[ExI] The history of a moral hazard?

[Dan Ust]

On Sep 10, 2017, at 8:19 AM, spike <spike66 at att.net> wrote:
>  
> From: extropy-chat [mailto:extropy-chat-bounces at lists.extropy.org] On Behalf Of Dan TheBookMan
> Sent: Sunday, September 10, 2017 7:29 AM
> To: ExI chat list <extropy-chat at lists.extropy.org>
> Subject: [ExI] The history of a moral hazard?
>  
> https://mises.org/blog/how-feds-blocked-effective-flood-insurance
>  
> The short of it: federal interventions destroyed a private flood insurance market and created perverse incentives for development in flood plains.
> 
>  
> Incentives ja, perverse no.

"Perverse" in this context means the incentive perverts the outcome -- not that it's rare.

>   We see it all the time, even now.  In 2008 we learned the phrase “Too big to fail.”  This is a version of that.
>  
> In 1945, the US Navy needed a test lab, so they built China Lake California which is only a lake once in a long while.  The rest of the time it is a dry lake bed.  They built the lab right there because it was easy to build: didn’t need to clear trees, most of the ground was hard enough you didn’t even need a foundation: a building could be plopped right on the rock-hard ground (not exaggerating a bit (it is easy to find even homes there built with no foundation (they just hammered together some form-boards, poured on cement, slammed together a house on top of it.)))
>  
> Problem: the entire town of Ridgecrest CA is built in a flood plane, as we found out on 15 August 1984.  It doesn’t rain much, but about once or twice a century it comes down hard and if so, all that water has to end up in China Lake.
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> Good old Google maps Sat-view makes it pretty easy to see the flood plane:
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> https://www.google.com/maps/@35.5317451,-117.7743442,134641m/data=!3m1!1e3
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> It is cheaper to rebuild houses a couple times a century than it is to build them right to start with.
>  
> Parting note, a funny one: after the 1984 event, they studied ways to protect the labs from flooding, see if there was a way to divert water, pump it away, etc.  The bottom floor had filled up with muddy, silty, rattlesnakey water which stayed there for weeks, causing all manner of difficulty. 
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> After extensive study, they decided on the best way to protect the lab and implemented it: set up huge storage tanks with fresh water, then when it is clear the lab flooding cannot be prevented, they open it up, fill the bottom floor with clean water.  Flood subsides, pump out the clean water, small mess instead of a huge one.
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> Sounds a little crazy, but that turned out to be the best engineering solution in that case.

That's not what happened in the cases detailed in the article. People would've stayed away from these particular flood plains. And there were other places left to live.

Even in the example you give -- a Navy facility -- the incentives are skewed because the Navy is funded via takings from the tax base. Thus, solving the problem of flooding is merely a matter of getting more money from the tax base. Were it funded voluntarily, its priorities might be very different, and it might not have built a base out there.

Regards,

Dan
   Sample my latest Kindle book "Sand Trap":
http://mybook.to/SandTrap

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