Wednesday, 5 February 2014

Why We Shouldn't Make A Habit Of Compensating UK Flood Victims

I heard on the news today that some of the flood victims in Somerset (and other places) are demanding compensation from the government for the damage to their properties. Giving it to them is a bad idea, and here's why. The price of their properties would have been cheaper to buy than equivalent properties not in precarious areas with increased flood possibilities. In buying a property at a reduced rate with a higher chance of flood damage, the buyers are, in effect, taking a risk with the reward of a cheaper property commensurate with that risk.

A government that gives compensation to riskier consumers ends up subsidising risk with your (the taxpayers) money. You might say that frequent dredging solves the problem, but it doesn't because dredging constitutes part of government expenditure, so it is still a case of subsidising risk - it's just a risk subsidy in the form of dredging instead of compensation. When risk is subsidised there is more of it, and when there is more of it there are further increases in it in the future - so instead of adopting more sensible property planning in the future, there will be a continuance of risky, and even riskier, ventures.

Imagine a time, say, one hundred years henceforward when - if the climate change portents are accurate - there is regular property-damaging flooding a few times a year. A situation in which governments kept compensating the victims would exhibit a system in which prior warnings were not heeded, and were, in fact, exacerbated by irresponsibility - an irresponsibility supported by taxpayer hand-outs (if you're interested, two corollary effects would be the raising of taxes for every taxpayer, including those who live in safer areas; and raising the value of property in these flood zones, which would have the effect of limiting people’s freedom to buy cheap, higher-risk property in preference to more expensive, safer property).

Having said all that, I try to be a fair-minded, compassionate man, and I will acknowledge that, so far, flood damage to the properties in question has been relatively infrequent. Thus, if government hand-outs of this kind are rare responses to relatively unforeseen disasters for families, it is a nice thing to help them out. I would just be very wary of any government that wantonly subsidises risks - because spending other people's money on things that bring about less of an incentive to be prudent won't be a good thing if flood-frequency starts to rise.

* Photo courtesy of The Times