Matt Yglesias thinks that straight up handing money to disaster relief victims subsidizes dumb behavior, and instead that money should be accessed as a low interest loan. This doesn't remove the subsidy, but it solves the "we are paying people to live in dumb, flood prone places" problem. If we loan them money then we aren't paying them, they're paying us, albeit at a subsidized interest rate.
The problem is we already do this. I worked in disaster relief. These are the steps:
1. Fema comes and gives you some "don't die on the side of the road" help. Food, shelter, etc.
2. The SBA comes and checks out your damaged home/small business. If a vacation home was damaged, you are out of luck.
3. If you can afford a loan at market rates, they offer you a loan at market rates. That's the only relief you get. The loan is collateralized by the best collateral available, normally the repaired property.
4. If you can only afford a low interest loan, you get a low interest loan. Again, collateral is taken.
5. If the SBA decides you can't afford even a super low interest loan (interest around 3 percent), you get your big bags of free money from FEMA. I assume. I didn't work for FEMA.
6. Eventually, the insurance company will decide how much they are going to pay you. Duplicated proceeds (IE, the SBA gave you a loan to rebuild your porch and you just got the same amount from the insurance company) are assigned to the government.
It's true that this still encourages bad behavior, but steps are taken even there:
1. If your home (or business? I forget) was very badly damaged, the SBA will let you use your loan to move to a non-flood zone rather than rebuilding.
2. If your home or business was damaged by rising water or is in a flood zone, you must purchase flood insurance after you repair it (of course, flood insurance is itself subsidized).
3. If you want extra funds to make improvements that the SBA's appraisers think will make the home more disaster resistant (stilts, say), you get that.
Now Yglesias's system is different from what we have in place, and may have more merit . He wants to have *states* borrow the money, not individuals, and to do this by giving states access to a fund that doesn't require jumping through congressional hoops every disaster to get its funding. This would shift the subsidizing of people who can't afford loans from areas of the country not prone to disasters to areas of the individual state not prone to disasters, which is a good or bad idea, depending on how you like federalism. But his basic insight -- we should loan rather than give disaster relief funds and should be sensitive to the fact that we are encouraging bad behavior -- is one congress has already taken on board.