Should the Feds Subsidize Flood Insurance?

In the aftermath of Hurricane Katrina, the New York Times‘ John Tierney opines on the need to get the Feds out of the flood insurance business:

Starting in the 1960’s, the federal government took over the business of insuring against floods. It offered subsidized insurance to people in flood-prone areas, encouraging seaside homes that never would have been built otherwise. Even at bargain rates, most people went without flood insurance – only about a third of the homes in New Orleans carried it. People don’t bother to protect themselves because they figure – correctly – that if disaster strikes they’ll be reimbursed anyway by FEMA. It gives out money so freely that it has grown into one of the great vote-buying tools of the modern presidency. Bill Clinton set a record for declaring disasters, and then President Bush set the single-state spending record in Florida before last year’s election. Now it’s New Orleans’s turn. Since Washington didn’t keep its promise to protect the city, the federal government should repair the damage and pay for a new flood-control system. But New Orleans and other coastal cities will never be safe if they go on relying on Washington for protection. Members of Congress will always have higher priorities than paying for levees in someone else’s state. The federal government has a role in coordinating flood control among states and in organizing outside disaster relief, but the locals should fight floods much the same way they fight fires. Fifteenth-century Dutch burghers didn’t have the financial or technological resources of today’s Louisianians, but they managed to hold back the sea without the Army Corps of Engineers. Here’s the bargain I’d offer New Orleans: the feds will spend the billions for your new levees, but then you’re on your own. You and others along the coast have to buy flood insurance the same way we all buy fire insurance – from private companies that have more at stake than do Washington bureaucrats. Private flood insurance has come to seem quaint in America, but in Britain it’s the norm. If Americans paid premiums for living in risky areas, they’d think twice about building oceanfront villas. Voters and insurance companies would put pressure on local politicians to take care of the levees, prepare for the worst – and stop waiting for that bumbling white knight from Washington.

It’s unfortunate that it takes a devastating event like Katrina to bring this issue to light, but a debate on the wisdom of federally-subsidized flood insurance is long overdue. From my own stint as a New Orleans homeowner earlier this decade, I recall that my flood insurance premium was a mere pittance of my total home insurance bill — perhaps 10-15%, if that. I always found it odd that the subtle message to homeowners was, “don’t worry, the Feds will bail you out in a catastrophic flood.” So I agree with Tierney that the perverse incentive structure created by federally-subsidized flood insurance dampens local public demand for better protection systems. There’s just no incentive to get your feathers ruffled about such matters when the costs of individual location decisions are dispersed among federal taxpayers-at-large. Let the debate begin.