Today's newspaper comes with a slick full page ad from Allstate and begins with the headline that "8 out of 10 of the largest U.S. catastrophes have happened in the last four years" (the last 5 words are italicized). The ad is meant to scare the reader; it even has an illustration of a domino effect crushing a helpless fellow. The ad encourages support for a political agenda that includes increased local police and fire resources, more attention to the purchase of earthquake and other insurance, better building codes, and the creation of integrated reserve funds that would back up insurance companies.
Never mind the problem of defining the greatest U.S. catastrophes, accounting for inflation, and so forth. And put aside the obvious interest of Allstate in encouraging the purchase of insurance and the de facto subsidy of its business through a variety of means. Let's even put aside the fact that little has stopped Allstate and other insurers from encouraging "better" building codes through insurance contracts and their premiums. The important questions are (1) how to allocate the task of disaster preparation among governments, and between the private and public sector, and (2) whether backup funds, or other reserves, are a good or bad idea.
One obvious effect of an available (governmentally controlled) pool of funds will be to make it easier to disburse funds. For the most part, if you save for a rainy day, you are more inclined to say that a truly rainy day has arrived. (There are counterexamples, but not many in the public sector. Moreover, even if the government legislates that funds will be made available post-disaster only to regions that abided by building codes and other requirements, it is difficult to stick to these rules when disaster strikes, and sympathetic citizens are out on the street.) On the other hand, it makes it less likely that a legislature will provide new funds while the rainy day fund is in existence. If more homeowners have insurance, and if insurance companies are backed up by state and federal funds, then a new disaster will be less likely to bring forth payments from the government.
New Orleans does not give one reason to think that advertisements, education, and government plans would make disasters easier to absorb. The webpage the Allstate ad recommends educates visitors with more scare about earthquake faults that most readers have not yet worred about. But hurricanes around New Orleans were hardly a secret, the building of levees is a well known issue, and the relationship between New Orleans and sea level is also extremely well known. Recent events might as well be advertisement for the fact that education and preparation can make things worse. They can lull a population; precautions can be poorly undertaken and wasteful; insurance seems to have little affect on post-disaster sentiments. Perhaps the most remarkable thing about our latest disasters, including hurricanes in Florida, earthquakes in California, flooding in New Orleans, and terrorism in NY, (not to mention car accidents, heart attacks, and other killers) is that these risks were relatively well known. One possibility is that we are bad at planning; some of us are too cautious and others too optimistic. Another is that our multiple layers of governments and public-private interactions create a kind of chicken, or collective action, problem that makes optimal precaution-taking difficult. And another is that where the likelihood and magnitude of government bailouts are so uncertain, planning and precaution expenses are of uncertain value.
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