The Peril of Blank Checks

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My seven years as staff on the Senate Banking Committee was largely spent trying to avert one financial disaster or another. In the middle of those impending financial disasters was at least one natural disaster: Hurricane Katrina. I was tasked with leading the staff efforts on the Republican side of the Committee. Working for Alabama’s senior senator added the urgency of constituent concerns. What follows are some of my reflections from that experience.

Lesson One: have a plan ahead of time and stick to it. While of course there was a framework for disaster assistance before Katrina, as spelled out under the Stafford Act, both the scale of the disaster and heated politics made the existing framework somewhat irrelevant. Instead everyone had a plan. Most of them half-baked. The result was the path of least resistance in Washington: a large blank check.

Blank checks have their advantages and their disadvantages. By delegating ultimate choices to local officials, recovery avoided a variety of federal strings. While we should, of course, evaluate many of the conditions attached to federal construction, such as onerous labor and environmental requirements, it became quickly clear that such requirements would slow recovery to a politically unacceptable pace. These arguments pushed for a blank check. An important determinate was also the fact that Mississippi’s Governor and Senior Senator (also chair of Appropriations) had quickly devised a plan that largely had the federal government hand the States a blank check.

Blank checks are not without their costs. While Mississippi quickly coalesced around a plan, as did Alabama, Louisiana was directionless. The result is that funding was spread throughout the state in a political manner and not prioritized to either those with the greatest needs or most impacted by Hurricane Katrina. The lesson here is that a blank check can work where there is a clear plan and accountability, where there is not, it can lead to confusion, infighting, waste and fraud.

For good or bad, natural disasters have become political footballs. Some might attribute President Obama’s re-election to Hurricane Sandy and the decline of President Bush to Hurricane Katrina, among other policies. Disasters can also exasperate existing tensions. Race relations had long been an issue in New Orleans. Having ignored this fact, initial plans to re-build ran into a brick wall when they are perceived as having a disparate impact. Any top down plan will be likely viewed as benefiting one group over another. For this reason, both re-building and the avoidance of disaster damage must rely on impersonal incentives and not top-down political management.

Despite the intense pressure to simply re-build everything as it was, any disaster assistance should incorporate incentives, including the reduction of subsidies, which force households to better recognize the risks they face and prepare accordingly.

Perhaps the most important lesson we can learn from natural disasters is that the increasing cost of such is not driven by more frequent or powerful storms but by the simple fact that more of us have chosen to live in their path. Federal subsidies, such as flood insurance, that encourage families to live in harm’s way, should be reduced, if not eliminated. Ultimately the best protector of life and property is to avoid placing them in harm’s way.

Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.

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