Government aid to flooded areas isn’t necessarily bad. Sending in the National Guard to help people evacuate, for example, fulfills an essential role of the government: protecting the public from real, physical harm. Subsidizing the cleanup and reconstruction, on the other hand, has nefarious long-term consequences.

The intention to help people is never misguided. However, the means used to help people may be ill-advised. So, it’s worth asking: Will this sort of flood relief actually relieve the pain that floods cause? In the short term, the answer is simple and obvious: yes. We can all see a farmer rebuilding his barn. Even more concretely, we’ve seen Chesterfield sprout back up after the 1993 disaster. This isn’t the entire story, though. What isn’t as obvious is that subsidizing reconstruction actually causes more flood damage over time, undermining the intended goal of relief.

It’s not difficult to figure out that lowland areas near rivers have a tendency to flood — or that this can be very costly for home and business owners. To varying degrees, people tend to take these extra costs into account when deciding where to move or set up a new business. But by providing aid to rebuild flood-prone areas, federal and state governments reduce the potential costs of a flood, and thereby the risk associated with living and doing business there. This essentially becomes a subsidy for areas that are likely to be flooded.

Any astute student of economics knows what will happen next. Somewhere in the state, there are people who enjoy the many benefits of living next to a large river like the Mississippi — the boating and fishing opportunities, for instance. But, all things considered, many of these people would ordinarily consider it just a bit too risky to live in such an area. Economists characterize these people as being “on the margin.” When the costs associated with flooding are mitigated by the expectation of disaster assistance, some of the people on the safe side of the margin cross to the risky side — they now see living by the river as an attractive option. Flood relief spurs some marginal home buyers to move into flood-prone areas.

This happens not only with potential residents, but potential business owners, as well. The decreased risk brought by relief efforts means that businesses on the margin build new facilities in the flood plain rather than somewhere else, while businesses already in the area purchase new equipment and improve their buildings rather than limit possible losses.

As a result, these areas contain not only more potential victims, but also a much greater potential for damage. So, while government assistance for flood reconstruction can certainly help people who have been hurt by flooding, it also encourages some people to set themselves up for disaster. When the next flood comes, the damage will likely be much worse than if there had been no flood relief at all — in terms of both dollars and human suffering.

To answer my original question: Does subsidizing reconstruction actually help ease the pain caused by floods? In the long run, the answer is a most emphatic no. Although this sort of relief does some immediate good, it will only cause a great deal more harm down the road.

Matt Simpson is an intern at the Show-Me Institute, a Missouri-based think tank. He is currently pursuing undergraduate degrees in philosophy and math at Lindenwood University.

First, it is important to distinguish between what is in Bombardier’s best interest and what is most beneficial to Missouri’s citizens. Some will be frustrated because Bombardier played Missouri against Canada. No one can blame Bombardier’s directors for seeking the best deal. They want as many governments offering tax incentives as possible. Suppose we are talking about two suppliers negotiating with Bombardier to supply their rivets. If the rivets are identical, we would expect Bombardier to choose the lower cost. Similarly, tax payments are a significant expense. When governments offer to lower taxes, Bombardier’s shareholders want their directors to listen. So, the lesson here — which is hardly surprising to anyone — is that companies can lower their expenses through competitive negotiations. In each case, one supplier wins. From Bombardier’s or any company’s perspective, they want to encourage this type of competition because their shareholders are the direct beneficiaries.

Second, we must ask whether the tax incentive package is most beneficial to Missourians, and whether it makes sense to continue using these tools to attract business in Missouri. Missouri legislators will continue to make the argument that their offer to Bombardier demonstrated that Missouri is “open for business.” If I took this assertion literally, the statement is extraordinarily hurtful. Hardworking Missourians should ask: When was the state not open for business? Did I miss some announcement that Missourians were not working hard to improve their productivity and compete with others living in states that are open for business?

I realize that this takes the legislators’ claims to their illogical extreme, and that the “open for business” claim is a sound byte standing for a deeper point. But it is important to note that Missouri’s total income is falling relative to other states. Therefore, Missouri state government is competing for new business to locate within our state’s borders. Tax incentive tools are the state’s way to signal this new, more aggressive stance. But the critical question is this: Are tax incentives the best way for Missouri to indicate that it is open for business? What is the best way for Missouri to indicate that it is open for business? The answer depends crucially on the engines that drive economic growth.

First, it is important to understand that tax credits reduce the revenues received by state government, resulting in either fewer services like roads, schools, etc. — or higher tax burdens for everyone else. The bottom line: Tax rates matter for Missouri’s future economic growth.

With the deal that state officials offered to Bombardier, and with other economic tax credits for business development and expansion, this approach assumes that economic growth stems from big plants. In fact, the evidence from economic research is that big plants typically drive other businesses out. Employees leave small businesses for the large ones, resulting in unchanged total economic activity.

New technologies are developed at research centers and businesses across Missouri that are seeking to lower production costs. Historically, we owe improved living standards to such technological progress. Because new technologies are mobile, developers look for production sites where the “after tax return” is the greatest. Sometimes it is best to stay in Missouri; sometimes it is best to move production elsewhere.

If legislators recognized that economic growth owes more to the ideagenerating process than to expansion via tax credits, and trusted their constituents to generate those ideas, spurred by high after-tax returns, the state could realize accelerating living standards. Economic development is not an exact, predictable outcome. I know that Missouri’s officials, such as Department of Economic Development Director Greg Steinhoff, Rep. Ron Richard, Sen. Charlie Shields, and others, had nothing but good intentions in pursuing Bombardier — but I wish I could convince them that the economic model they use is flawed. With their passion for improving their fellow citizens’ lives, and a sound economic model, I am confident that Missouri’s long-term economic future would brighten.

Joseph Haslag is a professor in the Economics Department at the University of Missouri–Columbia and executive vice president of the Show- Me Institute.