Hurricane Sandy, and Why Sound Risk Management Should Always Trump Populist Banner Waving

I suspect that this will have zero effect on the election, because I believe that the reason we vote for candidates has less to do with logical and rational reasoning than it does tribalism and “gut” reactions.  Still, I suspect that the parts of last year’s GOP debate about defunding FEMA will be replayed more than a few times over the next two weeks, and might (temporarily) lead to a more measured conversation about the role of government.

When asked about the role of FEMA by CNN’s John King, Mitt Romney played the populist card – a card I sincerely doubt he believed at the time – in order to ingratiate himself to the GOP base.  I expect once the campaigns are turned back “on” we’ll be hearing a lot of comments from his staff that contain the phrase “What Governor Romeny had meant to say was…”:

KING: What else, Governor Romney? You’ve been a chief executive of a state. I was just in Joplin, Mo. I’ve been in Mississippi and Louisiana and Tennessee and other communities dealing with [disaster], whether it’s the tornadoes, the flooding and worse. FEMA is about to run out of money, and there are some people who say, ‘Do it on a case-by-case basis,’ and some people who say, you know, ‘Maybe we’re learning a lesson here that the states should take on more of this role.’ How do you deal with something like that?

ROMNEY: Absolutely. Every time you have an occasion to take something from the federal government and send it back to the states, that’s the right direction. And if you can go even further and send it back to the private sector, that’s even better.  Instead of thinking in the federal budget, what we should cut — we should ask ourselves the opposite question. What should we keep?  We should take all of what we’re doing at the federal level and say, what are the things we’re doing that we don’t have to do? And those
things we’ve got to stop doing, because we’re borrowing $1.6 trillion more this year than we’re taking in. We cannot–

KING: Including disaster relief, though?

ROMNEY: We cannot afford to do those things without jeopardizing the future for our kids. It is simply immoral, in my view, for us to continue to rack up larger and larger debts and pass them on to our kids, knowing full well that we’ll all be dead and gone before it’s paid off. It makes no sense at all.

The Governor’s reasons for arguing to defund FEMA^[1] at the time were obvious – he wanted the Republican nomination, and in 2011 that meant putting FEMA squarely in one’s crosshairs.

Sure, FEMA has long been a target of right wing conspiracy theorists.  But there are bigger, less colorful reasons for the GOP’s willingness to go to the brink in order to defund both disaster assistance and relief last year; those reasons are actually fairly common and not limited to a political party.  In fact, those reasons are similar to reasons that have created such a mess in our healthcare system.  Prior to Obamacare, it was too easy for young, healthy people to abstain from purchasing health insurance until such time as they were likely to need it.  This meant that the risk that was being pooled was, more and more, made up of realized rather than potential risk – and that makes insurance unaffordable. Disaster relief is much the same.  It’s hard to remember in mild years but, like sickness and death, large losses caused by nature – losses so large that commercial insurance providers are not willing or able to cover them – are inevitable.

One of the hard lessons one learns in risk management is that no one funds for catastrophic losses unless they are required by an outside agency to do so.  In many cases this is because it is not feasible to do so; but even in those cases where it is feasible, no one does.  Were FEMA to be dismantled, for example, there would be no financial resources from which to quickly rebuild from disasters like Hurricane Sandy.  Conservatives might argue that private insurers could provide such protection, and this is certainly correct – on paper.  However, one of the axioms from my industry is that there is no such thing as an uninsurable risk, there are just risks people aren’t willing to pay enough premium for.  This is absolutely true for natural disasters.  If your insurance provider offered you or your business coverage that would protect you from disasters like Sandy, you would not be willing to pay the premium required.  You might disagree with that statement, but history shows that it is true. In fact, it is almost universally true.  Governmental disaster insurance schemes didn’t appear magically in a vacuum; they were created because prior no one was willing to pay enough money in premiums to allow insurance companies to properly fund for them, and as a result the inevitable losses were uncovered.

Similarly, you could – on paper – fund disaster relief on a state level.  But in order to do so, you’d have to fund appropriately for a much smaller pool of risk.  In order to properly fund for catastrophic losses, smaller pools must pay disproportionately compared to larger pools because smaller pools do not have the law of large numbers from which do draw actuarial confidence.  So in theory New Jersey might have been able to fund for Sandy on their own without the rest of the country chipping in with additional financial relief, but the thought that the citizenry would have agreed to pay the kinds of tax increases needed – in years when there were no disasters and everyone was feeling good about the future – is more than a little naive.

Using the federal government as a tool to prepare financially for catastrophic disasters isn’t something that evolved because government is evil.  What’s more, it didn’t even evolve because it’s the best way to properly fund for potentially crippling natural disasters.  It evolved because it’s the only way to fund for crippling natural disasters – at least the only way we’re willing to pay for.  It’s the insurance policy we collectively create and fund in order to make sure we get through the bad times.

Pretending that all of us, or most of us, or even some of us would pay that premium if we didn’t collectively force ourselves to do so with the cost-reducing strategy of risk pooling is a nice dream to have – but that’s all it is.

[1] Or, as I’m sure many will on the right will argue argue, his artful attempt to sound like he wanted to defund FEMA while still giving himself room to deny it later

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