[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

                               __________



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

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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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