Governments Subsidize Disaster—and the Wealthy

The Wall Street Journal takes a look at hurricane threats to cities along the seacoasts. It’s an odd article because the author, Greg Ip, does not discuss the central role that governments play in encouraging people to live in hurricane‐​prone areas.


Ip does mention the “levee effect” of misguided development taking place in low‐​lying areas because people feel safer behind large sea walls. In the United States, federal spending by the Army Corps of Engineers has encouraged people to live in unsafe coastal areas, as I discuss in this essay. After Hurricane Betsy struck New Orleans in 1965, for example, the Corps extended levees to additional low‐​lying areas around the city, thus encouraging further development and exacerbating damage in subsequent storms.


Ip does not discuss federal and state flood and wind insurance subsidies, which also encourage people to live in harm’s way. I discuss federal flood insurance subsidies in this essay, and a new essay in Cato’s Regulation examines state wind insurance subsidies.


I note,

rather than reducing the nation’s flooding problems, the National Flood Insurance Program (NFIP) has likely made flood damage worse by encouraging more development in hazardous areas. Since 1970, the estimated number of Americans living in coastal areas designated as Special Flood Hazard Areas by FEMA has increased from 10 million to more than 16 million. Subsidized flood insurance has backfired by helping to draw more people and development into flood zones.

And the Regulation article notes, “Insurance, if priced accurately, provides an important service of signaling to people the risk cost of living near water. [But] subsidized insurance rates destroy the information value of full‐​risk premiums, thus suppressing the true cost of living in severe weather zones and creating an excessive incentive to populate attractive but dangerous locations.” The federal government subsidizes flood insurance, and the article notes that Florida subsidizes wind insurance. Partly as a result of these subsidies, the coastal population of Florida has soared in recent decades.


An interesting fact about flood and wind insurance subsidies is that they are welfare for the well‐​to‐​do. Politicians often talk about helping the poor, but many of their policies disproportionally benefit the well‐​off.


A 2010 study, for example, looked at flood insurance claims data over a 10‐​year period and concluded, “the benefits of the NFIP appear to accrue largely to wealthy households concentrated in a few highly‐​exposed states.”


Similarly, the Regulation article examines Florida wind insurance data and finds that the benefits “accrue disproportionately to affluent households and the magnitude of this regressive redistribution is substantial.”