Moral hazard and greenies

Henry Ergas makes some good points in The Australian.

At the heart of the problem is the fact that each time disaster strikes, governments cover a large share of the losses borne by homeowners and businesses. This amounts to providing insurance at no charge, subsidising activity in high-risk areas at the expense of the areas where risks are lower.

The unsurprising side-effect has been to reduce the take-up of private insurance, with the result that developers, homeowners and businesses are not exposed to the premiums that could force them to recognise the risk locating in disaster-prone areas involves.

That reduction in demand for private disaster insurance is then compounded by other distortions. High taxes on insurance are the most perverse of these, as they both discourage insurance take-up by low-income consumers and shift what demand there is to policies with high deductibles.

As well as suppressing demand, state and local governments reduce the supply of private insurance, particularly against floods. They do this by not providing adequately detailed maps of flood proneness.

Moral hazard is a problem we all understand – after all the whole bank bashing exercise that we’ve recently experienced is all related to moral hazard. I suspect, however, that we’re not going to see an outbreak of Queensland home-owner bashing.

The other issue to recognise is that the Queensland floods, along with the Victorian bush fires are not just a natural disaster – they are policy disasters too.

… it is also apparent that governments have underinvested in collective goods that could reduce catastrophic risks. Simply put, in cost-benefit evaluations of projects such as extending dams and building new ones, and of burning-off in high bushfire risk areas, too low a value has been put on avoiding outcomes with a very small probability of occurring but that result in massive costs if they do eventuate.

Environmentalists rightly stress the importance of taking these low probability-high consequence risks into account in the context of climate change. But they ignore those risks when it comes to decisions they dislike. And state and federal governments have been far too willing to bend project evaluation processes to pander to the greenies’ demands. The result is to increase the likelihood of devastating loss.

The great irony is that greenies have been pushing AGW – the argument that we can avert disaster for our great-grandchildren – by appealing to ‘the science’ and the precautionary principle, yet they have advocated policies that place currently living people at risk.

Barry York – also at The Australian – explains the greenie aversion to dams.

During the recent long drought, the dam question arose again but the response from experts and governments was along the lines of: “Why build a dam if the climate has permanently changed in a way that means there will be less rain in future?

Opposition to dams has been a key success in the development of the green movement and the Greens party since the early 1980s. But the term opposition understates the situation: it is really demonisation of dams.

In the Green quasi-religion, dams are evil, akin to a Satanic force. Thus, there must never be any big new dams built. Not ever.

The Green policy is expressed at their website as a principle: “There should be no new large-scale dams on Australian rivers.”

Last word to Henry Ergas.

Now is a time to be generous. But as Queensland rebuilds, we owe the victims of this disaster a serious, considered reassessment of policies that have failed time after time, and that left as they are, will only fail again.

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43 Responses to Moral hazard and greenies

  1. TerjeP

    Tony Abbott has also used the occasion to put dams on the agenda.

  2. JC

    In the Green quasi-religion, dams are evil, akin to a Satanic force. Thus, there must never be any big new dams built. Not ever.

    The Green policy is expressed at their website as a principle: “There should be no new large-scale dams on Australian rivers.”

    Political scum bags at their worst. The Australian editorial was right about this party. It needs to be destroyed at the ballot box.

    I know it would make Bob Brown cry, but hey.

  3. jtfsoon

    ah I see Barry York is one the Strange Times dudes. He still has a soft spot for Marx

    t is indicative of our strange times that opposition to dams, as a matter of principle, can be seen as left-wing.

    What is the traditional practice of left-wing parties in power on this question? What is the left-wing theoretical foundation for a policy on dams?

    In practice, revolutionary left-wing parties in power – such as the communists in Russia/Soviet Union in the 20s and 30s and China in the 50s and 60s – were gung-ho in the building of dams.

    They did so because making a revolution is about changing things for the better, raising the standards of living and opportunities for liberation from wage slavery.

    To borrow from Karl Marx, it’s about “unleashing the productive forces” – not forcing them into a sustainable relationship with nature.

    It’s about an attitude based on “You ain’t seen nothin’ yet!”, not “tread gently – nature’s resources are finite”. But this is red politics, not green.

    In chapter one of The Communist Manifesto, Marx expressed his enthusiasm for the revolutionary consequences of the rise of the new bourgeoisie in transforming nature and extending human horizons.

    He said: “It has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades.”

    It is unlikely that he would not have been as awe-inspired by the wonders of large-scale dam construction and the range of benefits on such a vast scale arising from dams: the capture and storage of safe and reliable water supply, generation of hydro-electricity, irrigation, flood mitigation and recreational uses (all on a scale unimaginable in Marx’s time).

  4. Dams – like nuclear power – are also a good energy alternative to coal-burning or oil-burning.

  5. johno

    Aren’t the Greens lucky that the Queensland floods are smothering coverage of their hypocrisy of opposing large private contributions while accepting the largest donation ever made in Australia! Not that much of Australia’s media would take the Greens to task over it.

  6. ken n

    Dams – like nuclear power – are also a good energy alternative to coal-burning or oil-burning.

    Yep, wonderful stuff, gravity. Cheap, storable and always available. I’ve never understood what some have against it.

  7. PSC

    Moral hazard is a problem we all understand – after all the whole bank bashing exercise that we’ve recently experienced is all related to moral hazard. I suspect, however, that we’re not going to see an outbreak of Queensland home-owner bashing.

    I agree squared. It is so nice to see a conservative finally twigging to the effects of moral hazard.

    Meanwhile we have a hoard of flood victims not understanding that if their insurance does not cover them for flood damage that their insurance will not pay out for flood damage. And if you build a house in a flood zone you might get inundated once in a while. So don’t do that then.

    And worse some on the right take this as an excuse for green bashing, demanding the government build bigger dams to save us all. All we get is risk compensation – build a dam to save the areas at minor risk of inundation, make these areas risk free, and people will just build on properties closer to the river.

  8. dover_beach

    It is so nice to see a conservative finally twigging to the effects of moral hazard.

    This must count as one of the silliest statements all week. Next PSC will tells us that “it is nice to see a conservative finally twigging to the effects of planning” or some such.

  9. JC

    And worse some on the right take this as an excuse for green bashing, demanding the government build bigger dams to save us all.

    You mean like the Brisbane CBD was under water and if that dam hadn’t been built it would have been loads worse.

  10. Fleeced

    “It is so nice to see a conservative finally twigging to the effects of moral hazard.”

    I’m with dover… WTF?

  11. THR

    It could be a reference to the support for bank bailouts in 2008 by a range of conservative parties and political figures.

  12. Yeah I saw that on the news on my last vacation to opposite-land.

  13. THR

    Yeah I saw that on the news on my last vacation to opposite-land.

    Not unless by ‘opposite-land’ you mean the US.

  14. ConcernedConservative

    While the final decision stopping Traveston on ‘environmental’ grounds was made by Garrett, the most vehement political opponents of the two dams recently blocked in Eastern Australia (one in SE Qld, one in the Hunter) were the National Party. Not the Greens, the National Party.

  15. MarkL of Canberra

    heh. Some AGW types learn the lesson of making their predictions too soon. These ones should be safe, though. Wonder of their magnificent computer models work inside 10-20 years?

    They’d be mad to say they did. But 1000 years? they have no worries.

    Wynne Parry
    LiveScience Senior Writer
    LiveScience.com – Thu Jan 13, 9:00 am ET
    Even if humans stop producing excess carbon dioxide in 2100, the lingering effects of global warming could span the next millennia. The results? By the year 3000, global warming would be more than a hot topic – the West Antarctic ice sheet could collapse, and global sea levels would rise by about 13 feet (4 meters), according to a new study.
    Using a computer model, researchers looked at two scenarios – an end to humans’ industrial carbon dioxide emissions by 2010 and by 2100 – stretched out to the year 3000.

    AGW – it’s a nice little earner.

    MarkL
    Canberra

  16. Patrickb

    Does Ergas actually have any evidence for the assertion that there’s a low take up of insurance? Given the most people have a mortgage and a mortgage requires insurance I find his claim outrageous. Most of the govt. assistance is emergency.

  17. PSC

    I’m with dover… WTF?

    Take it up with Tony Abbott:


    As the Insurance Council of Australia confirmed that not all policies would cover flood damage, Tony Abbott said governments might have to step in to help people without flood insurance.

    http://www.theaustralian.com.au/news/nation/insurers-asked-to-show-compassion-for-queensland-home-owners/story-e6frg6nf-1225988036801

    I’ve asked a few times on this site for someone to point me to the Libertarian/Conservative plan to deal with TBTF and banking moral hazard. All I hear is the sound of crickets. Harry Ergas himself has written some very ordinary analysis which just fails to address this issue while obsessing with the immaterial RMBS program.

    The solution to the flood problem is either:
    a) government builds dams and/or stops people building on floodplains, or
    b) government forces insurers to provide cheap flood insurance or provides it themselves if insurers don’t, or
    c) government very publicly refuses to build dams or offer cheap insurance. People build houses where they want, and take personal responsibility for their choices.

    Prominent conservatives want either (a) or (b). No-one is talking about (c). The National Party/ Barnaby Joyce is calling for (a) – the central planning option. Tony Abbott has also called for more dams. Tony Abbott in my quote above is calling for (b).

    None of this says that Labor is any good on this issue, firmly in the (b) camp. I’m interested to hear what the Greens finally come up with – whether the Greens are closest to (a), (b) or (c).

    So yes, it’s nice to see a conservative on the libertarian end of the spectrum who’s not addressed moral hazard issues well before finally addressing it.

  18. .

    What is wrong with allowing private enterprise build dams, offer insurance and take responsibility for their choices?

    That’s the libertarian take. The only moral hazard arises from Government subsidisation of mistakes. The conservative/libertarian take is that the proper federal constitutional relations would have seen adequete mitigation anyway.

    You’re saying it doesn’t exist and then saying there is no libertarian solution.

    c) Is what is happening now and it should continue given the policy climate current circumstances arose under.

    We will always have floods. It’s simply the norm to build near sources of fresh water.

    Those who are imprudent (i.e building dangerously close to the water or not covering foreseeable losses) shouldn’t be subsisidised for their error in not taking risk seriously. This doesn’t exclude or excuse the Government/s from scrutiny or liability.

    If you’re arguing that Governments will always engage in moral hazard and thus we should just make insurance a public utility anyway with Government dictating risk taking activity, it’s a wholly perverse argument for Government intervention. The correct course of action is to constitutionally limit it then.

  19. PSC

    You’re saying it doesn’t exist and then saying there is no libertarian solution.

    For the case of floods, I think the libertarian solution is the best actually. But I’d add that property developers and vendors ought to be liable for at least disclosure of the potential for inundation if they know about it – under trade practices style laws. I don’t believe they are at the moment.

    Essentially I think it’s daft to build on a flood plain which is known to flood and not expect to be inundated periodically. So either prepare for periodic inundation or don’t build there.

  20. JC

    There’s a little more to it that than that, PSC.

    The Labor governments (since Beattie) have listening to the AGW zombies and spent $6 billion on the theory that Southern Australia was going to see permanent drops in rainfall and that this deluge we just witnessed was a thing of the past.

    So I’m not surprised that green zombies allowed flood plains to be developed.. that of course and the anticipation of wads of cash to fund the labor machine.

    Environmental zombidom, especially in our government is the fucking problem. It needs to be rooted out and wed poison sprayed so it never comes back…. and all labor governments.

  21. dover_beach

    PSC, your clarification was, thankfully, much more qualified then your original statement:

    It is so nice to see a conservative finally twigging to the effects of moral hazard.

    And yet Abbott’s statement is itself hardly averse to the issue of moral hazard. He makes the simple observation that the government MAY have step in to help people without flood insurance in the instance of a national disaster; its not as if a single street or even suburb has been devastated but a state capital.

  22. rog

    I’m not surprised that green zombies allowed flood plains to be developed

    These are the same anti development greens?

    V

  23. dover_beach

    Large parts of Melbourne’s inner south were once part of a flood plain. There is nothing wrong with building there but you have to take appropriate measures like embankments, dams, etc.

  24. PSC

    So I’m not surprised that green zombies allowed flood plains to be developed.. that of course and the anticipation of wads of cash to fund the labor machine.

    Whoever allowed it to be developed, Atkinson, Soorley or Newman – none of whom were greens, all pro-development in their own way – no-one forced anyone to buy floodprone land.

    If you buy Lehman commercial paper, and they default, it’s your own fault. Not the government for not saving TBTF banks.

    If you buy subprime RMBS and it’s worth cents in the dollar, it’s your own fault, not the government accreditied credit rating agency for labelling the stuff AAA.

    If you buy a gun, forget to lock the gunsafe and your kids die in a shooting accident it’s your own fault, not the government for letting you buy the gun.

    If you buy land on a floodplain and its inundated in a flood, it’s your own fault, not the government for letting you buy the land or not building a big enough dam.

    And you’re right DB, the government will probably have to step in, but it’s a bloody tradgedy that they will. I feel terrible for the poor people who are inundated and absolutely terrible for the poor people who’ve lost family. But the truth – the horrible truth is that there will be another “we never saw it coming” flood, people will have built even more on low-lying land and the whole cycle will continue.

    And more people will die.

    Unless both sides of politics get up and jawbone now and say together: “Next time, in 20-30 years or whenever, as a bipartisan policy, there will be much less support for people who get inundated. Emergency rescue and supplies and that’s it. So build on floodprone land at your own bloody risk. If you don’t like it, engineer your house to withstand flooding, buy private insurance on commercial terms or live on a hill.”

  25. So much Captain Hindsight going on here. I didn’t notice any reports prior to the flooding about releasing water from Wivenhoe. If the govt had prevented development on flood plains there would have been endless complaints about that. Many people have been whining about how the housing crisis is caused by restrictive zoning policies and now …. ?

  26. dover_beach

    If you buy land on a floodplain and its inundated in a flood, it’s your own fault, not the government for letting you buy the land or not building a big enough dam.

    This would be true if your house flooded every second winter, not every 30 years.

    And you’re right DB, the government will probably have to step in, but it’s a bloody tradgedy that they will.

    It’s no more a tragedy that the government provides assistance during a flood of this kind then it did after the Victorian bushfires. Anyone that supports a bi-partisan position of “tough titties, Therese” during a national disaster is practically and morally bankrupt.

    And more people will die.

    The people that died weren’t living in a flood plain. Toowoomba is not a flood plain nor the areas immediately downstream.

  27. DB is on the mark. If we have to prepare for every risk that arises 50 odd years or so then we may as well hand over the govt to the safety nazis. The south east corner has many flood plains: Brisbane, Bremer, Logan, Coomera, Nerang rivers. Toowoomba and the Lockyer Valley was just freakish. If we wanted to protect the Lockyer Valley against a similiar event we would have to wall the townships off.

  28. jc

    PSC;

    Stop being silly. The beattie government spent $6 bill so called weather proofing southern queensland.

    They’re now flooded.

    In other words Beattie listened to a bunch of green trogs and consequently allowed land to be sold in flood plains.

    That’s the point I’m making.

    Quodger

    sorry, you never finished high school. Go away.

  29. FDB

    “In other words Beattie listened to a bunch of green trogs and consequently allowed land to be sold in flood plains.

    That’s the point I’m making.”

    Yes, and it’s a boneheadedly stupid point.

  30. jc

    It’s a stupid point? Why? Everyone from the former Australian of the year, bonehead Flattery, the CSRIO, the Federal global warming office were all predicting a drier climate.

    Beattie listened to these morons and wasted all that money. You call my claim stupid? You idiot.

  31. jc

    Pratrick B from lavatory Pronto says:

    Does Ergas actually have any evidence for the assertion that there’s a low take up of insurance? Given the most people have a mortgage and a mortgage requires insurance I find his claim outrageous. Most of the govt. assistance is emergency.

    Lord these lavatory betas are thick. There’s all these stories of people not having flood insurance and Paddy wants evidence.

    Paddy, what do you think the Bobbsey Twins were doing meeting with the Insurance firms, mergatroid?

  32. FDB

    JC, the vast majority of the flood damage and loss of life didn’t occur on flood plains.

    I hope this information helps you in your quest to find someone to blame – you might as well blame accurately, right?

  33. Hey JC,

    Perhaps there is a business opportunity in this. On the coast there is no choice, we have to build on flood plains. It might be possible to design future buildings with inbuilt flood proofing, some means of rapidly walling off the main areas of the place from water.

    Hey, we’re still using sandbags. I mean to say, with modern building techniques and materials there has to be a better way.

  34. jc

    That’s bullshit, FDB.

    Beattie and Bligh were informed a number of times that they could extend the capacity of the current dam servicing Brisbane. The extension would have allowed the W to hold more water in the event of a flood.

    The reason that never went was because of the belief that were in permanent drought.

    Beattie and Bligh ought to both be up in criminal negligence charges.

    Note:

    Labor and green policies kill and cause disasters to be worse.

  35. FDB

    What an idiot you are JC.

    It’s so patently obvious you’re only saying this because the ALP is in government in QLD.

    Your ‘analysis’ is less than worthless.

  36. Peter Patton

    Why would anybody take out a home insurance policy and choose NOT to tick the “flood” box?

  37. jc

    Because it’s really expensive in the wrong places, peter.

    FDB:

    It has nothing to do with me despising the Australian Liars Party and all to do with the fact that the Liars Party seems to be attracted to every hairbrained ideas humans could possibly conceive.

    Pick a eally bad policy idea that could kill or financially destroy people and you’ll find that policy on Labor’s manifesto. It’s a scientific certainty and easily tested in a lab.

  38. Peter Patton

    Fair enough I suppose. Still, given how powerful the memory of 1974 is for Brisbanites…

  39. Pingback: Life During Wartime: Queensland floods 2010-2011 « Woolly Days

  40. Chris Grealy

    Phony Abbott is indeed an idiot, and the LNP have once again demonstrated that there is no depth they will not sink to if they think there is an advantage to be gained. Hey Rabbit, where do you want to put the new dam? Perhaps on the Bremer, so that Ipswich will be permanently submerged?. Or maybe we could dam the entire Lockyer Valley. Who needs all that good farming land? Now kindly remove your foot from your mouth and toddle back to fantasy land, boyo.

  41. JC

    ……the LNP have once again demonstrated that there is no depth they will not sink to if they think there is an advantage to be gained

    Yea Grealy. Unlike the senior members of the Australian Liars Party, right? Lol.

    Hey, tell us how you think duck bottom has been performing of late. She’s certainly a skilled pol hey.

  42. .

    “Perhaps on the Bremer, so that Ipswich will be permanently submerged?. Or maybe we could dam the entire Lockyer Valley. Who needs all that good farming land?”

    Hey who needs an unflooded CBD? LOL

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