The Economics of Rebuilding post-Sandy

Good Sunday reading & an interesting question: If New Jersey had to pay for its own rebuilding – and not rely on the federal government – would we rebuild at the shore again like it was? – Rosi

In a video that's making the rounds (after the break) and in a blog post in the Harvard Business review, UC Berkley Professor Mathew Kahn raises a provocative notion — the very existence of FEMA is squelching our ability to adapt to climate change.

Over the past several days, we've seen our governor make repeated statements that we're going to rebuild all the coastal communities along the Jersey shore that were hardest hit. But he's starting to hear it from the libertarian voices that he's got it all wrong. Peter Coy, writing in Bloomberg Businesweek, says:

Christie has gained a national reputation for fiscal discipline that’s led to talk that he could be the Republican nominee in the 2016 presidential election. But if Christie pushes too hard for federal reconstruction funds, he risks losing his reputation for stand-up frugality.

For years, environmentalists have been warning of the dangers of over-development along the coastal zone. Urban planners (like myself) have been calling for stricter development controls for a generation. What's interesting to me is that when liberals and libertarians agree on something, there's a good shot that we might actually get something done.

Video & more – after the jump

Kahn's argument boils down to the notion that people make better decisions when they see the full price of different choices. If the State of New Jersey had to bear the full cost of rebuilding after a storm — and there wasn't a FEMA to help pay for it — then we wouldn't keep building (and rebuilding) in places where it doesn't make sense. But since there's someone else paying the bill, we keep making bad choices:

From a strictly economics point of view, there's some problems with what Kahn is saying. First is that when we share risk across a larger pool, all of us are better off. So if this year we're spending money on the Jersey coast, next year it might be for flooding along the Red River in Fargo or to fight fires in Colorado. Its why insurance works.

The second problem I have with Kahn is that it assumes that rational economic actors are making decisions with perfect and complete information. And when it comes to the impacts of natural hazards — or with any events that don't happen too often — this breaks down.

Now, all that said, if this is what it takes for conservatives to start taking climate change seriously, that's all right with me. There are places along the barrier islands that we really shouldn't rebuild. Or at the very least we shouldn't build houses, but restore the beaches only for recreational uses — kind of like what Robert Moses did nearly a century ago in creating Jones Beach State Park. This is a conversation that needs to happen, because we all know that this won't be the last time we're facing this kind of extreme weather event.

Comments (3)

  1. Bertin Lefkovic

    …for a few days and once I have some time to relax and compose my thoughts, I am going to write something for examiner.com that I will also post here in some capacity.

    There can be no doubt that a rethink for the Jersey shore and our state as a whole is in order here and for good or ill, mostly ill, but hopefully some good, Sandy has created an opportunity to move forward with a new vision.

    It remains to be seen what kind of vision Governor Christie has, but what will be more interesting for me to see is what kind of vision his prospective Democratic opponents have.  In my opinion, next year’s gubernatorial primary and general election outcomes should be won by the candidate with the most compelling vision.

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  2. Hopeful

    Imagine a guy living in San Francisco lecturing the rest of country that they live in an unsafe place. Please.

    New Jersey and Connecticut subsidize the federal government more than any other state. We have long ago paid for every dollar that comes here. We pay for it every year.

    Meanwhile, New York City floods once in the history of the subway system. A hurricane once flooded Hartford, CT. Should we abandon inland Connecticut? Someday an earthquake will devastate Los Angeles. Does that mean everything that city has produced was not worthwhile?  We are not talking about neighborhoods that get destroyed every five years.  

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  3. mmgth

    Nowhere in this lecture is the logical answer to climate change (legislating and enforcing effective environmental protection measures) mentioned. Rathers it accepts that climate change is inevitable not man made and somewhat reversible, certainly stoppable.  The lecturer states …”I’m not saying redistribution is bad”…but goes on at length to argue why what he calls “redistribution” is bad. Healthy tree limbs don’t randomly fall, people aren’t puffing away in bed assured that if they were to start a fire their homeowners insurance would fix them up with a new house. True, the NFIP was not created with the intention of allowing the housing (high rise condos and apartments) boom that went on in coastal areas benefiting developers while sticking taxpayers with the cost of resulting insurance claims. But I don’t think that was specifically addressed.  

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