Moral Hazard 101

If You Keep Paying for People to Build Things Where They Shouldn't, They'll Keep Doing It

04.09.13 2:01 PM ET

Mark Wilson/Getty Images

The New York Times discovers the moral hazard created when the federal government repeatedly provides massive disaster assistance to people who build homes and businesses along our nation's most flood-prone shorelines:

It should be obvious that the more people we move out of harm’s way in the reasonably near future, the better off we will ultimately be.

But we are doing the opposite, offering huge subsidies for coastal development. We proffer federally backed flood insurance at rates bearing no resemblance to the risks. Even more important, we go in after storms and write big checks so towns can put the roads, sewers and beach sand right back where they were.

We are, in other words, using the federal Treasury to shield people from the true risks that they are taking by building on the coasts. Coastal development has soared as a direct consequence, and this rush toward the sea is the biggest factor in the rising costs of storm bailouts.