    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                        EXAMINING THE ROLE OF GOVERNMENT
                        ASSISTANCE FOR DISASTER VICTIMS:
                             A REVIEW OF H.R. 3042

    =======================================================================

                                    HEARING

                                   before the

                        SUBCOMMITTEE ON ECONOMIC GROWTH,
                             TAX AND CAPITAL ACCESS

                                     of the

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  HEARING HELD
                               FEBRUARY 16, 2012

                                   __________

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                Small Business Committee Document Number 112-055
               Available via the GPO Website: www.fdsys.gov/house

                                    _____

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    76-463                    WASHINGTON : 2012
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                       HOUSE COMMITTEE ON SMALL BUSINESS

                         SAM GRAVES, Missouri, Chairman
                           ROSCOE BARTLETT, Maryland
                               STEVE CHABOT, Ohio
                                STEVE KING, Iowa
                             MIKE COFFMAN, Colorado
                         MICK MULVANEY, South Carolina
                             SCOTT TIPTON, Colorado
                             JEFF LANDRY, Louisiana
                       JAIME HERRERA BEUTLER, Washington
                              ALLEN WEST, Florida
                         RENEE ELLMERS, North Carolina
                              JOE WALSH, Illinois
                           LOU BARLETTA, Pennsylvania
                            RICHARD HANNA, New York
                           ROBERT SCHILLING, Illinois

                   NYDIA VELAZQUEZ, New York, Ranking Member
                             KURT SCHRADER, Oregon
                            MARK CRITZ, Pennsylvania
                          JASON ALTMIRE, Pennsylvania
                            YVETTE CLARKE, New York
                              JUDY CHU, California
                         DAVID CICILLINE, Rhode Island
                           CEDRIC RICHMOND, Louisiana
                            JANICE HAHN, California
                             GARY PETERS, Michigan
                              BILL OWENS, New York
                          BILL KEATING, Massachusetts

                          Lori Salley, Staff Director
                        Paul Sass, Deputy Staff Director
                          Barry Pineles, Chief Counsel
                      Michael Day, Minority Staff Director

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page
    Hon. Joe Walsh...................................................     1
    Hon. Kurt Schrader...............................................     2

                                   WITNESSES

    Doug Hoell, Director, North Carolina Division of Emergency
      Management, Raleigh, N.C.......................................     3
    Gene Tighe, Owner, GT Fabrication, Inc., Pittston, PA............     5
    Howard Kunreuther, Ph.D., James G. Dinan Professor of Decision
      Sciences & Public Policy, Co-Director Risk Management and
      Decision Processes Center, University of Pennsylvania,
      Philadelphia, PA...............................................     8
    David B. Muhlhausen, Ph.D., Research Fellow in Empirical Policy
      Analysis, The Heritage Foundation, Washington, DC..............    10

                                    APPENDIX

    Prepared Statements:
        Doug Hoell, Director, North Carolina Division of Emergency
          Management, Raleigh, N.C...................................    22
        Gene Tighe, Owner, GT Fabrication, Inc., Pittson, PA.........    28
        Howard Kunreuther, Ph.D., James G. Dinan Professor of
          Decision Sciences & Public Policy, Co-Director Risk
          Management and Decision Processes Center, University of
          Pennsylvania, Philadelphia, PA.............................    31
        David B. Muhlhausen, Ph.D., Research Fellow in Empirical
          Policy Analysis, The Heritage Foundation, Washington DC....    38
    Questions for the Record:
        None
    Answers for the Record:
        None
    Additional Materials for the Record:
        ``Redesigning Flood Insurance,'' by Erwann Michel-Kerjan and
          Howard Kunreuther..........................................    45
        ``People Get Ready: Disaster Preparedness,'' by Howard
          Kunreuther and Erwann Michel-Kerjan........................    46

      EXAMINING THE ROLE OF GOVERNMENT ASSISTANCE FOR DISASTER VICTIMS: A
                              REVIEW OF H.R. 3042

                                  ----------

                          THURSDAY, FEBRUARY 16, 2012

                  House of Representatives,
                   Committee on Small Business,
                       Subcommittee on Economic Growth,
                                        Tax and Capital Access,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 10 a.m., in room
    2360, Rayburn House Office Building. Hon. Joe Walsh (chairman
    of the subcommittee) presiding.
        Present: Representatives Walsh, Barletta, Chabot, and
    Schrader.
        Chairman Walsh. Good morning, everyone. Welcome. I call
    this hearing of the Committee on Small Business, Subcommittee
    on Economic Growth and Access to Capital to Order.
        I would like to thank all of our witnesses for being here
    today. We look forward to your testimony. Let me give just a
    very brief opening statement.
        How to help our fellow citizens in their time of need is
    one of the most important questions we deal with as a society
    and as it relates to government. In the aftermath of a
    disaster, when a storm takes everything you have, the true test
    of resiliency is revealed. After a storm, homeowners and
    businesses grab a broom, a power washer, a chainsaw, and get to
    work trying to rebuild their lives. To do this disaster victims
    need money to rent a generator and purchase construction
    supplies. One thing they do not need is endless paperwork
    delays and confusing directions on how to obtain assistance.
        Under the current system, both state and federal resources
    are mobilized to respond to a disaster where they work hand-in-
    hand to conduct search and rescue operations, offer immediate
    food and shelter needs, and long-term rebuilding assistance. To
    help rebuild, the government offers both subsidized and
    unsubsidized financial assistance. This allows our neighbors
    access to funds when they need it most.
        Today we are here to try to answer a couple important
    questions. Is this assistance appropriate? And if so, how can
    it be given most effectively? How do we balance the American
    ideal of self-reliance with the practice of we as taxpayers
    paying to ensure the extra resources are available for those
    trying to rebuild.
        To help us answer these questions we have a distinguished
    panel of witnesses here today. These witnesses will inform us
    about their experience in the aftermath of a disaster and
    provide their thoughts about the proper role of government. I
    look forward to this discussion today and I now yield to the
    ranking member for his opening statement.
        Mr. Schrader. Thank you, Mr. Chairman.
        In today's era of modern technology and all the comforts we
    enjoy we sometimes think we are beyond Mother Nature's reach
    and we get reminded again and again, whether it is Katrina or
    Irene, that indeed Mother Nature can make a huge difference in
    each and every one of our lives. This disaster, Hurricane
    Irene, of course, started down in North Carolina, came all the
    way up the coast through New York and into New England causing
    unprecedented amounts of damage to people's homes and America's
    small businesses. The recovery tools that we have at our
    disposal in SBA for small businesses and homeowners are only
    effective if our agency utilizes them correctly. In the wake of
    Irene, the SBA deployed 398 disaster assistance workers to
    staff 160 recovery centers all up and down the Eastern
    seaboard.
        As of the beginning of this month, SBA issued over 183,000
    loan applications and already approved 8,000 loans, totaling
    over $200 million. Most of these loans were processed within
    the agency's target timeframe of 10 days or less. And that was
    a big improvement over Hurricane Katrina. And while the
    response I think was a step in the right direction, we also
    have some improvements that need to happen. For the victims of
    Irene only one out of every three applications for assistance
    was approved. That is lower than the Hurricane Katrina rate of
    51 percent. It is also about half of the agency's historical
    approval rate so we would like to understand that. And despite
    the fact this disaster happened over eight months ago, only 60
    percent of the funds that have been allocated have actually
    been dispersed. So that amounts to about $77 million of actual
    assistance that has found its way into the pockets of disaster
    victims so far.
        So these figures do suggest we need some reforms. We look
    forward to hearing from the panel about what form those should
    take. It is, I think, for those reasons that H.R. 3042, the
    Disaster Loan Fairness Act has been introduced. It is hopefully
    going to address some of the shortcomings that we have
    identified so far. We will play off of what we hear today from
    our witnesses about any other improvements that need to happen.
    And I think it is just really bottom-line important to
    understand that it is the small businesses that are job
    creators here for our country right now. The Northeast and
    Eastern seaboard are a big part of this great country's job
    creation machine that we want to get back on track, and a lot
    of businesses, you know, 40, 60 percent of them do not recover
    after a disaster in the small business area. So we really need
    to make sure these programs work. Between Katrina and Irene,
    unfortunately we have gotten some great lessons to hopefully
    learn from. We do not want to learn away again in a bad way. I
    am looking forward to hearing this hearing help us understand
    things a little bit better.
        And with that I yield back, Mr. Chair.
        Chairman Walsh. Thank you, Mr. Schrader.
        I understand that there is a request for Mr. Barletta from
    Pennsylvania, a member of the Small Business Committee, to join
    us for today's Subcommittee hearing. If that is okay with the
    ranking member, welcome, Mr. Barletta.
        Let me just quickly go over the rules for our witnesses. If
    any of the other committee members have an opening statement
    prepared I ask that it be submitted for the record. You will
    each have about five minutes to deliver your testimony. The
    light will start out as green. When you have one minute
    remaining the light will turn yellow, and finally it will turn
    red at the end of your five minutes. Do your best to keep it
    within that five minutes.

    STATEMENTS OF DOUG HOELL, DIRECTOR, NORTH CAROLINA DIVISION OF
        EMERGENCY MANAGEMENT, TESTIFYING ON BEHALF OF NATIONAL
        EMERGENCY MANAGEMENT ASSOCIATION; GENE TIGHE, OWNER, GT
       FABRICATION, INC.; HOWARD KUNREUTHER, PROFESSOR, WHARTON
    SCHOOL, UNIVERSITY OF PENNSYLVANIA; DAVID B. MUHLHAUSEN, PH.D.,
      RESEARCH FELLOW IN EMPIRICAL POLICY ANALYSIS, THE HERITAGE
                               FOUNDATION

        Chairman Walsh. Let me introduce our first witness today,
    Doug Hoell, director of the North Carolina Division of
    Emergency Management. In this position Doug is responsible for
    disaster response for the state of North Carolina. Doug began
    his career in emergency management in 1976 and worked for the
    Raleigh Wake County Emergency Preparedness, the North Carolina
    Division of Emergency Management and FEMA. Doug became
    assistant director of the North Carolina Division of Emergency
    Management in 1998 and director in 2005. Mr. Hoell is
    testifying on behalf of the National Emergency Managers
    Association. Welcome. I look forward to your testimony.

                        STATEMENT OF DOUG HOELL

        Mr. Hoell. Thank you, Chairman Walsh. Good morning to all
    of you. And thank you Ranking Member Schrader for the
    opportunity to talk and to all the distinguished members of the
    Committee or the Subcommittee.
        My name is Doug Hoell. I am director of the North Carolina
    Division of Emergency Management, and again, thank you for the
    opportunity to present testimony today on behalf of the
    National Emergency Management Association.
        NEMA represents the state emergency management directors of
    all 50 states, the District of Columbia, and the U.S.
    territories. I have included my full statement for the record,
    so I will give you a quick overview now and look forward to
    answering your questions.
        While not a traditional first responder agency, the Small
    Business Administration is a critical partner to states and
    localities affected by a wide variety of disasters. Following a
    disaster, Small Business Administration has the capability to
    mobilize staff from the Office of Disaster Assistance to begin
    disseminating public information about what services the SBA
    can provide to supplement many long-term federal recovery
    programs.
        While a major disaster declaration is awarded by the
    president, affected citizens begin the registration and
    eligibility determination process through FEMA. The entry point
    to FEMA assistance is through FEMA's individual assistance
    program. The first step in that process is to have the
    applicant complete an application for a Small Business
    Administration loan. An applicant may have insurance, but it
    may not be enough to return them to their pre-disaster standard
    of living. Often, citizens encounter damages and devastation
    from disasters which are ineligible under FEMA disaster
    recovery programs. SBA loans can help return a damaged home to
    its pre-disaster condition, including implementation of
    mitigation measures.
        Following Hurricane Irene last year in North Carolina, SBA
    loaned more than $43 million to eligible North Carolina
    citizens. Due to the importance of small business in a local
    community, SBA's Economic Injury Disaster Loan is a program
    that supports the whole community approach to disaster
    recovery. The Economic Injury Disaster Loan affords business
    owners continuity of operations by loaning to eligible
    businesses the funds to meet their ongoing obligations and to
    pay ordinary and necessary operating expenses.
        SBA was a critical resource in the state of North Carolina
    when a landslide on U.S. Highway 129 impeded traffic and
    prevented the day-to-day operations of business owners between
    North Carolina and Tennessee. The Economic Injury Disaster Loan
    Declaration made it possible for the businesses in both states
    to continue critical trade and accessibility functions.
    Programs designed to help disaster survivors are useless unless
    citizens understand the options available to them. SBA does a
    considerable amount of work in communities around the country,
    making personal contacts with Chambers of Commerce, with
    congressional offices, with state and local elected officials,
    with business organizations, and with community groups. SBA and
    state agency public information officers develop press releases
    announcing availability of disaster loans in affected areas.
        Media outlets are also informed of the declaration, and
    they are enlisted to alert the affected citizens to every
    opportunity to seek and receive assistance for their disaster
    recovery. In testimony given by the General Accounting Office
    before this Committee back in November 2011, William Shear
    referenced steps SBA continues to take to improve their
    marketing and outreach efforts. We look forward to continuing
    dialogue with SBA and are encouraged by their increased
    attention to the needs of individuals and communities.
        As a profession, emergency management stakeholders have
    focused a great deal on partnerships, which help us achieve a
    resilient and sustainable nation. FEMA administrator Craig
    Fugate has stressed the importance of the whole of community,
    and FEMA's position as a member of a much larger team to
    support the response and recovery to all hazards. There is no
    doubt that the SBA Office of Disaster Assistance is a vital
    member of the emergency management team, and we value their
    contributions to our communities. The continued challenge of
    protecting the nation from a variety of hazards within the
    reality of fiscal uncertainty elevates the importance of
    cooperation throughout the emergency management community and
    makes leveraging resources from across the federal family even
    more critical. Positive relationships between federal, state,
    and local government stakeholders are the lynchpin to
    coordinated recovery efforts supporting resilient individuals,
    prosperous businesses, and thriving economies.
        Thank you for the opportunity to testify today and your
    continued attention to disaster assistance matters under your
    purview. Your attention and leadership in this matter are
    greatly appreciated, and NEMA remains a ready resource for the
    Committee as you tackle tough issues of recovery from
    disasters.
        Chairman Walsh. Perfect timing, Mr. Hoell. Thank you for
    your testimony.
        Mr. Hoell. You are welcome.
        Chairman Walsh. I would now like to yield to Mr. Barletta
    from Pennsylvania to introduce our next witness.
        Mr. Barletta. Thank you, Mr. Chairman. And thank you for
    allowing me to participate today.
        I am pleased to welcome Mr. Gene Tighe, a constituent and
    small business owner from Pittstown, Pennsylvania. Mr. Tighe
    manages sales for his family business, GT Fabrication, Inc., a
    precision metal fabricating business serving clients around the
    United States. His family has run the company for over two
    decades and I am proud to say they have a reputation for
    reliability, precision, quality, and competitiveness throughout
    the entire industry. Despite strong competition from abroad,
    this American owned and operated business continues to serve
    our citizens despite the tough economic climate and the
    devastating flooding that ravaged Pennsylvania and the
    Northeast. I am glad Mr. Tighe accepted the Committee's
    invitation to hear what his family and company went through in
    order to reopen after the flooding. His testimony will
    contribute to the debate over the role of the federal
    government in providing disaster relief to our nation's
    citizens when they are most vulnerable.
        Thank you, Mr. Tighe.

                        STATEMENT OF GENE TIGHE

        Mr. Tighe. Thank you. Mr. Chairman, Ranking Member
    Schrader, thank you for inviting me here today to tell my story
    about the flood caused by Tropical Storm Lee.
        My name is Gene O. Tighe. I manage sales for our family
    business, GT Fabrication, Inc., a precision metal fabricating
    and powder coating business. My parents, Gene and Debbie Tighe,
    started the company more than 20 years ago. My sister Tracey
    and I have joined the family operation.
        Our company has had its ups and downs. We supplied large
    clients, like Pride Mobility. However, like so many other
    manufacturers, we lost many of our main customers to overseas
    competitors. We have not given up; we have adapted. We widened
    our customer base and produced more products in new industries.
    Our family business has survived many hurdles, but most
    recently natural disaster threatened to close our doors.
        My story begins on September 7, 2011, at 2 in the
    afternoon. Projections showed the Susquehanna River would rise
    to 35 feet by 3 p.m. the next day. Just two hours later,
    predictions changed, bumping it up to 38 feet by 3 o'clock. My
    family and our employees immediately knew our company would
    face heavy damages because our building is located 100 yards
    away from the Susquehanna River in Pittstown, Pennsylvania.
        We have been flooded before. We knew that this time we
    could not move some of our equipment. We had six machines in
    the excess of 25,000 pounds, so we started moving smaller
    equipment, materials, computers, and files. We worked through
    the night to move materials up to our back building. When our
    back building was built four feet higher because of past
    floods, we stored materials on pallet racking to try to keep
    them out of harm's way. After working through the night, by
    September 8th at 8 a.m., the water crept into our parking lot.
    By 9 a.m., we had a foot of water in our downstairs building.
    We did all we possibly could do and exited the facility. Water
    levels were rising at a breakneck speed.
        In four previous floods, the river has never risen so
    quickly. Millions of dollars of equipment left in the building
    and we knew we were in trouble. Despite paying $15,000 for
    flood insurance every year, we knew we could only expect to
    collect a maximum half million dollars in contents and a half
    million dollars in building damages. By the time the
    Susquehanna River crested at 1 a.m., September 9th, all I could
    see of GT Fabrication was the very top of our building.
        My family and I were devastated. Our 30 employees were
    devastated. We did not know if our family business could
    survive this, and that is a horrible feeling. The watermark on
    GT Fabrication's building was recorded at 15 feet. On our back
    building, which was raised 4 feet to serve as a precaution
    against flooding, the watermark was recorded at 9 feet.
        On September 10th, almost two days after flooding began,
    the water finally receded to 12 inches. I was the first one to
    enter the building to see the damage. As soon as I got into the
    building my heart sank. The destruction that the flood caused
    was by far the worst it has ever been. I really could not
    believe what I was seeing. Simply put, it looked like a bomb
    went off.
        My family, friends, and several of our employees were
    waiting outside for me to tell them the news. All I could say
    to them was it is bad but we will bounce back. But they had no
    idea. I pulled my father aside to warn him that we had a lot of
    work ahead of us if we wanted to stay in business. I could see
    defeat in his eyes. The successful business he had built from
    the ground up was wiped out just like that. The next day we did
    the only thing we knew to do; we got to work. We ordered three
    40-yard trash hoppers, a three-phase generator, power washers,
    brooms. We spent tens of thousands of dollars to start the
    cleanup process. We had the dry gut clean both buildings but
    almost everything was destroyed.
        At the exact same time we also had to do damage control
    with our customers. We had to outsource all of our work to
    finish our pending orders. We set our customers up with our
    other vendors, our competitors, until GT Fabrication could get
    back on its feet. Additionally, I knew that we desperately
    needed financial help because we were not doing any business
    and we were draining the company's funds on cleanup efforts.
        I spoke to a Small Business Administration Disaster
    representative, who told me to quickly complete the application
    for a disaster loan. As soon as I could fill out the documents
    I brought the paperwork to the SBA Disaster Response site. The
    SBA staff looked it over and told me I was missing a few
    documents. I immediately brought the missing documents back
    down to the disaster site. The SBA official even complimented
    me on my thorough completion of the application.
        We had to throw almost $1 million worth of supplies and
    demolish the inside lobby and office. After almost three weeks
    of backbreaking cleaning, an SBA inspector visited GT
    Fabrication to assess the damages and take pictures. A few days
    after the inspector's visit we received an SBA Disaster
    Assistance packet which stated they wanted us to provide
    monthly sales figures for the past three years. Additionally,
    SBA noted that they again needed Tax Form 8821. More than a
    month after filling our original application out, we received
    an SBA loan request to complete Tax Form 8821 for the third
    time. This time we included a letter stating we had completed
    this document twice previously. When you are in disaster mode
    working 15 hours a day, 7 days a week to save your family
    business, you do not have time to fill out all this paperwork,
    especially after many of our records were destroyed by 15 feet
    of water during the flood. Regardless, we provided the SBA with
    information that they needed as quickly as possible. It
    actually seemed as though the SBA was trying to purposefully
    discourage us from applying for an SBA loan.
        We had to find something else in the meantime. GT
    Fabrication was fully not back to business and we had not yet
    received an SBA loan. The company bank account was running dry.
    Then, Pennsylvania state senator, Senator Yudichak called us to
    tell us about the Luzerne County Flood Recovery Loan Program.
    This is a $4 million low interest loan program that had a
    borrowing limit of $100,000. The program applies a 1 percent
    interest rate with no borrower's fee. This quick, easy loan
    saved GT Fabrication by providing us an infusion of cash that
    we so desperately needed.
        Today, GT Fabrication is back in business, though we are
    only operating at 70 percent. I have been able to get almost
    two-thirds of my employees back to work. We look forward to
    getting back to 100 percent and growing our business so we can
    do our part in turning around our local, state, and national
    economy. It is my belief that small businesses like ours will
    add jobs to the U.S. economy, but I am disappointed that the
    federal government has not provided more effective assistance
    to small businesses at this time of greatest need. Our
    experience was marked by bureaucratic red tape and an
    ineffective disaster loan program.
        The City of Pittstown has been very helpful retaining
    consultants to help us relocate to a larger facility and a safe
    distance from the river, and Luzerne County provided us the
    loan that saved our business. But sadly, the federal
    government, in my view, failed. I hope that my story can shed
    some light on the problems that other small businesses face.
        I want to thank the members of this Committee, particularly
    Congressman Barletta, for working to improve the effectiveness
    of the SBA Loan Programs. Thank you again for the opportunity
    to be here today, and I will be happy to answer any questions.
        Chairman Walsh. Thank you, Mr. Tighe. Thank you for that
    powerful, powerful testimony.
        I would now like to recognize Ranking Member Schrader, who
    is going to introduce our next witness.
        Mr. Schrader. Thank you, Mr. Chairman.
        Howard Kunreuther, James G. Dinan Professor of Decision
    Sciences and Public Policy at Wharton School, University of
    Pennsylvania. In addition to his research, writing, and
    teaching, he has also been co-director of the Wharton Risk
    Management Decision Process Center, where he works on improving
    the roles of public and private sectors in reducing losses from
    natural disasters and aiding the recovery process following a
    catastrophic disaster. Thank you for joining us.

                     STATEMENT OF HOWARD KUNREUTHER

        Mr. Kunreuther. Thank you very much, Representative
    Schrader and Chairman Walsh, and other members of the
    Committee.
        I appreciate the invitation to testify here on this
    particular bill. And I do want to make a point right at the
    outset that I am very sympathetic to what Mr. Tighe has said
    with respect to the challenges and problems that he faced. But
    I want to raise really three points in my testimony.
        The first is why is the proposed legislation to extend SBA
    disaster loans at 1 percent to cover both disaster losses and
    other outstanding debts likely to increase future losses from
    natural disasters? Second, can we utilize mechanisms, like
    insurance, coupled with other policy tools, to reduce future
    losses so that the SBA can play a secondary role in providing
    funds for disaster recovery? And there is no question SBA may
    have a role to play. Third, how can the National Flood
    Insurance Program, which is now up for renewal and discussion,
    be modified so as to set a tone as to ways that the public and
    private sectors can work together to reduce losses from floods
    and other disasters like storm surge from hurricanes?
        So those are the three points I would like to emphasize.
        Let me talk about the first point and raise two issues. Dr.
    Muhlhausen may be saying more about one of them.
        With respect to the SBA provision of 1 percent loan, it
    creates a moral hazard problem in the following sense. It
    encourages people to locate their home and businesses in hazard
    prone areas while at the same time reducing the economic
    incentive to purchase insurance and invest in mitigation
    measures prior to a disaster. So we have to be aware of the
    fact that if you are going to get very low interest loans
    people may say I do not need to be protected.
        The proposed program also has the potential of creating a
    situation where people actually may be better off after the
    disaster than before financially. If you receive a 1 percent
    loan for retiring your old debts as well as your disaster
    losses, the actual payments would be lower than they were
    before the disaster if you had previous SBA loans. I have an
    example in my testimony to highlight this point.
        Let me turn to the second point on the role of insurance
    and other policy tools to reduce future losses. Insurance has
    three basic purposes that it can actually aid in this process.
    One is it provides a signal of risk to individuals and firms in
    their current location. If you have premiums that reflect risk,
    then you will actually be able to know whether or not you have
    a very severe hazard. Second, it will encourage property owners
    to invest in loss reducing measures. If you can get a premium
    discount--because you should if you invest in something that
    reduces your losses--then you may be in a position where you
    will be encouraged to do so. And the third point is insurance
    supports economic resiliency. Insured individuals and firms can
    make a claim to obtain funds to help pay for the loss caused by
    the catastrophe. I recognize that the Flood Insurance Program
    may have to extend coverage limits.
        Let me provide two guiding principles that have reflected
    our work in this area with respect to insurance. Principle No.
    1 is that insurance premiums should reflect risk for the
    reasons that I have stated. So people have a signal of how
    hazardous it is and they will want to invest in mitigation
    measures. Principle No. 2 is just as important and it is called
    equity and affordability. When you have premiums that reflect
    risk, there may be people who need special treatment. They
    should not be given a subsidized insurance premium; they should
    be given an insurance voucher, like a food stamp. It enables
    one to still see what the premium is on the basis of the risk,
    and have an opportunity to obtain a premium discount if they
    invest in mitigation measures.
        I would like to put forward a few ideas for the National
    Flood Insurance Program reform which have been discussed with
    Congress that would actually try to move in that direction. The
    first is multi-year insurance not tied to the individual but to
    the property because people cancel their policies if they turn
    out that they have not received a claim. It is hard to convince
    people that the best return on an insurance policy is no return
    at all. You should celebrate not having a loss.
        The second point is we would want insurance vouchers for
    those needing special treatment. Third, you may want to
    consider required insurance for property owners because many
    people do not have policies. And the fourth point is multi-year
    loans for mitigation. If the mitigation measure to reduce the
    losses is a cost effective one, the actual cost of the loan may
    be actually less than the premium reduction one receives, so it
    will be financially attractive for people to invest in
    mitigation. And finally, well-enforced building codes. Having
    said all of that, there certainly will be a role that the SBA
    will have to play after a disaster, but the emphasis should be
    to place more attention on reducing these losses beforehand.
        To conclude, our country has entered a new era of
    catastrophes. Our exposure is growing and the damage from
    disasters over the next few years is likely to be more
    devastating than what we experienced during this past decade.
    When the next catastrophe occurs, the federal government will
    very likely come to the rescue again. If the public's response
    to recent disasters is an indicator of their future behavior,
    new spending records will be spent with respect to federal
    assistance unless steps are taken to reduce future losses, and
    they should be undertaken now. And so with all due respect to
    all of the challenges after a disaster I would like to at least
    argue that we better try to do more to prevent these losses
    from occurring.
        Thank you very much.
        Chairman Walsh. Thank you, Doctor.
        Our final witness that I have the pleasure of introducing
    is Dr. Muhlhausen, research fellow in Empirical Policy Analysis
    at The Heritage Foundation here in town. Dr. Muhlhausen joined
    Heritage in 1999 after serving on the staff for the Senate
    Judiciary Committee. He holds a doctorate in Public Policy from
    the University of Maryland, Baltimore County, and a bachelor's
    degree in Political Science and Justice Studies from Frostburg
    State University. Dr. Muhlhausen is also an adjunct professor
    at George Mason University.
        Welcome, sir. You have five minutes.

                    STATEMENT OF DAVID B. MUHLHAUSEN

        Mr. Muhlhausen. Thank you. My name is David Muhlhausen. I
    am a research fellow in Empirical Policy Analysis in the Center
    for Data Analysis at the Heritage Foundation. I thank Chairman
    Joe Walsh, Ranking Member Kurt Schrader, and the rest of the
    Committee for the opportunity to testify today on the Disaster
    Loan Fairness Act. The views I express in this testimony are my
    own and should not be construed as representing any official
    position of The Heritage Foundation.
        After the president declares a major disaster, the Disaster
    Loan Fairness Act would set the interest rates for the Small
    Business Administration's Disaster Loan Program at 1 percent
    for eligible applicants. Unfortunately, as my testimony will
    illustrate, the Disaster Loan Fairness Act does not provide the
    necessary reform to our nation's disaster prevention and
    recovery programs.
        My testimony focuses on three deficiencies of the
    legislation. First, by providing more generous benefits, the
    legislation does nothing to reduce the overreliance of state
    and local governments on the federal government for the
    provision of recovery assistance. Far too frequently the
    federal government has been the primary source of recovery
    efforts for natural disasters that are inherently localized in
    small geographic areas and do not rise to the level that should
    require action by the federal government. Increasingly,
    Americans are becoming overly dependent on federal assistance
    after natural disasters occur.
        Further, disaster assistance appears to have become a
    political tool because the number of disaster declarations is
    significantly higher in election years compared to nonelection
    years. Since 1996, the year President Clinton sought
    reelection, the number of disaster declarations issued by FEMA
    dramatically increased. The chart in my written testimony
    demonstrates this trend. The previous record of the most
    declarations in a year was set by President Clinton in 1996
    with 158 incidences. President Obama smashed this record with
    242 declarations in 2011. Given that 2012 is a presidential
    election year, I doubt this record is going to last very long.
    Essentially, this trend is the result of disaster responses
    that were once entirely local in nature and handled by state
    and local governments becoming nationalized and thus, the
    responsibility of the federal government.
        Second, with out-of-control spending surging and public
    debt threatening our nation's stability, Disaster Loan Fairness
    Act increases federal spending. Instead of practicing fiscal
    constraint, the legislation does not reduce the cost of future
    disaster recoveries. Reform should be focused on preventative
    measures that limit the cost of disasters. Contrarily, this
    legislation puts the federal taxpayer on the hook for more
    spending.
        Third, increasing the generosity of SBA disaster loans
    creates a moral hazard by providing greater encouragement for
    homeowners, renters, and businesses to avoid purchasing
    adequate disaster insurance because natural disasters are low
    probability events. Clearly, having adequate insurance before
    disasters occur is the responsible course of action. SBA
    disaster loans are intended to help applicants return their
    property to the same condition as before the disaster. The
    unintended consequence of this requirement is applicants are
    forced to rebuild in the same disaster-prone location. For
    example, instead of relocating out of a town sitting in a major
    flood zone, applicants are required to rebuild in the same
    exact location. Thus, applicants are still located in a high-
    risk area, preventing a long-term solution from taking place.
    While this dilemma exists with or without the passage of the
    Disaster Loan Fairness Act, the legislation only increases the
    incentive to rebuild in high-risk areas.
        In conclusion, the Disaster Loan Fairness Act is neither
    fair to the federal taxpayer, nor an effective reform of our
    nation's disaster prevention recovery policies. Instead of
    considering this legislation, Congress should focus on reforms
    that will make American more resilient to disasters and reduce
    recovery costs imposed on the federal taxpayer.
        That is all. Thank you.
        Chairman Walsh. Thank you, Dr. Muhlhausen for your
    testimony.
        Let me begin with just a couple questions. Mr. Hoell, Dr.
    Muhlhausen alluded to and as did Dr. Kunreuther alluded to the
    fact that federal government is seemingly taking more of the
    responsibility for disaster assistance away from the states.
    How would you respond to that? Good thing? Bad thing? And do
    you see the same sort of trend?
        Mr. Hoell. I would say to you that there are criteria that
    we have to meet for a presidential disaster declaration under
    the Stafford Act. And so when we have disasters that affect the
    state of North Carolina, we look to those criteria. There is a
    certain per capital cost, you know, to the individuals in the
    state of North Carolina. Our threshold for public assistance,
    for example, is over $10 million. And, you know, that is
    statewide. And then you have to meet the criteria on a county-
    by-county basis for a county to be declared. So that is on the
    public assistance side. On the individual assistance side more
    where the SBA would come to bear would be, you know, you have
    got to have numbers of people affected--businesses and people.
    And so again, I think that there are criteria that we have to
    meet.
        I favor the mitigation efforts. I think mitigation is a
    good thing but I would tell you that the mitigation program,
    the way it is established is a very slow process and it takes
    us two or three years probably to buy properties or elevate
    properties and things of that nature.
        Chairman Walsh. Has that criteria changed?
        Mr. Hoell. The hazard mitigation criteria? Or the criteria
    for federal declaration? Yes, it has. In fact, the figures keep
    going up and they just changed this year and in fact, went up a
    little bit higher. I do not know exact numbers. I am certain we
    can get them for you if you like.
        Chairman Walsh. Would you concur with Dr. Muhlhausen that
    the trend is toward much greater federal assistance?
        Mr. Kunreuther. I think that is absolutely the case and I
    think that what Mr. Hoell indicated is an important direction
    one has to go. We really do have to encourage mitigation using
    the National Flood Insurance Program (NFIP) as a starting
    point. If you can reform the NFIP, mitigation can be a lot more
    attractive than it currently is. That is why the whole idea of
    long-term contracts, long-term multi-year insurance tied to the
    property, along with a multi-year loan, could change that
    situation radically so that people will then appreciate the
    fact that when they have a loan they do not have to necessarily
    pay the upfront cost. This is what discourages many homeowners
    from investing in mitigation. They will now know that they have
    a longer term payment and they will get something back in the
    context of an insurance premium. So it is in that direction
    that we would want to go. Then the SBA program would have a
    perspective that I think it does not have today. It is being
    used because people have not taken this action and everyone is
    then demanding assistance after the fact.
        Chairman Walsh. Dr. Muhlhausen, expand briefly on this
    notion of overly dependent on disaster relief. Why is that? How
    does that play out?
        Mr. Muhlhausen. Well, I think there is a political benefit.
    I think after each natural disaster occurs, I think
    politicians, unfortunately, are upping the ante, wanting to
    provide more disaster assistance to outdo what was done
    previously. And so I think Americans have come to expect the
    federal government to act.
        And I think Mr. Tighe's case is a case study that should be
    considered where state and local governments provide assistance
    to his business, not the federal government. And it sounds like
    his business is doing well and existing and is continuing and
    was relocated out of a flood plain. And if he did get an SBA
    disaster loan, would he have been allowed to relocate his
    business or would it still be sitting in the same area that was
    so prone to flooding?
        And so I think that disaster assistance first must be local
    in nature based on state and local governments, and then only
    rise to the level of federal assistance when it overwhelms the
    capacity of state and local governments to handle the
    situation. And so I think there has definitely been a normative
    change when the Stafford Act has been declared by FEMA.
        Chairman Walsh. Last question. Mr. Tighe, let us bring this
    to you. It is a fascinating policy discussion.
        Mr. Tighe. Yes.
        Chairman Walsh. But you can bring this home like nobody
    else in this room.
        Mr. Tighe. Yes.
        Chairman Walsh. Expand on what Dr. Muhlhausen said. I mean,
    is there--in your testimony you clearly expressed greater
    pleasure with the way that local and state reacted to you as
    opposed to federal. I mean, but as you now look back is there
    anything differently you would have or could have done?
        Mr. Tighe. At the time, I mean, if anybody has ever been
    through a disaster--we have actually been through four of them.
    By far this one was the worst. When you are in a disaster mode
    you really are not thinking about filling out paperwork and
    doing this and doing that, but also in the same breath you have
    to be very conscious of how much money you are pulling out of
    your bank account before you go below the zero line. You know,
    at the time I went to the local Chamber of Commerce. I spoke to
    a SBA disaster official. He told me to fill it out and get it
    in. You know, I was a little leery about the 6 percent loan
    but, you know, I said would it be good for me to just get in
    the system? He said absolutely. Get in the system and then, you
    know, if something happens down the road, you know, we will
    look at it.
        My biggest problem with them was just the communication
    back and forth. You know, they have had me fill out the same
    documents four or five times. And then, you know, at the end of
    the day, you know, we were draining our bank account. I had to
    go somewhere else. The Luzerne County Flood Recovery Program, I
    mean, it was not enough money by far; it was very little but it
    did give us a quick infusion of cash. And we were able to get
    back in business. And like I said, we are not back in business
    by any means. Seventy percent, mostly powder coating and some
    manufacturing, but I have a million dollars worth of machines
    in that building and, you know, I have been trying to get
    relocated for years. And, you know, I just keep getting
    stonewalled. I mean, obviously I would like not to be flooded
    ever again. You know, we have a 35,000 square foot building
    with machines that weigh 25,000 pounds. You would have to give
    me two weeks to move that equipment. I need cranes to come in.
    I need riggers to come in. When I find out the day before that
    the river is going to flood, there is nothing I can do. My
    hands are tied.
        So, I mean, you know, going forward I think, you know, the
    state did help us out but, you know, if I was able to get the
    SBA loan for a disaster, I mean, we are an established company.
    We have been in business for over 20 years.
        Chairman Walsh. If you had gone to your local bank do you
    know what your interest rate would have been?
        Mr. Tighe. I do not know exactly but I think it would have
    been around the same.
        Chairman Walsh. Okay. Great. Thank you.
        Mr. Schrader.
        Mr. Schrader. Thank you, Mr. Chairman.
        Sorry about what happened to you. That is a business
    person's worst nightmare.
        Mr. Tighe. Thank you.
        Mr. Schrader. Not being able to get out of that.
        Mr. Hoell, given some of the comments from Mr. Tighe on
    this communication issue with SBA and having to fill the same
    forms out several times, can you comment on why that would even
    happen?
        Mr. Hoell. You know, it is hard to say. The Small Business
    Administration has been a good partner with us and they have
    serviced a lot of people in the state of North Carolina. In
    fact, after Hurricane Irene, over 19,000 people made
    application to the Small Business Administration and received
    $43 million in loans. So I cannot tell you that we have had a
    lot of difficulty with the paperwork process.
        Mr. Schrader. If you were to have difficulty, is there a
    mechanism? You know, it is probably personality-driven in the
    real world. Do you have a mechanism? Does SBA to your knowledge
    have a mechanism to deal with that sort of thing so that if a
    person in the middle of a disaster says, ``Man, I am filling
    this form out again,'' they can call someone or they can get
    somebody up the food chain, if you will?
        Mr. Hoell. When we have a disaster there are community
    outreach people that work for the Federal Emergency Management
    Agency and SBA has people that also are out there in the
    community outreach to deal with people who are having
    difficulty. You know, but the challenge is, like Mr. Tighe
    says, he is busy trying to recover his business and he may not
    have the time to engage with them, you know, in more
    conversation or more paperwork that they have to deal with. But
    there are people who are trying to address the needs of the
    disaster victims out there.
        Mr. Schrader. Not well enough.
        Mr. Tighe, do you want to comment on that?
        Mr. Tighe. Yes. I actually talked to SBA field
    representatives. I have talked to SBA staff members. As a
    matter of fact, I went out of my way to talk to them and ask
    them why I was filling this 8821 Tax Form out so many times.
    And they could not answer the question.
        And the same thing with I got a letter from them from Texas
    and, you know, it was postmarked for Monday. It was due back in
    their office on Sunday. Mail does not run on Sunday. Seven days
    I have got to get it. I asked the lady, you know, can you
    explain to me how I am supposed to do this? And she says----
        Mr. Schrader. And why seven days?
        Mr. Tighe. Yes. Exactly. And she said, ``I am sorry. That
    is just the way it is.''
        Mr. Schrader. All right.
        Mr. Tighe. So we kind of get straight answers. You know,
    they do not really want to get into it. And usually when you
    ask somebody else they say, well, I do not know.
        Mr. Schrader. Yes. Ask the next guy.
        Mr. Tighe. Yes. Ask the next guy.
        Mr. Schrader. Let us talk about the moral hazard issue.
    That is something I am concerned about and I think that, you
    know, what is the even proper role between SBA and flood
    insurance? I mean, SBA would be a super disaster assistance,
    when things go beyond the norm, and obviously our flood
    insurance programs are not doing what they should be doing and
    we do not want to give a very low--we all on this panel are
    worried about our debt and deficit at the federal level and so
    we are very conscious about the cost of this particular piece
    of legislation potentially.
        So what is the balance, if you will? I will be curious,
    both Dr. Kunreuther and Dr. Muhlhausen on what is the right
    balance? What is the role of the SBA versus flood insurance?
    What specific mitigation changes do we need to make in either
    program in your opinion to be more effective? And what is the
    magic interest rate that gets the right point to avoid moral
    hazard?
        Mr. Kunreuther. Well, first I do want to say before I
    respond to that, the sympathetic aspect that we have for your
    particular position. And I think a lot of the work that we are
    doing is very much in the spirit of the question that you are
    raising. To the extent that one can take steps beforehand, even
    in the sense of having enough insurance so that you would be
    protected against the particular losses that one has, that is a
    very important element. The SBA may have to come in at the end
    of the day to provide disaster relief for those who need
    special treatment. And the question of the interest rate is an
    important one for people who can get credit and who may have
    enough income. You may want to have a different interest rate
    which is the current policy for ones who actually are in
    special need.
        I think Representative Schrader, the question you are
    asking is the central one with respect to what has to be done.
    Where do you find mitigation coming into play? Where do you
    find insurance coming into play to avoid a number of problems
    that we are hearing from Mr. Tighe and from others who suffer
    these losses? If you can somehow make mitigation attractive
    enough, if you can do things that let people understand, let
    businesses understand and residents understand that there are
    very good reasons for doing this. The moral hazard problem is
    that victims are not going to get the kind of federal relief
    that would otherwise be forthcoming that Dr. Muhlhausen
    mentioned in his testimony and that we have lots of data to
    suggest. In a presidential election you know that moreso than
    at other times you are going to have an enormous amount of
    support. We all have sympathy after a disaster. As we are
    concerned about being in that situation.
        So our feeling is that if you can take the steps
    beforehand, if you can recognize that insurance has a vital
    role to play in terms of letting people not only know about
    what the risk is but at the same time rewarding people for
    taking action to reduce their loss, then I think we can stem
    these losses from natural catastrophes.
        The other point I would want to make is that the
    affordability issue is critically important here. So that
    having a voucher, like a food stamp, that is designated for
    insurance, for people in special need is central to making this
    work for political reasons and for equity and efficiency
    reasons. Let me give you just two examples.
        The first is that if you have a better flood map or you
    find a dam or levee is decommissioned, there is a resistance to
    these changes by Congress because they feel their constituents
    will have to pay higher premiums. We would say let everyone
    know what the insurance premium is that reflects the risk, but
    give these individuals an insurance voucher to recognize that
    now you are increasing their premiums. The voucher could be
    decreased over time but at least these communities will have
    better flood maps and a better notion of what the risk is. The
    same thing would happen with low income people, if Congress
    raises the flood insurance premium to reflect the risk, one
    needs a voucher for special treatment.
        The last point I will make on the mitigation side. If you
    have a voucher and a person still invests in a mitigation
    measure, they still should get a premium discount. Just because
    they have a voucher, there is no reason why they should not be
    rewarded for reducing the losses. The voucher was given for
    equity and affordability. If at that point a homeowner or a
    business says we still want to mitigate, there is every reason
    to want to reward it with a premium discount and with a long-
    term loan to encourage it. So it is on those directions that we
    believe you can address the moral hazard problem in a way that
    will be effective from the point of view of businesses like Mr.
    Tighe's and homeowners who are living in these hazard prone
    areas.
        Mr. Muhlhausen. I think Professor Kunreuther's policy ideas
    are very encouraging and I think they need to be looked into at
    a much greater depth. Right now I cannot sign off on them but I
    am very enthusiastic about exploring his ideas more and working
    with him in the future.
        What I do think is that premiums should reflect risk. And
    this means that there should be regulatory reform on the
    federal and state level. And that is one of the first steps to
    get us to a solution. For affordability, I think some of these
    affordability solutions such as these vouchers would be best
    worked at the local level since most disasters are inherently
    occurring in small geographic areas. They are localized and can
    be best dealt with in the first place by state and local
    governments. And I think they best know their needs and maybe
    the states can set up their own voucher programs. And whether
    or not there will be another layer with the federal government
    providing such assistance is something that may be explored.
    But I think on a fundamental level I think these solutions need
    to come from the ground up before they come from the top down
    from the federal government.
        Mr. Schrader. Thank you.
        Chairman Walsh. Quickly.
        Mr. Kunreuther. I am very sympathetic to what Dr.
    Muhlhausen said except that since the Flood Insurance Program
    since it is a national program. Vouchers may have to come from
    FEMA or some government organization. So that would be the one
    exception.
        Chairman Walsh. Thank you. Let me turn to Mr. Barletta.
        Mr. Barletta. Thank you very much.
        Let me just go back for a few moments and tell you what I
    experienced during this latest flood, Hurricane Irene, and
    Tropical Storm Lee, which was really a double-barrel disaster
    to our area. As I traveled throughout my district, I went from
    community to community, walked the streets, and it was the same
    scene everywhere I went. Mr. Tighe's story here is very
    familiar but it was even further than that actually. I watched
    as--I stood on porches and watched grown men cry. Literally
    cry. I have had senior citizens tell me that they are not going
    back into their homes again. I have had businesses telling me
    we are going to collect the insurance and we are done. We are
    not going back into business again. We are not going to go
    through this again. We cannot do this anymore.
        See, in my part of the state, in Pennsylvania, in
    Northeastern Pennsylvania, we have the highest unemployment
    rate in the state. And it sounds good here in Washington in
    this beautiful building to say, well, Mr. Tighe, just move. Go
    somewhere else. And when he does, what happens to the people
    that worked there in our area that already is experiencing a
    high unemployment? What happens to their jobs? What is the cost
    to the economy if he takes your advice and he goes somewhere
    far away so this does not happen again? Does that help or does
    that hurt?
        I have a couple questions. If you can look at those photos
    over there, that is much what I saw throughout my entire
    district. Now, I certainly do not believe that these people
    would move into an area like this so that they could take
    advantage of some government loan program that we are going to
    be offering. But I want to ask. The question is, Dr.
    Muhlhausen, do you believe that helping those folk would be
    politically motivating?
        Mr. Muhlhausen. I think upping the ante, making sure that
    federal assistance becomes more generous throughout the year is
    politically motivated.
        Mr. Barletta. No, I am asking, these folk right here, these
    are real people. These are real people. So do you think us
    coming in to help them is politically motivated? That I would
    say maybe these people would vote for me if I came and gave
    them help? Do you think that enters anybody's mind? When you
    are witnessing people carrying their life's possessions to the
    sidewalk to be hauled away--their memories, their pictures,
    memorabilia, things that have been given to them from
    generation to generation--do you actually believe that when you
    walk those streets that those folks--that political motivation
    would be the reason for trying to help them?
        Mr. Muhlhausen. No, I think there are people who come out
    of the woodwork to help their neighbors. I think that is good.
    I think local politicians, local programs can provide
    assistance. But I think the fact that we see that there is an
    uptick, a statistically significant increase in presidential
    disaster declarations during an election year, we know that
    some of this assistance is politically motivated. It is
    empirically demonstrated.
        Mr. Barletta. I am not talking about--this was not an
    election year. What about these folks?
        Mr. Muhlhausen. Well, I am sure we can always help them out
    and that is good.
        Mr. Barletta. Yes. Here is how we will help them out. Let
    me tell you how we will help them out. If you can get--you have
    a business and you can get credit somewhere else, this is what
    the United States will do and this is what SBA will do. We will
    help you out. If you can get credit somewhere else we will
    offer you a 6 percent loan. Now, you ask the question is the
    Disaster Loan Fairness Act fair to the taxpayers? Well, let me
    ask you. Do you think this is fair to the American taxpayers?
    In the last two years we gave Pakistan--Pakistan--$215 million
    for flood disaster relief. Did we insist that Pakistan--did we
    require them to have mitigation first before we use American
    tax dollars? Did we ask them do they have insurance before we
    give American tax dollars? Do you know what interest they are
    paying? Not 6 percent like we would have offered Mr. Tighe; 0
    percent. Zero percent. Is that fair to the American taxpayers?
    And do you know what the payback is? There is no payback. They
    do not have to pay it back.
        So I would tell Mr. Tighe if he wanted to move, maybe we
    want to say maybe you should move to Pakistan where we would
    have offered a 0 percent loan and you would not have to pay the
    money back. We are trying to keep manufacturers and people in
    business, sir. We are not trying to make a profit or say, well,
    maybe you are going to take advantage of it.
        We gave Japan $94 million for the recent tsunami and
    earthquake. We gave Haiti $838 million for disasters there. In
    fact, we gave $4.98 billion--billion dollars in humanitarian
    assistance.
        Now, we are all very proud of that because when disasters
    strike America is the first to help, and I am proud to say that
    I am an American and we do that. But sir, I believe we should
    be helping Americans first. Now, this loan disaster bill is not
    going to cost the taxpayers anything because I am offsetting it
    with aid, international aid, disaster aid, that would cover the
    cost. So should we not--my question is should we not help
    Americans firsts?
        Mr. Muhlhausen. I think flaws in our foreign aid system are
    an entirely different issue, and two wrongs do not make a
    right. So if our foreign aid system has questionable policies
    that is a separate issue for a separate hearing and actually a
    separate committee. But I will add that we should be
    compassionate to help people recover from disasters; the
    question is the best way to do it. And the best way is to have
    preventative measures, help people mitigate against future
    disasters. And the problem with the SBA program is that it
    presents a moral hazard that people--it is an incentive not to
    have adequate insurance. It is an incentive not to----
        Mr. Barletta. But you are not answering my question. Should
    we not, if we could, take the money from international disaster
    relief--before we help people who are affected by a flood in
    Pakistan, not help our own neighbors, our own friends, if this
    will not cost the American taxpayers? If a 1 percent loan--this
    is not a small business loan. We are not encouraging people to
    open up a risky business; we are saying your business has been
    lost or your home has been lost to no fault of your own. And if
    we could not have a cost directly on the taxpayers by
    offsetting it with international disaster aid, why would we not
    do that? I am just failing to miss--I understand what you are
    saying and I am all for mitigation. And many of the people who
    were affected here, sir, did not have flood insurance because
    they were told they were not in a flood plain.
        And do you know how long, Dr. Kunreuther, it takes before
    you see a check? I have constituents that have waited six
    months for an insurance check. Six months. What does that
    business do in the meantime? This sounds good here but when you
    are walking the streets and standing on the porches of these
    people it does not work. And how do you justify that we help
    other people before we help Americans?
        Mr. Muhlhausen. Nowhere in my testimony have I justified
    helping foreigners over Americans. So I think the question
    right here does not pertain to me. Maybe you need to ask
    Congress, your fellow congressmen, why aid is going to these
    foreign countries that you think are so questionable.
        Mr. Barletta. Well, can I ask you this then? If I told you
    today that the 1 percent CBO has suggested that there will be
    no affect on direct spending and that if we offset the
    discretionary cost by taking it out of international foreign
    disaster relief, if I told you that would you then think that
    this bill maybe is a good idea that we are helping Mr. Tighe
    stay in business and other people stay in business before we
    help someone else?
        Mr. Muhlhausen. I think Mr. Tighe stayed in business
    without SBA loans and he would have stayed in business without
    reforms.
        Mr. Barletta. If we can offset the costs?
        Mr. Muhlhausen. I think offsetting would be an improvement
    in a flawed bill. It is not control for the moral hazard issue.
    It does not account for the fact that we are having too many
    disaster declarations that should be not nationalized; they
    should be handled best by local governments.
        Mr. Barletta. But for those that are. For those that are.
    For these folks right here.
        Mr. Muhlhausen. There is a case where if there is a natural
    disaster that is so devastating that it is beyond the capacity
    of state and local governments, there may be a case for SBA
    disaster loans. But if it is just a tornado, if it is a flood
    that people knew they were in a flood high-risk area for years
    and they continued to have their business located there, that
    presents a moral hazard issue. The policy should be we should
    not encourage people to be in dangerous areas. We should
    encourage people to be in safe areas.
        Mr. Barletta. Well, when should they move? You know, there
    could be an earthquake in California, so should everyone move
    from California? People in the Midwest, you know, there could
    be a tornado. Should they move out? Where will we move?
        Mr. Muhlhausen. Well, in the case of hurricanes or, I mean,
    earthquakes you have to have good building codes to make sure
    the buildings can withstand a severe earthquake. So obviously
    you would not have people leave California. But if you are
    sitting in an area where it is easy to move, where if you can
    move one mile up the road and be completely safe from a flood,
    that is a better solution than continuing a business in an area
    that is going to get flooded repeatedly.
        Mr. Barletta. And for the folk who are not in a flood plain
    but still lose everything to a flood, I guess my point is, you
    know, there are people who lose their homes, their possessions,
    their businesses, and choose to take the insurance. Because we
    talked a lot about insurance today. And we seem to think that
    that is going to solve the problem. But if Mr. Tighe takes his
    insurance check and decides I am done, does that help America?
    Is there not a return to the American taxpayer by helping
    American businesses stay in business? Because of a disaster
    that was no fault of their own and will not cost the American
    taxpayers any money because we are going to take it from other
    countries that we are helping rather than----
        Chairman Walsh. Let me just interject, Mr. Barletta. Why do
    you not take a breath, Dr. Muhlhausen. Dr. Kunreuther, why do
    you not jump in here.
        Mr. Kunreuther. I think you are raising issues that are
    central to the challenges we face with natural disasters. When
    we focus, as you are with your photos and with our example, Mr.
    Tighe, on specific situations, we all want to help. We all want
    to do something to assist on equity and sympathy grounds. But
    Representative Barletta, I think that what Dr. Muhlhausen and I
    have been saying is can we learn lessens from Mr. Tighe's
    experience for others to think about these events beforehand in
    a way that will be attractive but where there are actions they
    are taking?
        And what I mean by that is if it turns out that you had
    higher limits, for example, on flood insurance, the private
    sector may be able to even come in.
        We finished a study suggesting the private sector can
    supplement the federal government on that. And so you have full
    protection if you were given incentives and we would have to
    talk with Mr. Tighe--and each individual business and home will
    be different on that--to take steps beforehand. In order to
    reduce it we would avoid a lot of the situations that you are
    talking about. And so I think we are all on the same page here.
        Mr. Barletta. Where we are different--and I agree with you.
        Mr. Kunreuther. Okay.
        Mr. Barletta. I agree with exactly what you are saying. And
    I am with you. I get it. Where the disconnect is is at the time
    when we do offer an SBA loan, I mean, we are surely not
    suggesting do away with SBA disaster loans. So if we do all
    that you say, and I agree we should. That is a good idea. That
    is good policy. But for the times when we do offer those SBA
    loans, why would we not offer a 1 percent loan and give
    Americans a chance and an opportunity to get back up on their
    feet, to decide I am going to stay in business, and offset that
    cost. We make good points here but if we are going to offset
    the cost, what I am saying is let us not help that business in
    Pakistan before we help somebody in Pittstown, Pennsylvania. I
    cannot justify that and there is no argument--I do not believe
    that as an American we can make--that we would rather help
    businesses somewhere in the world before we will help our own
    Americans here at home.
        Mr. Kunreuther. I am not going to get into the foreign
    domestic trade offs in my response.
        Mr. Barletta. It is part of this bill.
        Mr. Kunreuther. I understand the point and I think that
    there are reasons to ask where should our money go. But let me
    answer your point directly on the 1 percent loans. At the end
    of the day when there is a disaster we have to ask ourselves
    who is in need. There are likely to be businesses who could
    afford to take out a loan at a normal interest rate. However,
    affordability needs to be put on the table. If someone cannot
    afford the premium and it happens to be a small business that
    may be in real need, one has to consider whether there should
    be special treatment given to it.
        The SBA disaster loan program does exactly that today as
    you know. It happens to have higher interest rates, 4 percent
    and 8 percent, depending on whether there is an affordability
    problem. The question that you are posing is should you go down
    to 1 percent. That is a value judgment. It is a judgment that
    everyone has to make as to how much assistance we want to give
    and whether or not that money could have been spent better in
    other ways. I will not answer that question directly because I
    think at the end of the day we as a society, and Congress plays
    that role, has to judge at what point do we want to provide
    special relief. And it certainly could be argued that if it
    turns out someone would not be able to stay in business unless
    they were able to get a very, very small loan, a low interest
    loan, then you may want to go in that direction.
        But I think as a general policy, and I think that is what
    we are talking about here in the way of the legislation, it
    sets the tone that really argues for post-disaster relief
    rather than protection beforehand. And that is the reason I
    think Dr. Muhlhausen and I are making the comments we are. Let
    us take some steps beforehand rather than focus purely after.
        Mr. Kunreuther. And I appreciate the arguments that you are
    making but we cannot ignore the fact that we give Pakistan
    flood disaster relief at 0 interest. I know we are not here to
    solve but we are. We are part of Congress and we do look at the
    big picture. And the big picture is I am sitting here seeing
    that we gave Pakistan $215 million with 0 interest. How can we
    justify that and argue here in your testimony saying, well, if
    an American business could afford to pay something else, why
    should not an American business pay 6 percent interest if they
    could? But why should somebody in Pakistan, who I do not even
    know, pay 0 percent interest? That is the question that I am
    asking my colleagues here. Do you think that is fair?
        Chairman Walsh. It sounds like a wonderful topic as well
    for another hearing. I will give you time for a very brief
    answer because Mr. Barletta's time has expired. Go ahead, Dr.
    Kunreuther, if you want to weigh into that at all.
        Mr. Kunreuther. No, I am not going to weigh into that
    because I really want to second what Dr. Muhlhausen said. I
    think there are two separate issues. I think one has to ask the
    question in Pakistan whether or not you are going to give a 0
    percent interest rate if you are going to do it for other
    reasons, rather than sort of make the comparison between what
    we do in this country. I think that is an issue that should be
    put on the table but not in the context of this particular
    piece of legislation.
        Chairman Walsh. Thank you. Mr. Barletta, thank you.
        On behalf of the entire Subcommittee I would like to thank
    all of our witnesses for being here today. The testimony that
    you provided will be helpful as we continue to consider
    amendments to SBA's Disaster Assistance Programs.
        As was mentioned in the opening, we want to make sure that
    our neighbors have the right tools to get back on their feet
    after a disaster. None of us question that. The question is how
    best to fund and supply those tools. The faster people get back
    on their feet, the better off we will all be as a nation.
        With that, without objection, I ask that the record be kept
    open for five legislative days. Without objection, so ordered.
        This hearing is now adjourned.
        [Whereupon, at 11:10 a.m., the Subcommittee hearing was
    adjourned.]

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