We will all be paying for Harvey (or the cost of laissez-fare)

The Thinker by Rodin

Did government fail the people of Houston? Or did Texans get the second-class government they voted for? Or was Hurricane/Tropical Storm Harvey truly a “no one could have predicted” event, beyond reasonable mitigation by government?

“Don’t mess with Texas” I hear from my Texan friends and it is something they are passionate about. They like doing things the Texan way: all sort of laissez-fare (abstention by governments from interfering in the workings of the free market because government is not to be trusted). It was heartwarming to see fellow Texans come to the aid of those unable to evacuate, although many from the “Cajun Navy” came from nearby Louisiana. The “Cajun Navy” was pretty ad-hoc and poorly coordinated, but Harvey was clearly a storm beyond the resources of federal, state and local government, at least as we taxpayers chose to fund them.

Some compared it with the evacuation of Dunkirk during World War Two where pretty much every vessel available along the coast of Britain headed to this coast in France to evacuate British soldiers stationed there. Thankfully no one was firing live explosives at this “navy”. Now with floodwaters receding we are getting a better picture of the damage. So far loss of life has been minimal considering the scale of the storm. The property damage though looks horrific: hundreds of thousands of homes in need of repair, replacement or abandonment and an estimated 500,000 automobiles totaled. Estimates of repairing all the damage exceed $100 billion.

Only about 20% of these flooded homes had federal flood insurance. You would think getting this insurance would be a no-brainer for Houstonians, who are used to flooding but not quite on this scale. Except flood insurance is hardly cheap. Most of these homeowners figured they could not afford it, so they rolled the die. Most of them lost this bet.

The federal government through an act of beneficence could pay for their catastrophic losses. It’s unclear how much the federal government will rush to Texans’ aid. There would be quite a lot of hypocrisy if Texans accepted too much flood aid, given their hostility toward the federal government in general and the unwillingness of many of their legislators to fund Hurricane Sandy relief.

So it appears that most of these homeowners are on the hook for rebuilding their houses, should they choose to do so. It’s likely that most of these homeowners don’t own their homes outright, i.e. they have a mortgage on the property. Insurance companies won’t pay for flood damages, so the principal victims of this storm will be property owners. They will have to fund the rebuilding of their homes out of their own pockets. This means finding lenders who will loan them money to rebuild. Of course they are also on the hook for the balance of their mortgage. It’s unclear whether they could borrow the money to rebuild, as it may be more than they can afford to pay back.

It’s not too hard to predict then that barring some extraordinary largess from the federal government many if not most of these property owners will walk away from their investment. If they do they will ruin their credit and likely lose any equity they have in the property too. Lenders will take them to court to try to make them pay anyhow for houses they cannot afford to rebuild. Most of these lenders will eventually write off these losses. This will shift at least some of these costs to taxpayers, since when these lenders report losses they are not paying income taxes on the loss and may get money back. These flooded homeowners too will write off their losses if they can. In short whether we like it or not a lot of these losses will be socialized on you, the American taxpayer through decreased revenues to the federal government and increased borrowing costs. Perhaps the economic growth from rebuilding will mitigate some of these costs to taxpayers.

So we are all paying for Harvey, whether we know it or not and whether we like it or not. In theory taxpayers could stem their losses. It is possible to write legislation to not allow these lenders or taxpayers to write off these losses. After all, they were stupid enough to put up housing in a flood zone. That won’t happen. It’s also possible, as Senator Ted Cruz wanted to do after Hurricane Sandy, for the federal government not to come to the financial rescue of Houstonians. That won’t happen either.

However, if these unlikely events happened, the impact might be pretty profound. Texans might realize that the cost of their bad financial decisions will really be totally borne by them. This might encourage Texans to write laws that mitigate many of the preventable costs of floods. It might incentivize Houstonians to implement zoning and prioritize funding for flood mitigation. It might result in laws and ordinances to require new housing to be built outside of likely flood plains or at least raised above the floodplain.

It won’t happen. Instead, Texans will get to pretend that no one will mess with Texas. Because Texas allows cities like Houston to have no zoning laws, and because we admitted Texas into the United States knowing that federalism would make it hard to force Texas to implement common sense measures like not building houses in flood zones, we all get to pay the costs of Harvey. Certainly Houston homeowners will shoulder huge losses, and the lenders of these flooded houses will shoulder a share of these losses too. But in reality we all are paying for this mess, and we’ll continue to pay for similar messes like this in the future.

All we can really do is pass common sense legislation to minimize our liabilities when these events occur. But that requires government to work as a fiduciary, which will seem Big Brotherish. There is little likelihood of that happening, particularly in good old Laissez-faire Texas. Our own obstinacy about the so-called evil of too much government is in fact bleeding us dry.