Posted: 02/17/2006 | Author: H. Sterling Burnett
Perversions Insured
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.
President Bush hasn't helped matters. Though he made little mention of rebuilding New Orleans in his State of the Union address, in previous statements he promised to rebuild New Orleans bigger and better.
The President's position is unfortunate since he has something new to offer on the subject. President Bush has touted the "ownership society" as a solution to a variety of policy problems -- including health care, education and retirement. He should go farther and extend the ownership ideal to Federal response to flooding and natural disasters.
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.
The Corps approves and regulates the construction of levees and other flood control structures. From 1928 through 2001, it spent $123 billion (adjusted for inflation) on flood control projects nationwide. The federal government pays 65 percent of these projects' costs.
Corps flood control projects substantially undermine the incentive to purchase flood insurance, since the presence of levees and other flood control devices often eliminates federal and state requirements that the property's owners purchase flood insurance.
However, flood control structures do not guarantee protection as could be seen from the Great Midwest Flood in 1993 which caused $20 billion in damages when more than 1,000 levees failed and 100,000 homes were damaged, or of course from the breach of the levees in New Orleans in 2005.
The 37-year-old NFIP program's original purpose to provide temporary flood insurance to property owners who were unaware they were in flood-prone areas. As early as 1973, government reports noted two perverse effects of the flood insurance program: 1) federal disaster relief replaced rather than supplemented nonfederal efforts; and 2) disaster relief was often perceived to be so generous that "individuals, business and communities had little incentive to take initiatives to reduce personal and local hazards."
The NFIP both encourages people to build homes where they otherwise would not and encourages lenders to finance mortgages they otherwise would not. Today, NFIP covers more than 4.5 million homes in more than 20,000 communities. But because of full-disclosure mortgage and insurance requirements, most of those currently insured were aware of their area's flood problems when they purchased or developed their properties.
The NFIP continues to pay claims for homes destroyed by floods, mudslides and other natural disasters without requiring homeowners to relocate. They can use the money to rebuild in the same location, and their new home is also eligible for NFIP coverage. According to FEMA, repetitive claims are the most significant factor in increasing flood insurance costs.
- NFIP pays claims averaging $200 million per year for about 40,000 repetitively flooded properties.
- Since its creation in 1968, the NFIP has paid out nearly $1 billion for at least 10,000 properties that have experienced two or more losses, with cumulative claims often exceeding the value of the property.
- Flood damage costs increased from an average of $2.6 billion per year (in 2002 dollars) during the first half of the 20th century to more than $6 billion per year in the past 10 years.
In New Orleans, in part because of the extensive levee system, many properties were underinsured or uninsured. Yet based on statements from the Administration and in Congress, the Federal government seems likely to help both the insured and the uninsured alike to rebuild. The makes those who didn't pay for the insurance seem like geniuses. Whereas those who carried the insurance seem like suckers -- a powerful message to those who consider insuring property in the future. Regardless, the Federal response to New Orleans' recent flooding offers little hope that people will make wiser development decisions in the future.
Increased population and development of coastal areas is responsible for escalating losses due to hurricanes. According to the 2000 U.S. Census, more than half of Americans live within 50 miles of a coast and by 2025, 75 percent will. Indeed, the Heinz Center, an environmental research institute, determined that in the absence of insurance and flood control programs, development density in areas at high risk of flooding would be about 25 percent lower than in areas at low risk of floods.
In short, federal policies, including subsidized flood insurance and Army Corp of Engineers flood control efforts in New Orleans, most recently, turned what could have been a bad weather event into a catastrophic human tragedy.
Applying the ownership society ideal to these programs would require ending them. This would still allow the owners of the property involved to develop their property as they see fit, but it would have the benefit of ensuring that they, rather than the general public, were responsible for poor development decisions. Since the costs of making bad decisions are substantial, under the "ownership" regime of disaster response, we should expect fewer of them.
Flood insurance should be left to the private market entirely.
The government should not enroll any new homes or businesses in federally-backed flood insurance, and it should stop offering below-cost insurance rates. When disasters occur, payouts should be limited to the value of the home or business at the time the "ownership" insurance regime is implemented. Absent this provision, the government's payout for flood and other disaster claims will grow with the value of insured properties and property owners will have little or no incentive to forgo rebuilding or to make anti-flood improvements.
Applying the ownership society concept to these and other environmental issues would make this President Bush what his father rhetorically claimed to be -- the environmental president.