Tuesday, October 30, 2012

Rebuilding New Jersey and Coastal Moral Hazard

Read Maureen Dowd's piece and see if you recognize that the Governor of New Jersey seeks a very large FEMA bailout for his stricken state.  When you spend "other people's money", do you have the right incentives to rebuild in a smart way?  A "what if".  What if New Jersey's residents knew that there would never be another FEMA $ for rebuilding their state's residential and commercial structures and any new structures that would be built post-Hurricane Sandy would  have to withstand future natural disasters or the people of New Jersey would be on the hook for such damage?

I predict that in the "no FEMA" equilibrium, that the state's residents and leaders would invest in taking many more precautions to reduce their exposure to flood and hurricane risk.  Zoning laws would change to discourage construction in the riskiest areas and to reduce population density in those areas.  Coastal home owners would be incentivized by the state to take much greater precautions to reduce ex-post damage.  

Given the reliance on FEMA $,  how will coastal areas such as Atlantic City be rebuilt?  Will a higher quality capital stock that is more flood resilient be built?  Will FEMA $ be used to rebuild in the same places using the same materials as before?  

During a time of tragedy, we seek to make the victims whole but is an unintended consequence of such well meaning aid to create a "moral hazard" effect such that the next natural disaster causes equal pain?  Could "tough love" (i.e no FEMA bailout) actually aid climate change adaptation efforts?

Away from the coasts, we are learning that falling tree limbs killed many people.  An obvious externality exists here.  When neighbors under-invest in trimming tree limbs, this imposes risks on the neighborhood.  Will liability laws need to be strengthened to hold home owners liable for their trees? How do we incentivize such owners to invest in costly precautions such as tree trimming?  Such legal changes would create more "green jobs" (i.e more guys trimming dangerous limbs).   How do we use the legal code to encourage more ex-ante self precautions to reduce the damage caused by natural disasters?

How do natural disasters affect population migration patterns?  In this short piece, Boustan, Rhode and I explore this issue.  Well meaning government investment in rebuilding shocked areas can crowd out private self protection and actually increase the number of people who live in harm's way.   Sea Walls can increase the victim count if they act as a magnet attracting people to live in risky places that they would have avoided in the absence of the Sea Walls.