Market Distortions

While in Chicago yesterday I had lunch with an old fraternity brother who now works in the re-insurance business. We ended up talking quite a bit about tort reform, which led to a broader discussion about government regulation/intervention, and I walked away from the conversation with a lot of questions, and few answers.

One of the things that bothered me most was that, as far as I can tell, he was quite right to bemoan emergency disaster relief granted to those who fail to sufficiently insure their property. His claim was that the end result of such relief is that it lowers the incentive to properly insure in the first place, and that it stunts the market's ability to tell people where they should and should not be living. If the people living in the Mississippi flood plains cannot afford flood insurance because it is so expensive, the market is telling them that they ought not live there. If they continue to do so, they should bear the cost of that choice. Instead, emergency relief forces you and I to bear the cost of their choice.

I countered with the simplistic claim that, even if that logic is correct, our society has evolved to a point where we're unwilling to let those struck by disaster freeze or starve to death, even if they are unwilling or unable to insure. And of course, this led us straight to what I see as the crux of the welfare state debate. By its very nature a welfare system distorts the market. We like this when it prevents people from starving. But the more I thought about it (and this was after reading the Contracts and Tort chapters of Patterson's Companion to Philosophy of Law), the more upset I got that the other big effect of the system is to relieve individuals of responsibility for protecting themselves. Do I sound like a 1994 Republican or what?

Anyhow, it was a very interesting conversation and has left me feeling a bit dazed. I've always struggled to mesh my social libertarianism with my more collectivist economic leanings, and this is just another blow.