Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Disaster Spending Creates Perpetual Rebuilding Cycles
Transcript
- Lucas: When a hurricane wipes out a coastal neighborhood, the federal government typically writes a check to rebuild it exactly as it was—same houses, same streets, same flood risk. And then, a few years later, it does it again. Luna: You're describing what sounds like a policy designed to fail, but politically it's almost impossible to stop. Lucas: Exactly. This is the paradox at the heart of federal disaster spending. On one hand, when a community gets devastated, you want to help. On the other hand, by subsidizing rebuilding in high-risk areas, we're locking in future losses. Luna: And we're not talking small numbers. The National Flood Insurance Program alone has paid out over fifty billion dollars since it started in 1968. Lucas: Right. And here's the kicker: according to FEMA's own data, about twenty-five percent of all flood insurance claims come from just one percent of repeatedly damaged properties. So a tiny fraction of buildings account for a quarter of the payouts. Luna: So we're effectively subsidizing people to live in the path of predictable disasters. Lucas: Precisely. Let's take a concrete example. In North Carolina's Outer Banks, there's a stretch of highway called NC 12 that gets washed out by storms almost annually. The state and federal government have spent over a hundred million dollars rebuilding it over the past two decades. Meanwhile, the ocean keeps rising. Luna: And the alternative would be what—abandon the road? Move the houses? Lucas: That's exactly the debate right now. The term for it is 'managed retreat.' Instead of rebuilding in place, you buy out homeowners, demolish the structures, and return the land to a natural state. FEMA has a buyout program, but it's voluntary and underused. Luna: Why underused? If it saves money in the long run, you'd think it would be popular with budget hawks. Lucas: Politically, it's brutal. Telling a family they can't rebuild their home after a disaster feels cruel, even if it's the rational choice. Local officials want to restore their tax base. And there's a strong cultural attachment to place. Luna: So the incentives are misaligned. The federal government pays for the rebuild, but the local community gets to keep its property tax revenue. Lucas: Bingo. And the federal government doesn't have a great mechanism to say no. The Stafford Act, which governs disaster relief, prioritizes speed over efficiency. When a disaster hits, the political pressure to act fast is enormous. Luna: So you end up with a cycle: disaster, rebuild, disaster, rebuild. And the federal tab keeps growing. Lucas: There's a study from the Wharton Risk Center that looked at over thirty thousand repetitive loss properties. They found that buyouts would have saved taxpayers about two hundred thousand dollars per property compared to repeated repairs. Luna: But how many buyouts actually happen? I recall Harris County, Texas, has had a pretty aggressive program after Hurricane Harvey. Lucas: Great example. Harris County, which includes Houston, used a combination of FEMA and HUD money to buy out over three thousand homes in floodplains after Harvey in 2017. That program cost about seven hundred million dollars. But FEMA estimates it avoided over one point five billion in future flood damages. Luna: So a two-to-one return on investment. That's better than most infrastructure projects. Lucas: And yet nationally, the buyout approach is the exception, not the rule. Most disaster money still goes to rebuilding in place. Part of the problem is that the federal government has multiple pots of money—FEMA, HUD, the Army Corps of Engineers—and they don't coordinate well. Luna: And each agency has its own definition of what's eligible. So a community might get FEMA money to rebuild a road but not to relocate it. Lucas: Exactly. The Army Corps of Engineers, for example, has a cost-benefit test for flood control projects that often favors building higher levees rather than moving people. But levees can fail, and they encourage more development in the protected area. Luna: That's the classic 'levee effect.' People feel safer, so they build more, and then when the levee overtops, the damage is worse. Lucas: Right. And this gets to a deeper issue: the disaster spending framework was designed in an era when climate was more stable. Now, with more frequent and intense storms, the costs are exploding. Luna: The Government Accountability Office has had disaster risk on its high-risk list for over a decade. And yet Congress hasn't fundamentally reformed the system. Lucas: Part of the reason is that any reform looks like you're punishing disaster victims. No politician wants to be seen as heartless. But the current system is arguably more heartless in the long run because it sets people up for repeated trauma. Luna: And it wastes taxpayer money that could be used for other priorities. Lucas: There's also an equity angle. Wealthier homeowners can often afford flood insurance and can navigate the bureaucracy for buyouts. Lower-income families are more likely to be renters or to lack the resources to relocate on their own. Luna: So they end up stuck in flood-prone areas, hoping the next storm isn't the one that washes them out. Lucas: And since they have less political power, their neighborhoods are less likely to get buyout funding. There's a study from Texas A&M that found buyout programs disproportionately benefit white, higher-income areas. Luna: That's the opposite of what you'd want from a disaster relief program. Lucas: Exactly. So we have a system that's inefficient, inequitable, and unsustainable. And yet it persists because the political cost of changing it is higher than the fiscal cost of continuing. Luna: Speaking of sustainability, one thing I appreciate about this show is that we don't run ads. It keeps the focus on the substance. Lucas: Yeah, we deliberately keep this ad-free. If the kind of deep-dive conversations we have here add value to your week, the best way to support that is at buy me a coffee dot com slash fexingo. Luna: It's a small way to help us keep doing these episodes without any commercial pressure. Lucas: So back to disaster spending. There is a glimmer of hope: the Bipartisan Infrastructure Law included some funding for resilience projects. And FEMA has started to reform its mapping and pricing for flood insurance. Luna: But those are incremental changes. The real shift would need to come from Congress rewriting the Stafford Act to prioritize relocation over rebuilding. Lucas: Or at least requiring a cost-benefit analysis before approving large rebuilding projects. If the expected cost of future disasters exceeds the rebuild cost by a certain ratio, then a buyout should be mandatory. Luna: That would be a huge change. But it would also require the federal government to have the political will to say no to a state or local government. Lucas: And that's the hard part. Disaster spending is one of the few areas where both parties agree on spending more. So there's no natural constituency for restraint. Luna: Unless you count the taxpayer. Lucas: Right. And the taxpayer isn't organized in the same way as the homebuilders or the local chambers of commerce. So the cycle continues. Luna: It makes you wonder: at what point does the cost become so high that even politicians can't ignore it? Lucas: We might be approaching that point. Flood losses are projected to increase by thirty percent in the next decade just from sea level rise. At some point, the math becomes undeniable. Luna: But by then, a lot more communities will have been rebuilt and destroyed again. Lucas: That's the tragedy of this particular fiscal policy. It's not that we don't know what to do. It's that doing the right thing is politically painful, so we kick the can down the road. Luna: And the road keeps flooding. Lucas: Exactly. So that's the state of play on disaster spending. A system that's rational on paper but irrational in practice, and one that will likely cost trillions more before any fundamental reform happens. Luna: It's a sobering note to end on, but it's the reality. Lucas: Yeah. Let's hope the next wave of policymakers looks at that GAO report and takes it seriously.