This is happening for several reasons. For starters, the United States adds to its wealth each year, especially when it comes to housing, and that means more wealth is vulnerable to loss in a disaster. Last year the nation added nearly 1.5 million units to its housing stock and home prices nationwide climbed an average of 8.5%. Hence, any random hurricane, flood, tornado, wildfire, or mudslide can damage more — and more valuable — property.
Another reason is that people are locating to disaster-prone areas. Florida (subject to floods and hurricanes), Texas (which recently suffered through a record cold snap that may have done over $100 billion in damage to the state’s economy), and California (subject to floods, wildfires, earthquakes, and mudslides) have seen plenty of disasters in the last decade. These are the three most populous states in the country.
Moreover, some 127 million Americans — 40% percent of the national population — live in coastal counties. If they comprised a nation unto itself, these coastal counties would rank third in the world in gross domestic product, behind only China and the United States as a whole, according to the National Ocean Service. In fact, population density is over five times greater in coastal shoreline counties than the U.S. average. Coastal communities face such natural disaster risks as high-tide flooding, hurricanes, sea-level rise, erosion, and climate change.
The federal government has not done much to preemptively mitigate such disasters or encourage residents of such places to take mitigation steps on their own. The National Flood Insurance Program, which effectively subsidizes the risk of living by flood-prone bodies of water — especially for high-income people — has exacerbated the costs of coastal disasters for residents and the government. (See “The Flood Insurance Fix,” Winter 2011; “The Unintended Effects of Government-Subsidized Weather Insurance,” Fall 2015.)
Government failure / Federal disaster management authorities have a well-documented track record of inefficiency and mismanagement. A 2019 report by the Government Accountability Office (GAO) found that the federal government struggles in its efforts to help communities recover from disasters. Among the problems are that recovery efforts tend to be complicated, difficult to execute, and slow to gear-up.
The report also highlighted problems engendered by the ad hoc nature of disaster recovery block grants, especially those that come from the Department of Housing and Urban Development (HUD). The last-minute funding results in a lack of adequately trained staff and an over-reliance on those few who do have relevant expertise and training, which leads to burnout and higher staff turnover. The GAO made several recommendations to correct those shortcomings in the future but, it noted in a subsequent report, most of its proposals have not been adopted.
Another problem pointed out by the GAO is that the lead agency for disaster relief, the Federal Emergency Management Agency (FEMA) is often guilty of poor advanced planning, which begets bureaucratic infighting among other federal agencies and state and local governments that try to fill the void. That further slows disaster response. For instance, one of the first steps following most disasters is to remove debris, but a primary complaint by those affected by disasters is that it can be especially difficult to get assistance for debris removal.
Private administration / The poor track record of government disaster response has some policymakers experimenting with using private entities to manage relief efforts. This idea had its origins in the wake of Hurricane Katrina, when then-governor Haley Barbour of Mississippi hired the accounting firm Horne to oversee billions of dollars in federal disaster recovery funds. His idea was to have the firm apply accounting, auditing, and business management disciplines to disaster oversight.
The experience proved highly successful in terms of taxpayer savings. The Disaster Recovery Division of the Mississippi Development Authority reported that the cost of administering disaster recovery programs, including housing, was held below what was authorized by HUD, while the rate of fraud was kept below 0.1%. In the years since, Horne and other consulting firms have created a robust private-sector disaster-relief industry.
The use of private contractors lessens the problems created by FEMA’s lack of experienced administrative staff, engendered by the ad hoc nature of disaster relief.
When Congress allocates disaster money, it generally gives FEMA wide discretion in how it allocates the funds, encumbered only by some broad strictures, if at all. The agency also decides how to distribute the funds across the affected states, a politically sensitive task. It, of course, has an incentive to ensure that the allocation is proportional to the damage, but more money tends to flow to places that prove to be more competent in disaster recovery by speedily clearing debris and working with insurance companies so that rebuilding can proceed. In some ways this is an efficient outcome: if a state’s bureaucracy struggles to spend the money allocated to it, there is little reason to give it more. However, this can lead to disparities across states that are politically untenable in the long run.
A major concern for states and localities is that they will undergo an audit after a disaster and be required to return disaster relief funds found to have been misappropriated. The fear of this occurring results in state and local governments being excessively cautious in distributing funds, which slows recovery efforts. For example, a South Carolina resident whose home was heavily damaged by Hurricane Dorian in 2019 was not permitted to access federal relief funds because he had delinquent municipal trash fees, and the local government administrator was unsure whether that rendered the household ineligible. (It didn’t).
Sometimes a state simply has little relevant experience in administering aid and has little choice but to resort to a private contractor. In 2020, California set aside $2.6 billion of COVID-19 relief funds to provide rental assistance for low-income households, but it had no existing program that would make it easy to identify those who might be eligible for the subsidy. To solve the problem, the state hired Horne, the same firm that Mississippi hired in the wake of Hurricane Katrina, and the firm constructed a website that explains the program and its eligibility rules and that uses geolocation to route applicants to the correct city, county, or state websites. (That complexity was the result of some localities’ insistence that they administer their own rent-relief programs.)
Agility and responsiveness / The use of private contractors lessens the problems created by FEMA’s lack of experienced administrative staff, engendered by the ad hoc nature of disaster relief budgeting. FEMA cannot quickly expand the hiring of trained staff when a disaster begins: the federal government needs months to go through the process of posting a job, screening applicants, interviewing finalists, making offers, and bringing new hires onboard. Private disaster management companies can move with much greater haste. The major competitors in the disaster contracting field tend to be accounting or consulting firms such as Civix, AAECom, KPMG, and Deloitte. Such firms can reallocate employees from other sectors of the business for short intervals during particularly acute crises.
What’s more, FEMA cannot lay off workers during a slow disaster season because of employment protections granted to government workers. Private contractors are not bound by such inflexibility, enhancing their efficiency. And in a year with relatively few serious disasters, the government could simply do without hiring a disaster consultancy altogether.
Outcomes / In an ideal world, government would play a minimal role in the provision of disaster relief: businesses and households would purchase insurance sufficient to cover any potential losses from any calamity, and the role of the state would be limited to the rehabilitation of public properties.
We are far from that world, however, and moral hazard abounds. For instance, though the National Flood Insurance Program caps residential coverage at $250,000 for the structure and $100,000 for contents (non-residential coverage has higher caps), it still crowds out the private market for such insurance. This government support in the aftermath of previous disasters has undoubtedly led businesses, individuals, and governments to do less preparation than they otherwise would because of the anticipation of government support should a disaster occur.
As Nobel economics laureates Ed Prescott and Finn Kydland have sagely observed, if we can’t prevent people from making bad decisions in the first place, the government apparently cannot abandon them to their own devices. The question, then, is how to help them in the most efficient manner? Contracting out the administration of emergency rebuilding services to the private sector, but funded by the government, appears to be the cost-effective second-best solution for a country where the number and cost of natural disasters are growing steadily.
