The Canadian government is considering buying out homeowners in high-risk flood zones. Let’s take this opportunity to illustrate why the constraint on governments is material not fiscal.

The buyouts are an alternative to repeated bailouts to assist homeowners recovering after a flood.

A VP with the Insurance Bureau of Canada described the problem of repeated assistance this way: “Taxpayers should no longer be on the hook for these bailouts.” However, this rhetoric misrepresents the problem.

Modern Monetary Theory (MMT) explains that governments do not use tax money when it spends. Rather, it creates money when it spends. Taxes are a way to remove some of that money from the economy. The problem of bailouts or buyouts is not a fiscal problem. The government can afford either policy.

The actual problem is the material realities of rebuilding vs retreating.

Bailouts

Consider the bailout. A community in a high-risk zone floods. Many homes are seriously damaged. Some may need to be rebuilt. The damaged and destroyed homes will produce a lot of waste.

There will be damaged concrete, carpets, flooring, siding, electrical equipment, etc. Some of the damaged stuff may be recyclable or compostable. But much of it will be waste destined for a landfill.

To replace the damaged materials will require replacement wood, cement, drywall, plastics and many other building components. Some may be recycled products, but most must be newly produced.

The homes are repaired and rebuilt but the risk remains. In the context of climate change those risks are growing worse and there is a high probability that these homes will be flooded again.

So, we once again remove much of the housing material to a landfill and replace it with newly produced materials.

From the perspective of gross domestic product (GDP), the government’s favourite measure of well-being, this is a good thing. Every time these houses are damaged and must be rebuild or repaired, economic value is created.

Any reasonable person can see the problem with this perspective. This is wasteful. By repeatedly renewing these houses we are shortening the lifespan of the materials used. GDP does not subtract for the loss of homes. It only adds for the repairs and rebuilding.

The demand for this repeated replacement material will compete with other demands for those materials. With repeated injections of government money to bailout homeowners, there is greater inflationary pressure.

We may decide this is money well-spent. Perhaps the community is so important we think this is a valuable use for the wood, cement, drywall, plastics, etc. In that case, the government should continue to fund bailouts for flood-prone homes.

We should also figure out how to make the homes more suited to a flood zone and the materials used more resilient and capable of being recycled.

If we choose bailouts, taxes could be used to reduce the risk of inflation from the repeated injections of money. Or, the government could entice increased productive capacity of the necessary rebuilding and repair inputs, ensuring adequate supplies for both the rebuilding and other purposes.

Buyouts

Now, consider the buyout. Again, a high-risk community floods. However, instead of providing money for materials to repair homes, the government buys the properties. It can remove any structures. Much of the materials will end up in a landfill although some will be recycled and composted. This time, however, no new material is placed back in the flood zone.

The homeowners can take the money from the sale of their properties and buy or build homes elsewhere. If they build homes there will be new demand for wood, cement, drywall, plastics, etc. But the homes built will be at less risk of future damage and destruction, providing value for a longer period of time. The materials that would eventually be used for rebuilding in the flood zone can be used for other purposes.

Because the buyout is one-time the policy does not repeatedly inject money and demand for building materials. Therefore, it has less inflationary pressure.

Our current discussion of government spending treats money as more substantial and consequential than what we do with the money. The government has all the money it needs. The issue is what we think we actually need and what we can actually do given the material limits.

Do we need to rebuild in high risk flood zones? What are the material constraints on rebuilding? Could we do so sustainably? What are we giving up by devoting materials to that instead of other uses? To answer that question requires much more information than just “what will it cost?”