Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [80]
Substantial federal assistance in the aftermath of major disasters had emerged as an accepted feature of American life. Indeed, not even a century after it was first articulated, President Cleveland’s dictum that “the Government should not support the people” would represent near political suicide for a modern American president, particularly if declared against the backdrop of a large-scale disaster.
RELIEF OVER INSURANCE: A PROBLEM OF CONCENTRATED BENEFITS AND DIFFUSE COSTS?
Today, there can be little doubt that federal disaster policy represents an implicit form of insurance. Although the victims of natural disasters typically have no contractual claim on federal assistance (outside of federal flood and crop insurance), past experience suggests that substantial federal aid will almost certainly be forthcoming in the wake of a major disaster. It is widely recognized that at least some federal role is necessary in addressing disaster losses, given numerous weaknesses in the private management of catastrophe risk, including long-standing—and apparently growing—gaps in private insurance coverage.10 The question, though, is why implicit federal insurance against disaster losses has never been converted into explicit insurance, along the lines of workers’ compensation, public unemployment insurance, or federal deposit insurance.
As compared to open-ended relief (i.e., implicit insurance), explicit federal disaster insurance or reinsurance could foster appropriate incentives for loss prevention through the assessment of risk-based premiums. The collection of premiums would also provide an important source of funds for compensating victims in the aftermath of disasters, and truly risk-based and actuarially appropriate premiums would reduce or eliminate existing cross-subsidies. President Franklin Roosevelt introduced federal crop insurance in the late 1930s, and federal lawmakers enacted the National Flood Insurance Program in 1968. For a long time, however, both of these programs remained limited in scope and highly subsidized. Even today, as subsidies for federal flood insurance have been reduced, both programs continue to be dwarfed in magnitude by general disaster relief. The fact is that despite repeated calls for comprehensive disaster insurance, Congress never moved to convert implicit disaster insurance (relief) into explicit disaster insurance or reinsurance.11 What accounts for this seemingly suboptimal outcome?
One plausible answer is that the preference for relief over insurance is simply the political product of concentrated benefits and diffuse costs, a la Mancur Olson.12 To be sure, those living in hazard-prone areas have much to gain from an open-ended system of federal disaster payments, funded out of general revenues, whereas everyone else has relatively little to lose, since the per capita cost of such relief is relatively small, at least for any given disaster. As a result, those living in hazard-prone areas may have a strong incentive to organize politically (in support of federal relief), whereas average taxpayers may have little incentive to expend resources to lobby in the opposite direction.
Although this explanation carries strong intuitive appeal, it nonetheless suffers from a number of possible problems. First, one has to wonder why federal disaster expenditures grew so dramatically beginning in the 1960s if the political dynamic of concentrated benefits and diffuse costs had always favored large federal relief spending. Second, although concentrated interests are normally expected to achieve their political