TCS Daily

Perversions Insured

By H. Sterling Burnett - February 17, 2006 12:00 AM

Editor's Note: President George W. Bush just promised another $4.2 billion to New Orleans.

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.

H. Sterling Burnett is Senior Fellow at the National Center for Policy Analysis (NCPA).



Only Fools and Dang Yankees
Growing up on the Florida Gulf Coast in the '50s, there were a few funky shacks on the barrier island across the bay from my home town. It was a beautiful place, with the whitest, most pure silicon sand on the planet.

So why didn't more people build there?

The locals knew why. Only fools and dang Yankees would sink their money into a sand bar. Someday, a hurricane is going to come along and wipe it all off. Who's that stupid and/or has that much money to waste? Smart people paid a premium for high and dry land.

That all changed with President Johnson. Once he got the federal flood insurance through Congress, everyone wanted a place at the beach. With the federal insurance, the Yankees would pay for in anyway!

Mississippians move out!
The extent of the flood plain problem is greater than you might imagine...

Background on Upper Mississippi River Basin
EPA, 2005

The Upper Mississippi River Basin drains approximately 189,000 square miles, including large parts of the states of Illinois, Iowa, Minnesota, Missouri, and Wisconsin. Small portions of Indiana, Michigan, and South Dakota are also within the basin.

More than 30 million people live in the basin. Nearly 80% of the population lives in urban areas such as Minneapolis-St. Paul, Minnesota; St. Louis, Missouri; Chicago, Illinois; the Quad Cities, Illinois and Iowa; Des Moines, Iowa; La Crosse, Wisconsin; and Peoria, Illinois...

flood plains
Are you trying to claim that the entire Mississippi basin is a flood plain?

Democracy Insures Perversion
Under democracy, the people get both the leaders and policies they deserve. By treating the public fisc as a lottery jackpot, politically organized and active citizens are entitled to indulge any and all possible perversions, so long as they're earmarked.

Government grows because the people want it to, because government is a big pot of cash that goes to the highest bidders. Period. Although it's true that Congress constitutes part of this problem, it's truer that the people constitute the largest part.

So, under democracy the people get both the leaders and policies they deserve. If certain of your countrymen build their homes on the sand despite good and re****ble advice to the contrary, rather than calling them fools, ask yourself whether the largess you demand from Uncle Sugar is any more sensible.

Making a point
Enough of the Mississippi Flood Plain has been developed that we are talking about millions of people. The past century alone has seen dozens of majors floods and several massive floods along its length -- and it will continue to do so.

Flood Plain Development Study
St. Louis Post-Dispatch, July 27, 2003


* Missouri has developed more flood plain than any other state affected by the Flood of 1993. Buildings, parking lots and highways now cover more than 4,200 acres of flood plain, most of which was under water 10 years ago.

* Nebraska was next with 2,224 acres, most of it residential development on land that didn't flood in '93.

* Illinois, Iowa and Wisconsin had 1,000 to 2,000 acres of development, and Kansas and Minnesota had fewer than 1,000.

* Overall, the study detected more than 12,000 acres of development in the Midwest. Of this, about 6,630 acres were commercial and industrial, 2,557 acres were residential, and 2,327 acres were highways and interchanges.

* All residential development happened on land that had not been flooded in '93, except for one subdivision in Wood River, where some internal flooding occurred. Most of the new houses were in the 500-year flood plain, not the 100-year flood plain.

* Census data shows that 28,000 houses have been built on land that was under water in 1993, and a total of 84,500 houses have been built in the historic flood plain.

Chicago is only part of the Mississippi Basin, because engineers built the Illinois and Michigan Canal connecting the Illinois River with the South Branch of the Chicago River. This caused the Chicago River and its South Branch to flow backwards out of Lake Michigan.

If Chicago is in the Mississipi Basin, then the parts of Michigan, Indiana, and Wisconsin that flow into Lake Michigan should also be part of the Mississipi Basin.

Good point
But the majority of people do not make the law. It is a corrupt few. We get the government we deserve because fewer than half of the electorate can get themselves to a voting place because they do not care. So the most corrupt and degraded make the decisions. One simply has to look at the McKinney incident to see how arrogant and degraded our representatives are.

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