Running the numbers on flood insurance


Demand is greater than supply because the true costs are reflected in the price
Great stuff here. Remember that government promises seldom result in government action.

Congress is mired in seemingly interminable hearings concerning what went wrong and why during the recent hurricane season along the Gulf Coast, particularly in New Orleans. Most of these hearings carry nearly as much bluster as the season's storms with politicians playing the blame game rather than trying to examine objectively the true underlying causes of the widespread damage.

However, one set of hearings has been particularly telling -- those in the Senate Banking, Housing and Urban Affairs Committee concerning the National Flood Insurance Program (NFIP).

Despite FEMA's recent claims to the contrary, the NFIP does not pay its own way. Indeed, the program is essentially bankrupt and coming to Congress hat in hand requesting a $23 billion dollar bailout to cover its losses this last year. Sadly, while the testimony has shed light on many flaws in the NFIP, the solutions proposed have failed to examine the problematic assumptions underlying the program itself.

Not surprisingly I agree with this analysis. A little later, Mr. Burnett uses the same reasoning that I have used before.

When people own property and are fully responsible for losses due to their poor land use or development decisions, they are less likely to build or rebuild in areas regularly prone to flooding or erosion. This link -- between a person's property ownership and responsibility for their land use decisions -- disciplines people who use their property badly.

Unfortunately, a host of government programs break this link by subsidizing unwise development. All too often the result is lost lives, destroyed property and diminished livelihoods. The U.S. Army Corps of Engineers (Corps) flood control program and federal flood insurance subsidize construction in flood-prone areas and encourage high-risk development by shifting the cost of insurance and physical protection against floods from property owners to taxpayers. The result: more construction in high risk areas. Its economics 101 -- if you subsidize something you get more of it.

When government subsidizes risky behavior, people feel that the risk is less. This means more marginally risky behavior, which changes where the margin is, which in turn increases the risky behavior even more. It's a devastating feedback loop that is almost impossible to break once it has started.

As long as people are insulated from the consequences of their actions, they believe that someone else will be picking up the bill.

— NeoWayland

Posted: Fri - February 17, 2006 at 04:51 AM  Tag


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