocating in disaster-prone areas if they offer tax breaks and other incentives.

Finally, and at the risk of opening a can of worms, I think religious beliefs are to some extent responsible for people locating in disaster-prone areas. The idea here is that as long as people pray and observe other rituals of their religion, they will be kept safe from harm. Iím not implying that all religious people share this idea; most religious people are quite rational and understand that they need to help themselves first before asking for Divine Intervention. But I think it is a factor to consider.

nate

According to data at this internet site (http://www.demographia.com/db-city1970sloss.htm), the population in New Orleans has decreased over the last 50 years. The decrease in % terms may be more than the decrease in other cities (see data in table). This seems to indicate that even before Katrina people were moving out of New Orleans. The generosity of individuals and government programs did not seem to stop people from leaving New Orleans before Katrina. Given choice, a lot of people may choose to not return after Katrina. The U.S. may need to start worrying about providing opportunities for people in their new cities as much as worry about rebuilding New Orleans.

Information assymetries still exist. It is hard for many people to see the world from the perspective of a child stuck in New Orleans following a hurricane.

Sometimes the story of the prodigal son gets confused with the "good samaritan" paradox. It might help to read the story of the good samaritan in addition to considering the "good samaritan" paradox. I found it in Luke 10 at www.godrules.net and learned many things. One lesson from Luke 10 is that help does not come from where you might expect it. Second, emergency assistance may have been good for trade between Jerusalem and Jericho. Third, crime has always existed, and we should not be unprepared for crime in modern times.

The whole country benefits from trade that moves through ports around New Orleans. Stability, law and order is worth a lot. Arguaby everyone benefits.

Nin

New Orleans is a poor example of a "recurring disaster prone area"

as there is no history of New Orleans flooding on a regular basis;

once is an off-chance, twice is a coincidence, thrice is a pattern

as an old english teacher once taught me. The Tornado Belt in

Oklahoma, allright. Florida and it's yearly hurricanes, I'll go

with that too. But You're not telling me that New Orleans is a

disaster zone any more than New York, Boston, Washington D.C., or

any costal city is a disaster prone land. Then again, it also

depends on what your view of disaster is as well; there's nobody

telling me I can't build a hurricane proof and flood proof building

in these areas, and indeed, people have built and engineered

buildings to handle these kinds of events.

I also resent the idea of family helping eachother out through

disaster as encouragement to cause disaster; the POINT of a family

is to stick together through anything, and if the kid turns out

stupid I blame the parents first and the kid second; no child

properly reared does that. Do some research on Italian families.

Aside from that, on the topic of encouraging people away from

disaster-prone areas.

The reality of the situation is this; if your neighbors house burns

down, you go out to your church, you pitch in what you all can, you

get wood(either by cutting it down yourself or buying it), you get

nails, they stay at the church for awhile and you build them a new

home with everyone else. Why? It keeps the community strong.

Now, if a tornado wipes out the whole community, you move elsewhere. If tornado's do it on a regular basis, well, then you build in a way that they can't. There are structures we can build today, cheaply, that can handle a tornado or hurricane overhead, that are flood-resistant, and that are perminant.

The reason people donate money to relief funds is to help these

people out; to get them back on their feet. We're seeing people

donate beds and apartments and even houses. Why? Keeps the country

strong, and they know it because it's ingrained into their minds for

a damn good reason.

So, what exactly do you have a problem with, Becker? It seems

you've got a problem with people building on disaster prone lands

and then not taking responsability for their mistake.

This is an absolutely ludicrous arguement to make as it defy's all

logic and reason. These people just had their houses turned into

swimming pools, they've got no clue as to where their next meal is

coming from and you mean to tell me they aren't taking

responsability? They have to take responsability; if they don't

they die, and 90% of them will.

Second of all, if you even remotely believe insurance is a good idea

for protection against disaster you're not seeing the bigger

picture. There are trust ,and cost, issues with a for-profit

insurance corporation. Never trust or support a person who has

declared their interest in a position to profit of off screwing you

over.

There's also marketability issues; most insurance is for the

marketability of the property. Meaning, My mother just got hit by a

man in a nice Mercedies and they paid her $500 for her car because

that's what the market value of the car is. Does that replace the

car? No, it doesn't.

So if someone has a house and it's "market value" is say $15,000,

why is that? Location, condition, ect. Does it replace the house?

No, it doesn't.

Additionally, no matter how many paper notes or electronic 1's and

0's you manage to save, it still doesn't mean you've got resources.

It means you can buy them. How many tons of concrete, lumber,

steel, glue, how many manhours will it take to rebuild a city?

Even if savings accounts were to be set up and later tapped, it

still wouldn't make a lick of difference; it's gone.

Wanna know the best solution to this disaster is?

The Adopt-an-Orleansean foundation. Churches, corporations, people,

ect pledge 12 month lodging for these people and we get them

working. A manditory insurance scheme won't work because on a

fundemental level, it does nothing about the problem of resources.

nate

"Never trust or support a person who has declared their interest in a position to profit of off screwing you over."

i agree that trust should be guarded... however, businesses that intend to be around for years have profit-driven reason to not screw you over. The lifetime value of you as a customer coupled with word of mouth advertising may provide an incentive for an insurance company to be as fair and as nice as possible. If they are not nice and are bullies as any reasonable person would agree, then they will lose current and future customers.

Matthew Collin

Another idea: There is no part of the US that isn't prone to some sort of natural disaster, be it earthquake, flooding, tornadoes, hurricane, snowstorms, or even volcanoes. Perhaps instead of abandoning disaster relief, we come up with a policy which adjusts the monetary value of relief based on frequency and severity of the destruction?

If performed correctly, the expected amount of disaster relief would be constant throughout the nation, and the Good Samaritan distortion would be eliminated?

Wes

Unfortunately for the parents, children can distinguish reality... If they anticipate that their parents will help them out ... they might..."find themselves".If "finding themselves" means the difference between a job they enjoy and a loving family or job they hate and a dysfunctional family then it might be worth the $20,000 or so that it would cost for them to take a year off and "find themselves". Then again maybe Republican parents value their childrens' happiness less than one fifth of the cost of a new sports car for daddy or renovating the guest house for mommy.

nate


investment with long lead times under uncertainty may be higher risk but higher reward.

Alex

Could you apply this argument to thinking about the location of people in different countries? For instance, do more people choose to live in Indonesia than they would otherwise simply because they know that when a tsunami occurs, the nations of the world will come to their assistance?

Matthew Collin

investment with long lead times under uncertainty may be higher risk but higher reward.

Ah yes Nate, but you are talking about the good end of the coin flip. Higher risk doesn't always mean higher expected returns, and even if it does, a risk-averse individual might still choose the less-risky option because the expected utility pay-off is higher.

nate


A risk-averse person may have a range of investment choices and may be able to tuck one or two long-term, uncertain, and risky investments into a portfolio that is overall risk-averse.

Over long periods of times (20-40 years), it may be more risky to not take risk.

Katie

Doesn't anyone think that the people of New Orleans have suffered beyond what the government or NGO's help can ever repay? These people have lost their homes and communities and lived through a major catastrophe without an ability to do anything about it. Their lives have been ripped apart - would anyone choose to do that to be given hand-outs?
And not all choices are as free as the market theorists would like to think. It seems irrational to think that people have complete information and sufficient means to choose the safest, most economically sensible residence and those failing to do so, should be considered to deserve the consequences that follow. Or that everyone has the financial means to make rational choices regarding insurance. So please have some mercy on these people, they did not invite Katrina to their homes.

nate

If blog readers and writers are concerned about people taking advantage of kindness from authorities in a way that leads to bigger disasters down the road, you might read the following:

http://tinyurl.com/7ndn4

Anonymous

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Anonymous

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