The Dallas Morning News ran an op-ed I wrote about where to
spend tornado safety funds. The
most tragic element of last week’s tornado in Moore was that an EF-5 tornado,
an extremely rare event, hit two elementary schools with full force. Few structures are designed for that type of
stress but engineered buildings would be about the best choice you could
have. Most residential structures would
be leveled. ...
If you consider that Oklahoma has 1,780 campuses and estimates to provide a safe room run from $500,000 to $1,000,000 per campus, the outlay to protect all schools would be immense, $1 to $2 billion dollars. ...
In general, my research suggests that using public money to save lives from tornado fatalities fails the benchmark that spending is considered reasonable if the cost per avoided fatality is less than $10 million. In our book Economic and Societal Impacts of Tornadoes and the follow up to that book DeadlySeason: An Analysis of the 2011 TornadoOutbreak, Dan Sutter and I show that these programs are well outside that benchmark for most uses of the program. Using the funds to reduce fatalities in mobile homes is the one exception for some states.
Should that be "greater than $10 million"? And, $10 million is much higher than the value of a statistical life used in other areas of public policy (e.g., traffic, air quality) making safe rooms in schools even more difficult to justify with benefit-cost analysis.
I was interviewed on Bloomberg Friday. The video link is here. One of the questions was about saferooms and given the
horrible tornado in Moore last week it is an important topic. I live in North Texas and have seen my share
of tornadoes. Surviving one depends on
many factors but the most important are the size of the storm, the amount of
time you have to prepare and the type of structure you are in when the storm
hits. A well-built engineered structure
is the safest. The worst is a mobile
Permanent homes provide reasonable shelter from small
tornadoes and with modest enhancements in construction can also provide
reasonable shelter from many strong storms.
That would account for almost 98% of all tornadoes (EF0-EF2). The Insurance Institute for Business and Home
Safety suggests building homes to meet their Fortified Home Program. Some communities are adopting aspects of
the program in their building codes.
Moore OK, is one of those. But
that would not apply to homes built prior to the enactment of enhanced codes.
For residents of permanent homes to get protection from violent
tornadoes some type of shelter is required, in residence or underground, and
the options for those are growing every year.
We recently converted our hall closet to a shelter. ...
The public policy question is whether or not we should require the installation of shelters by homeowners. They do add a significant cost to the price of a home. Some homeowners, myself included, are willing to pay the added cost but I’m not sure that most people would, even those that live in tornado alley. A second policy option is to offer a subsidy to homeowners for a shelter. Dan Sutter and I have written extensively about this. This is a very expensive program and will reduce fatalities but at a higher cost than programs to reduce casualties from other risks we face.
Gov. Andrew M. Cuomo is proposing to spend as much as $400 million to purchase homes wrecked by Hurricane Sandy, have them demolished and then preserve the flood-prone land permanently, as undeveloped coastline. ...
For the 10,000 or so homes in the 100-year flood plain that were substantially damaged by Hurricane Sandy, Mr. Cuomo would offer owners the pre-storm full market value of their houses. Homeowners who chose to relocate within their home county would receive a 5 percent bonus above the market value, as part of a government effort to encourage them to stay nearby. State officials said they were planning for the possibility that 10 to 15 percent of those eligible would take the buyout.
Residents of more vulnerable areas would receive a further enticement: they would be allowed to sell their homes even if the homes suffered little, or possibly even no, damage from the hurricane, and the state would pay them an additional 10 percent bonus, above market value, to sweeten the deal.
In a few dozen blocks located in areas of extreme risk, the state would offer another 10 percent bonus if every homeowner on the block agreed to sell. Local officials would be expected to determine how best to use the new open space, though they would not be allowed to build on it.
Other than the increasing moral hazardness, this seems like a good idea. But can you imagine being the one holdout on a block when everyone is counting the 10%?
... Anyone shopping for a home should consult National Flood Insurance Program maps to understand what the estimated risk of flooding is for their property, protect themselves with flood insurance, and possibly even decide against buying a home at all if it’s located in a flood-prone area. Unfortunately, however, humans don’t always act rationally — and according to a forthcoming paper by economists Okmyung Bin and Craig E. Landry, they also tend to have extremely short memories when it comes to natural disasters.
Bin and Landry studied real estate prices in Pitt County, North Carolina before and in the aftermath of Hurricanes Fran and Floyd in 1996 and 1999, respectively. According to their research, prior to Hurricane Fran there was no differential in home prices between those in flood-prone areas and those outside — as there hadn’t been a significant flooding event in Pitt County since the 1950s. Immediately after Hurricane Fran, however, home prices inside the flood zones predictably fell in price, selling for 5% less on average than homes outside flood zones. After the particularly ruinous Hurricane Floyd, this price difference became an even-more-extreme 8%.
But what surprised Bin and Landry was that the differential evaporated completely by 2005, a mere six years after Floyd devastated much of Pitt County. In other words, it doesn’t take long for prospective home buyers to forget the dangers of living in flood-prone areas. According to Landry, “We were really surprised by this result. We expected to see a decay, but not to see it disappear completely.”
To explain their confounding results, Bin and Landry turned to a concept in behavioral economics called the “availability heuristic.” Basically, what this theory argues is that human beings are less able to judge the probability of an event occurring which they have not recently experienced themselves. A person who hasn’t lived through a flood will downplay the probability of his house getting flooded, and the same goes for someone who hasn’t experienced a flood very recently.
In light of events surrounding Hurricane/Frankenstorm Sandy, and John's post calling for reductions in federal subsidies for flood insurance in repeated flood zones, I thought it would be a good time to dig through the archives and find what John and I said about flood insurance in the aftermath of Hurricane Katrina. So here's a link to an article John and I wrote for the Milken Institute Review on the National Flood Insurance Program back in 2006. While the whole article is obviously well worth the read (despite a few typos), here's a particularly prescient excerpt:
While it would be irresponsible to abandon federal flood insurance overnight after providing financial incentives for coastal development for more than 35 years, it would be equally irresponsible to subsidize fl ood insurance on new construction. If a developer wants to build in a flood zone, the real cost of insuring against flood damage should be built into the market value – much the way location in a poor school district or a high-crime area is built into the value.
Lack of information on the true likelihood of floods might still lead property owners to make bad decisions. Requiring them to buy unsubsidized flood insurance as a condition for obtaining a federally insured mortgage would be one way to solve the problem. But one could imagine a less coercive approach in which the best available information of flood risks is provided to every person buying or developing property in flood zones.
A well-intentioned government program has encouraged millions of Americans to live and play in places – often very beautiful places – that are accidents waiting to happen. It would be fitting to use the same program to tame this risky behavior gradually, at minimal cost to property owners and taxpayers.
I sure am glad people listened to us back then...sarc.
New York and New Jersey residents, just coming to grips with the enormous costs of repairing homes damaged or destroyed by Hurricane Sandy, will soon face another financial blow: soaring flood insurance rates and heightened standards for rebuilding that threaten to make seaside living, once and for all, a luxury only the wealthy can afford.
Homeowners in storm-damaged coastal areas who had flood insurance — and many more who did not, but will now be required to — will face premium increases of as much as 20 percent or 25 percent per year beginning in January, under legislation enacted in July to shore up the debt-ridden National Flood Insurance Program. The yearly increases will add hundreds, even thousands, of dollars to homeowners’ annual bills.
The heightened financial pressure has emerged as an unintended consequence of efforts to stop the government subsidization of risk that has encouraged so many to build and rebuild along coasts increasingly vulnerable to extreme weather. Supporters of the effort acknowledged that it would squeeze lower-income residents but said it was vital for the insurance program to reflect the risk of living along the shore.
Because private insurers rarely provide flood insurance, the program has been run by the federal government, which kept rates artificially low under pressure from the real estate industry and other groups. Flood insurance in higher-risk areas typically costs $1,100 to $3,000 a year, for coverage capped at $250,000; the contents of a home could be insured up to $100,000 for an additional $500 or so a year, said Steve Harty, president of National Flood Services, a large claims-processing company.
Premiums will double for new policyholders and many old ones within three or four years under the new law.
One resident likened this to kicking people while they are down, and that is very true and heartbreaking. But, if the government suspends the insurance price increases then that would encourage rebuilding and there is a decent chance that this will happen all over again.
I fear I'm going to say something snarkfully inappropriate in this post. But here goes anyway:
Reports are being investigated in New York City, the Hudson Valley and on Long Island by state Attorney General Eric Schneiderman.
Schneiderman said Monday that he's investigating an increasing number of reports of spikes in prices for essential goods including gasoline, food, bottled water, generators, batteries and flashlights. The probe can include sharp, unwarranted increases in the cost of prices by retailers including supermarkets, hardware stores, bodegas, delis, hotels and taxis, he said.
In one report, the cost of a bag of potatoes jumped to $7, up from $3 before the storm hit. The cost of the box of matches appears more than three times the usual cost, and the loaf of bread is more than double the usual cost.
New Yorkers can report price gouging by telephone at 800-771-7755 or through his office website.
What's the phone number for reporting public officials who break the laws of supply and demand?
"We are actively investigating hundreds of complaints
we've received from consumers of businesses preying on victims of
Hurricane Sandy," Schneiderman said. "Our office has zero tolerance for
And I have zero tolerance for offices with a blatant disregard for economics.
No arrests were reported as of Monday. Schneiderman wouldn't discuss details of the reports or the investigation.
Wait...what? You can be arrested for raising prices in light of dramatically increased demand and inelastic supply?
Vendors may defend higher prices if
they can show an increased cost of obtaining goods from wholesalers or
in delivering services, making prosecutions difficult.
Supply is very inelastic in the very shortrun--but really that's really only one side of the story. Think of it this way, if the area hot by the hurricane is completely isolated for a couple of days, the supply of essential goods and services is fixed. That is, there is no way to increase the quantity supplied in the very short run. But, during a disaster, the demand for essentials (you know, those things that are absolutely essential and indispensable) increases quickly and dramatically for a short period of time. This increase in demand puts quick upward pressure on prices. Failing to raise prices will result in what we economists like to call shortages.
A telltale sign of a shortage is more people wanting/needing a good than is currently available. Costs may be an issue, but prices are the markets' means of rationing a limited supply. Restricting the price rationing mechanism during a warranted increase in demand (see the definition of unwarranted above) is a highly inefficient way to try to ration the available goods.
No one likes higher prices. And no one is comfortable with having to deal with higher prices at a time when everything else in their life is in turmoil. But what is the alternative? Failing to raise prices simple makes the shortage worse. How high should we allow prices to go?
I have no idea...retailers have a much better read on what the market will bear than I do, and for that matter than any government official does. In an attempt to maintain the appearance of 'doing something' what the officials are doing is making the problem worse by restricting the rationing ability of markets. Now who is doing something unwarranted?
State law should prohibit unconsionable excessive lack of understanding of how markets work. And don't get me started on fairness. Nothing about this is fair. But that's really irrelevant. Because no matter how fair you want to be, in the immediate short run, there simply isn't enough of the essential goods to go around. One way or another the price is going to rise until supplies are restored and demand decreases.
When you spend "other people's money", do you have the right incentives to rebuild in a smart way? ... 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? ...
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?
... 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? ... 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? ...
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