Tag: flood insurance

Should There Be ‘Shared Sacrifice’?

At the Encyclopedia Britannica blog, I take on the argument made, for instance, by President Obama in his Friday news conference:

We should not be asking sacrifices from middle-class folks who are working hard every day, from the most vulnerable in our society – we should not be asking them to make sacrifices if we’re not asking the most fortunate in our society to make some sacrifices as well.

I call that a fundamentally flawed argument:

The main thing our government does these days, despite the lack of any constitutional authority for it, is tax some people and transfer money to other people. …But there is no moral equivalence in the two sides of the transfer system. On the one hand, the government takes money by force from people who have earned it. On the other hand, it gives some of that money to people who have not earned it. Taking yet more money that people have earned is simply not equivalent to reducing the size of a government transfer.

There is, however, one way that we could ask businesses and the rich to join in the deficit-reduction effort:

But here’s a way to satisfy both those who see spending as the problem and those who want the highest-taxed Americans to pay yet more: Start cutting subsidies to businesses and the rich. Let’s cut out the big-business subsidy machine, the Export-Import Bank. Let’s get rid of farm subsidies. Let’s tell affluent people who build houses in coastal flood areas to pay for their own flood insurance at market prices.

Read the whole thing.

Put Federal Flood Insurance Out of Its Misery

The House of Representatives is scheduled this week, as early as today, to consider an extension and “reform” of the National Flood Insurance Program (NFIP), administered by FEMA. Since Hurricane Katrina in 2005, the NFIP has been about $18 billion in the hole. And this is from a program that only collects around $2 billion a year in premiums, which barely covers losses and expenses in a normal year. So make no mistake, the NFIP is still on course to cost the taxpayer billions more in the future.

Even before Katrina, the Congressional Budget Office estimated that the NFIP was receiving a subsidy of close to a billion dollars a year. Under CBO’s optimistic projections, the House’s reform bill would increase NFIP revenues by about $4 billion over the next ten years, making only a small dent in the program’s current deficit.

The projected cost savings could potentially be lost by the expansion of the NFIP in the House bill. Yes, you read that correctly. Despite being deep in debt, the House is proposing to expand the coverage, and hence the risk, underwritten by the NFIP. For instance, the reform bill adds coverage for living expenses and “business interruption expenses,” as well as increasing the coverage limit from $350,000 (250k for structure and 100k for contents) to about $520,000 per home.

Such a massive expansion of coverage would likely drive out the existing providers of excess flood insurance coverage. And yes, you also read that correctly: there are a handful of insurers that offer private flood insurance. There is absolutely no reason that the private market could not offer flood insurance. Yes, rates might go up for the highest risk properties, but they would likely go down for others (and clearly reduce costs to the taxpayer). And given the high administrative costs of the NFIP (about 30 percent of premiums go directly to private insurance companies to help run it), it is likely that a completely private system of flood insurance would be cheaper.

In the aftermath of the housing bubble and its extreme costs to the taxpayer, we should eliminate the vast array of subsidies for housing construction, including the NFIP. If there’s one thing we should have learned, the underpricing of risk can have disastrous results.

A Fannie Mae for Intrastructure?

Like President Bush before him, Obama has a knack for taking the worst ideas of his opponents and making them his own.  It is truly bipartisanship in the worst of ways (think Sarbanes-Oxley, the TARP or No Child Left Behind).  The newest example is the President’s proposed “infrastructure bank.”  A bill along those lines was introduced a few years ago by then Senator Hagel, although the idea is far from new.

First, let’s get out of the way the myth that we have been “under-funding” intrastructure.  Take the largest, and usually most popular, piece:  transportation.  Over the last decade, transportation spending at all levels of government has increased over 70 percent.  One can debate if that money has been spent wisely, but there’s no doubt we’ve been spending an ever-increasing amount on infrastructure - so there goes one rationale for an infrastructure bank.

The real rationale for an infrastructure bank is to transfer the risk of default away from investors, bankers and local/state governments onto the federal taxpayer, but to do so in such a manner that the taxpayer has no idea what they are on the hook for.

If there are truly great projects out there that will pay their own way, then they should have no trouble getting private funding.

Of course, we will be told that the bank will charge an interest rate sufficient to cover losses and that the taxpayer won’t be on the hook.  Again, if it is charging an appropriate rate, then why does the bank need to be chartered (and backed) by the taxpayer?  We’ve heard this story before…with Social Security, flood insurance, FHA, Fannie/Freddie…the list goes on, that all of these programs would pay their own way and never cost the taxpayer a dime.  If there are truly outstanding infrastructure needs, then appropriate the money and pay for them.  An infrastructure bank is just another way to allow Wall Street to line its pockets while leaving the risk with the taxpayer.  If bankers aren’t willing to actually take the risks, then why exactly do we need them?

Flood Insurance: Mend It or End It, But Don’t Just Extend It

Before leaving for the August recess, the House of Representatives passed a bill (HR3139) to extend the authority for the National Flood Insurance Program (NFIP) until March 2010.  The program was set to expire on Oct. 1, 2009.   The bill now goes to the Senate.  Instead of taking up HR3139, the Senate should insist on real reforms to the NFIP, rather then a blanket extension.

Since Hurricane Katrina, the NFIP has operated under a deficit of close to $17 billion, which had to be borrowed from the Treasury in order to pay claims.  Under the NFIP’s current structure, it cannot even make the interest payments on its borrowing; these losses will ultimately hit the taxpayer. 

The Senate last Congress passed a strong reform bill that would have eliminated almost half of the subsidies in the NFIP.  The House decided to instead seek an expansion of the broken program, adding wind coverage and raising the coverage levels (despite the availability of private flood insurance).

Many of the homes receiving subsidies under the NFIP are either vacation/second homes or properties where the government has paid repeated claims.  In one instance, a house in Houston this is valued at around $100,000 received over $800,000 in flood insurance claims over a 20-year period, before it was finally destroyed. 

Not only does the NFIP subsidize at taxpayer expense beach-front vacation homes, but there is growing evidence that the program causes substantial harm to the environment and local fisheries.  Just last year, the National Marine Fisheries Service issued a finding that the NFIP is pushing orcas and some runs of salmon to extinction.  Before the federal government forces significant costs on the private sector to protect the environment, perhaps it should take a close look at the damage its own activities inflict.