THIS week saw something of a turning point for both New Orleans and George Bush. Down on the Gulf coast, some sense of order returned to the flooded city (see article). Meanwhile, the president began to act presidentially. Mr Bush belatedly took “responsibility” for the failures of the federal government in the aftermath of Hurricane Katrina. He also belatedly pushed out Michael Brown, a horse expert whom he had foolishly appointed to run the Federal Emergency Management Agency.
The arguments about who got what wrong will have a big impact on American politics (see article). But the main priority for Mr Bush should be avoiding any further mistakes—and there are worrying signs. “Nothing can salve the wounds like money,” a White House official told Time magazine last week. That is the prevailing wisdom in Washington, DC, as politicians rush to atone for their earlier incompetence. Some $60 billion has been pledged for post-hurricane relief and reconstruction (with far, far more to come) and some contracting rules about competitive bidding have been loosened.
When it comes to immediate relief, this is understandable. Some of the cash will no doubt be wasted through cronyism and fraud, but America has been shamed by its inability to look after the destitute. The bigger problem lies ahead with the money that is supposed to go to reconstruction. That is partly because the numbers are far larger. But it is also because throwing money at the Gulf coast now may set America up for an even bigger mess when the next natural disaster strikes.
Consider the question of how to rebuild New Orleans. Dennis Hastert, the Republican speaker of the House of Representatives, recently suggested that some areas of the city could be bulldozed; so great was the outcry at this cruelty that he had to issue an apologetic clarification. This is nonsense. Many of the worst-hit areas were not just unusually vulnerable to flood; they were also among the most squalid places in the country. They should not be brought back.
Even if Mr Bush thinks he has a responsibility to rebuild a new New Orleans, some transparent weighing of costs and benefits is needed. Too much federal cash for reconstruction will encourage yet more development along the hurricane- and flood-prone Gulf coast. And the “moral hazard” extends well beyond the South: the more cash that is spent rebuilding New Orleans, the more foolhardy Californians will be about where they build in their earthquake-prone state, confident the government will bail them out if the “Big One” strikes.
A big part of the problem is America's system of insurance against natural disasters. Hurricanes are covered by the private market but, since 1968, the federal government has been responsible for the provision of flood insurance. The reasoning was that, since flood victims expected to be bailed out by the government anyway, they might as well pay up front.
The division between flood and hurricane now sets up the spectre of endless lawsuits between insurers and the homeowners over whether the damage was caused by wind or water. Meanwhile, although federal flood insurance was both subsidised and supposedly obligatory for most mortgage holders, remarkably few people on the Gulf had federal cover: less than a fifth along Mississippi's coast and only 40% in New Orleans. People bet that if a hurricane struck, the government would bail them out. In California, for much the same reason, only one in five homes is insured against earthquakes.
The cleanest approach would be to get rid of federal flood insurance entirely and let the private market price the risks of living below sea level or in flood-prone areas. The problem is that the inevitability of government bail-outs will persuade many not to pay up. An alternative would be to make natural-disaster insurance (covering floods, earthquakes, avalanches and so on) obligatory, with premiums more closely reflecting the risk. The system could be run for profit by the private sector, with the government, in effect, acting only as an insurer of last resort. This would cost homeowners money and force them to be more careful about where they live; but that, surely, is the point.