Are you ready for another case study in bad economics? Look no further than the National Flood Insurance Program (NFIP). As usual, the government thinks it has a solution to this natural disaster: spend more of your money.
A new analysis of public data by the Associated Press found that federal and local governments have spent $5 billion over the last 30 years purchasing tens of thousands of flood-prone homes across the country. The buyouts have increased in cost because many of the strong storms have slammed into expensive and heavily populated coastal states, such as Florida, New York, New Jersey, and Texas.
Despite the risks, the buyouts are voluntary, which means homeowners can opt to renew their taxpayer-funded, underpriced flood insurance policies. And there is the problem: the NFIP.
Al Gore’s Beach House
Shore the State Offers Flood Insurance
In 2010, former Vice President Al Gore and his family purchased a $9 million oceanfront property. This was around the same time when the Nobel Prize winner claimed that polar ice would be gone in five years, increasing sea water levels and causing devastating flooding. If this were true, then why would he want to reside in any coastal area? Wouldn’t he be putting his home and his family in jeopardy? Well, part of the reason could be that he has taxpayer-subsidized insurance.
Fifty years ago, Congress established the NFIP, so the federal government could share the risk of flood losses, potentially reduce destruction, and offer homeowners an insurance alternative amid surging costs of recovery. It started off benign, covering up to $250,000 in damage to single-family homes and buildings in jurisdictions that met certain flooding criteria. And it was in 1973 when the NFIP undermined the insurance market. Congress extended coverage to property owners who should have paid for insurance but chose not to do so.
Put simply, the NFIP helps irresponsible individuals on the coast who won’t buy private flood insurance.
Sea, We Told You So
Today, more than five million homes subscribe to this federal subsidy. Like many other government programs, the NFIP is in the red, accruing about $25 billion of debt by 2017. It used to be covered fully by underpriced premiums, which were enough until the state covered more, expanding the budget gap. Because it loses roughly $1.4 billion a year, it has resulted in repeated taxpayer bailouts.
You would think a body that controls 95% of a certain market would be in the green, but we’re talking about the Leviathan.
Experts contend that the main problem for the NFIP is that the premiums do not reflect covered risk. But shouldn’t rate match risk? Don’t tell that to the politicians who think homeowners are entitled to federal flood insurance and should not pay a penny more.
Right now, if Gore’s house is submerged by the sea, you would foot the bill. Ditto for other global-warming zealots who warn of rising sea levels but own beach houses, homes on the edge of the Atlantic, and luxurious oceanfront mansions. You are forced to pay for the property of the elites.
Miami, Florida
The other issue is the unintended consequence of improper real estate development. If left to the market, companies using their own money would price insurance policies properly. These agreements would cover the real risk, eventually discouraging enough folks from building and investing in properties that are routinely threatened by severe flooding. If the private market had a greater share, then the premiums would likely signal that it isn’t such a good idea to live right next to the Atlantic Ocean.
Indeed, federal flood insurance encourages people to build condominiums, houses, and villas in these risky areas. For instance, South Florida, which is supposed to be ground zero for climate change in the next few decades, has seen a spike in development. Why? It is estimated that three million people will relocate to this part of the country within 30 years. However, if the sea level rises and creates horrendous flooding, then as much as $400 billion in coastal property is under threat.
Should these catastrophic prognostications take place, the bankrupt NFIP would be on the hook for billions more. So, perhaps it is time to let the NFIP sink or swim on its own and allow the market to intervene.
Flooding Market With Moral Hazard
In economics, there is something called moral hazard.
This is a situation that enables parties to participate in perilous events knowing that they are protected against that risk, resulting in someone else incurring the cost. This is what’s going on with this program. Instead of being responsible and taking out a private federal insurance plan that is priced accurately, consumers turn to the state, knowing full well that they will pay less for more. Can we expect anything different? Government distorts everything, does more harm than good, and goes broke in the process.
Why can’t Washington ever flood the market with common sense and logic instead of unintended consequences and moral hazard?
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