Topic: Tax and Budget Policy

Folly of Federal Flood Insurance

Subsidized flood insurance is one of the many federal programs that is counter to both sound economic policy and sound environmental policy. Congress created the National Flood Insurance Program (NFIP) in 1968 to help homeowners in flood-prone areas purchase insurance. The FEMA-run program covers floods from river surges and storms on the seacoasts.

In recent years, the NFIP has gone hugely into debt and it may be bailed-out by taxpayers at some point. The program has encouraged people to build homes in areas that are too hazardous to safely occupy. It has encouraged towns to expand development in flood-prone areas. And the program undermines constitutional federalism by prompting the federal government to reach its regulatory tentacles into local zoning issues.

The NFIP subsidizes wealthy people with multiple payouts after their homes on the seacoasts are repeatedly destroyed. The program is very bad policy—a seemingly good idea to policymakers in the 1960s that has ended up creating growing distortions.

When I started reading about the NFIP recently, I was surprised to learn that Congress made sensible reforms to it in 2012 under the Biggert-Waters Act. The best reform would be a complete repeal of the NFIP, but in the meantime the 2012 law was a good start at reducing the program’s costs and distortions.

Alas, the prospect of Congress staying on a pro-market, pro-environment reform path was apparently too good to be true. No sooner had the ink dried on the 2012 law than members of Congress began trying to reverse the reforms.

This week, Congress will be voting on a bill that backtracks on the 2012 reforms. I have not studied the details of the new bill, but Diane Katz at the Heritage Foundation has penned a nice overview.

Congress against Budget Reform: Voting to Hike Subsidies for People Who Build in Flood Plains

Uncle Sam is essentially broke.  But the federal government keeps spending.  The House is voting this week on a measure already adopted by the U.S. Senate to suspend money-saving reforms adopted less than two years ago.

In 1968 Congress created the National Flood Insurance Program, shifting the cost of disasters from people who chose to live in flood-prone areas to taxpayers who don’t.  Over time Congress kept cutting premiums.  By 1982 two-thirds of participants received a subsidy.

NFIP turned into foolishness squared.  The first cost is financial:  the federal government keeps insurance premiums low for people who choose to build where they otherwise wouldn’t.  The Congressional Research Service figured that the government charges about one-third of the market rate for flood insurance.  The second cost is environmental:  Washington essentially pays participants to build on environmentally-fragile lands that tend to flood. 

Uncle Sam also has a propensity to spend billions more to rebuild public buildings and infrastructure in flood zones. 

Although not every NFIP beneficiary is wealthy, CRS noted:  “Some critics point out that the costs—financial risk and ecological damage—are widely distributed to taxpayers across the country and the benefits, by contrast are disproportionately enjoyed by wealthy counties and by owners of vacation homes.”

NFIP’s overall liability is $1.3 trillion.  Today total program debt is about $25 billion.  Economists Judith Kildow and Jason Scorse warned that “the flood insurance program is a fiscal time bomb for the government.” 

So disastrous were the program’s finances that even Congress felt the need to act.  In July 2012 legislators approved the Biggert-Waters Flood Insurance Reform Act in an attempt to make the NFIP more accurate, efficient, and solvent.  For different properties rates were increased and subsidies were cut.  Overall, the legislation was expected to save about $25 billion.

The amendment worked—too well.  Insurance bills began increasing.  People used to living well at taxpayer expense complained to their legislators.  Interest groups which profit from property sales also raced to Capitol Hill,  

So now reform co-sponsor Rep. Maxine Waters (D-Ca.) is pushing to delay the reforms until 2018.  Of course, in 2018 no one will be more willing to pay higher premiums, and undoubtedly will again lobby for further relief from Congress.

Explained Waters:  “Never in our wildest dreams did we think the premium increases would be what they appear to be today.”  Her new legislation, backed by a mix of Republicans and Democrats, would bar increases in premiums and reductions in subsidies for some properties, restore earlier subsidies for others, and mandate an “affordability study.”

Said Waters:  “neither Democrats nor Republican envisioned it would reap the kind of harm and heartache that may result from this law.”  She was echoed by Nicholas Pinter, a professor at Southern Illinois University, who advocated reforms but also “compassion for Americans living on flood-prone lands.” 

As I point out in my new article on Forbes online: 

Actually, those people need to be held responsible for their actions.  Compassion should be accorded taxpayers, who have suffered for decades.  Mississippi Commissioner of Insurance Mike Chaney said the NFIP should not make up its shortfall from homeowners who “simply followed the rules.”  But if not them, who?  After all, they received the benefits of the subsidized insurance.

At the end of January, the Senate voted to effectively kill the 2012 reform.  That would “return the program to a state of insolvency,” Shai Akabas of the Bipartisan Policy Center told the New York Times

The Republican House leadership has approved a vote on a companion measure.  Even the White House criticized Congress’ potential U-turn.

In fact, the 2012 measure didn’t go far enough.  Congress should eliminate federally-subsidized flood insurance—entirely.  There is no justification for turning Uncle Sam into a back-stop for wealthy vacationers and other privileged recipients of federal largesse.

Like Uncle Sam, NFIP is broke.  It should be killed, not reformed.  Legislators should start exhibiting compassion for American taxpayers.

The Missing Data in Krugman’s German Austerity Narrative

There’s an ongoing debate about Keynesian economics, stimulus spending, and various versions of fiscal austerity, and regular readers know I do everything possible to explain that you can promote added prosperity by reducing the burden of government spending.

Simply stated, we get more jobs, output, and growth when resources are allocated by competitive markets. But when resources are allocated by political forces, cronyism and pork cause inefficiency and waste.

That’s why statist nations languish and market-oriented countries flourish.

Paul Krugman has a different perspective on these issues, which is hardly a revelation. But I am surprised that he often times doesn’t get the numbers quite right when he delves into specific case studies.

He claimed that spending cuts caused an Estonian economic downturn in 2008, but the government’s budget actually skyrocketed by 18 percent that year.

He complained about a “government pullback” in the United Kingdom even though the data show that government spending was climbing faster than inflation.

He even claimed that Hollande’s election in France was a revolt against austerity, notwithstanding the fact that the burden of government spending rose during the Sarkozy years.

My colleague Alan Reynolds pointed out that Krugman mischaracterized the supposed austerity in the PIIGS nations such as Portugal, Ireland, Italy, Greece, and Spain.

We have another example to add to the list.

He now wants us to believe that Germany has been a good Keynesian nation.

Fannie and Freddie Offset Reported Government Spending

The federal government took control of mortgage giants Fannie Mae and Freddie Mac (F&F) in 2008 and have bailed them out with $189 billion of taxpayer money.

Today the mortgage companies have returned to profitability and are paying the government dividends. All profits earned by the companies since August 2012 are going to the federal government, as discussed by the CRS and the Washington Post.

How large are the F&F dividends? You can find out from a number of data sources:

  • FHFA (Table 2) shows that Fannie has paid a cumulative $114 billion in dividends to the government, while Freddie has paid $71 billion.
  • FHFA data show that F&F together paid $131 billion in dividends in calendar 2013, which matches what BEA Table 3.2 shows for federal “income receipts from assets” (dividend portion).
  • CBO (p. 101) says that F&F dividends received by the government were $97 billion in fiscal 2013 and will be $81 billion in fiscal 2014. Curiously, the CBO does not report how large future dividends are expected to be because they account for F&F going forward based on a net subsidy approach.

Here is the important thing for budget wonks and reporters: the money now pouring into the Treasury from F&F is not counted as “revenues” but as “offsetting receipts.” Those receipts are subtracted from federal spending before the “net outlays” reported by CBO and OMB, which people may wrongly assume is total federal spending.

Thus the government was reported to have spent $3.5 trillion in fiscal 2013, but without the F&F offset spending was $3.6 trillion. It is a similar story in 2014. And without the F&F dividends, federal deficits would be about $100 billion a year greater than reported.

Looking ahead, a fear is that with the return to profitability of F&F, politicians will get hooked on the inflows of cash, particularly since it has the magical effect of reducing reported spending. Reformers should press on with privatization and severing government ties to the mortgage companies as soon as possible.

A further discussion of offsetting receipts is here. Mark Calabria discusses F&F here and here.

Spending Restraint in Arkansas

For the fourth day in a row, the Arkansas House of Representatives has refused to approve the yearly appropriation for its Medicaid program, dubbed the “private-option.” If the legislature continues this refusal and reverses its decision to expand Medicaid under Obamacare, state and federal taxpayers will save billions of dollars, making the Little Rock legislative battle the most important spending fight in the country.

Last spring, Arkansas made headlines for adopting a “free-market” alternative to Medicaid expansion. Instead of expanding using the traditional Medicaid model in which the federal and state government would directly fund enrollees’ care, Arkansas decided to provide subsidies to 250,000 new enrollees, so that they could purchase private health insurance through the bureaucratic exchanges created under Obamacare. By using private insurance, supporters claimed, Arkansas would be able to provide individuals with insurance coverage and protect them from the broken Medicaid system that fails to provide “significant improvements” to enrollees’ health.

Medicaid expansion will cost the federal government $800 billion over the next 10 years if all states expand their qualification thresholds for the program as Obamacare’s architects want. (Currently, only half of the states have obliged.)

Arkansas’ expansion is actually even more expensive than the traditional expansion model envisioned by President Obama and Health and Human Services Secretary Kathleen Sebelius. According to the Congressional Budget Office, private insurance actually costs 50 percent more than traditional Medicaid coverage. Earlier this month, Arkansas Gov. Mike Beebe, a supporter of the private option plan, acknowledged that the plan costs the federal government—read taxpayers—more. Under the conservative estimates from the state, Arkansas’ expansion will cost $20 billion over the next 10 years.

Arkansas’ actions could affect other states. Following its expansion last year, Iowa, Michigan, and Pennsylvania expanded their Medicaid programs using a private-option model costing federal taxpayers billions more. Defunding Medicaid expansion in Arkansas would likely stop the wave of expansion, saving even more public dollars.

If opponents of the private option are successful, Arkansas will do far more to help federal taxpayers this month than anything coming from Washington.

Another $6.5 Billion in DOE Loan Guarantees

After Solyndra collapsed, the Department of Energy (DOE) should have learned its lesson. Guaranteeing loans for energy and industrial companies is a bad idea. The failures of Beacon Power and Fisker Automotive should have driven home the message. Now, we have further proof that the DOE isn’t paying attention.

Yesterday, DOE Secretary Ernest Moniz traveled to Georgia to announce $6.5 billion in loan guarantees for two new nuclear reactors already under construction. 

The loan, like so many others, has the markings of an incredible risky use of taxpayer dollars. According to the Washington Post, the project is already 21 months behind schedule. Additionally, Southern Company, the largest shareholder of the project, had its ratings’ outlook downgraded from “stable” to “negative” by Standard and Poor’s last year, in part because of “cost overruns” at the Georgia facility.

Even more frustrating, the company already had private loans in place to finance construction. Now we, the taxpayers, will save the company $250 million a year in interest costs by bearing the full burden of default.

The company also benefits from $2 billion in other federal tax credits, according to its CEO.

Some deal.

Water in the West: It’s Complicated

In the media, one hears two different stories regarding the drought in California and Western water problems in general. Liberals say that droughts are being made worse by climate change. Conservatives say that water shortages are being perpetrated by the EPA in a misguided effort to sacrifice farmers for some tiny fish. The Washington Times editorial today is of the latter genre.

The real story is more complicated. It’s not just Mother Nature, and it’s not just farmer vs. fish.

The fundamental problem is that the federal government has been heavily subsidizing Western water for decades, particularly for crop irrigation. Artificially low water prices have encouraged overconsumption and the planting of very dry areas where farming is inefficient and environmentally unsound. Subsidized irrigation farming has created major environmental problems in the San Joaquin Valley, for example.

To make matters worse, federal farm subsidies have boosted demand for irrigation water, which has further encouraged farmers to bring marginal lands into production.

So don’t blame the Delta smelt. Instead, blame antimarket policies going back eight decades in the case of farm subsidies and a century in the case of subsidized water from the federal Bureau of Reclamation.

The long-term solution to the West’s growing water problems is free-market economics. Policymakers should end the farm subsidies, reform water property rights, transfer federal dams and aqueducts to state ownership, and move toward market pricing of water.

For more, see my essay with Peter Hill and check out the great work from the free-market environmentalists at PERC.