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Recipe for disaster

Zach Einterz | Tuesday, October 16, 2007

Last month, the Army Corps of Engineers announced a buyout plan for 17,000 homes along the Gulf Coast in Mississippi. The Corps has plans to restore wetlands in this area, which is ironic considering that they are simultaneously destroying wetlands in other areas as they dredge canals and build levees. Congress is unlikely to approve the buyout due to strong opposition, yet the plan is symbolic of a greater movement aimed at encouraging Americans to move away from the coasts. Experts claim that global warming will lead to higher sea levels and more intense hurricanes in the future, and FEMA estimates that costal erosion could wipe out a quarter of all homes within 500 feet of U.S. coasts by 2060.

In addition to the increasing risk of property destruction, development near the coasts destroys ecologically sensitive areas that provide protection against natural disasters. Barrier islands and wetlands are considered first defenses against hurricanes. Barriers islands are so-named because they provide a barrier against rising tides and each mile of coastal marsh can absorb one foot of storm surge. University of Vermont economist Robert Costanza estimates that coastal wetlands in the U.S. provide 23 billion dollars per year in storm protection services.

Since residential and commercial development increases the risk of property destruction and destroys valuable natural ecosystems, policy makers are left with a dilemma: What is the best way to dissuade individuals and businesses from locating in high-risk areas near the coasts?

The Corps’ buyout program, which comes at a cost of 10 billion dollars, is a reversal of the effects of federal policies over the last 40 years that have encouraged development near coasts and in flood-prone areas. In 1968, Congress created the National Flood Insurance Program (NFIP), making it easier for property owners to buy flood insurance. Congress hoped the NFIP would reduce the cost of natural disasters. If more property owners were covered by flood insurance, then less money would have to be paid out in disaster relief. However, by making it easier to obtain flood insurance, the program created incentives for people to build their homes in flood-prone areas.

In addition to the NFIP, the federal government spends billions of dollars a year on disaster relief. To date, the federal government has provided 114 billion dollars for the Gulf Coast following Hurricanes Katrina and Rita. Billions of dollars more are spent each year providing relief following floods, droughts, tornadoes, earthquakes and just about any natural disaster imaginable.

Congress has good intentions when it allocates money toward disaster relief or the NFIP, but these programs are ultimately counterproductive. Flood insurance and disaster aid programs provide incentives for people to locate in high-risk areas because they transfer the burden of risk from individual property owners to taxpayers.

It seems as though very little thought has been given to retracting these disastrous federal incentives in order to dissuade individuals from locating in high-risk areas. Instead, policy makers have reverted to “command-and-control” type policies, advocating buyouts and prohibitions against development. The largest buyout to date occurred after the Mississippi River flood in 1993. Over 8,000 properties were purchased, yet today many of these 8,000 properties are being redeveloped. Moral of the story: Unless you change incentives, you won’t see a change in behavior.

The best way to dissuade development in high-risk areas is to remove government interference in insurance and property markets. Get rid of the NFIP, federal disaster aid and federal buyouts. High-risk areas, which often are also the most ecologically sensitive, will garner higher insurance premiums. High costs may not convince people to move to Indiana from Florida, but it will give them second thoughts about building a seaside villa.

Zach Einterz is a senior majoring in economics and environmental sciences. He will be spending his fall break at home, visiting the dentist and playing with his arthritic dog. Contact him at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.