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The Politics of Federal Flood Insurance

There's been quite a buzz recently on the second anniversary of Hurricane Kartrina's destruction of New Orleans. Presidential contender Barack Obama even offered a plan to restore the city. Of course one should sympathize with the residents of New Orleans, especially those who were driven from their homes and lack the resources to rebuild. But from what springs the belief that one is entitled not only to live in a flood plain, below sea level, but to have the rest of the country pay one's way? America is a large country and there are plenty of places to build a house that do now sit in a bowl between a lake and an ocean. It's one thing to make the mistake once. But to repeat the mistake again--and to put the taxpayers at risk again--is outrageous. Of course, New Orleans is not the only place where Uncle Sam subsidizes construction in flood-prone areas. Indeed, that's the only reason that federal flood insurance exists: to subsidize people who live in areas where private insurance is unavailable. The result is predictable: a federal financial bath. Congress responds with promises of reform. And nothing happens. Reports the Washington Times:
Congress has promised changes to the nation's main flood-insurance program but has shown little enthusiasm for taking the unpopular steps that analysts say are necessary to fix it. Recent flooding in the Midwest has brought the issue back to the forefront. Hurricanes Katrina and Rita, back-to-back storms in 2005, dispelled any notion that the insurance program was self-sustaining. They threw it roughly $20 billion into debt and called attention to major structural flaws. Nearly everyone acknowledges it cannot pay off the debt, much less pay for losses in future storms. But so far, Congress has done little besides raising the program's borrowing limit, essentially handing taxpayers a series of shaky IOUs. "The early rhetoric was, 'We're going to fix this. We're not going to tolerate this continued exposure of taxpayers to unlimited subsidies,' " said Robert Hunter, a former director of the flood program who now oversees insurance issues for the Consumer Federation of America. "They've done nothing to fix it. It's just unbelievable." The National Flood Insurance Program was created in 1968. Run by the Federal Emergency Management Agency, it provides nearly all the flood coverage in the U.S. Private agents sell policies to homeowners worth up to $250,000 in structural coverage and an additional $100,000 for contents. Premiums average about $400 per $100,000 of coverage — rates that do not reflect real risks and therefore shift costs to taxpayers. After the 2005 hurricane season, the Government Accountability Office added the program to a short list of "high-risk" areas in the government that the agency thinks need urgent attention. The starting point for an overhaul, scholars say, is raising rates for the more than 5 million policyholders, particularly those with high-risk coastal properties or vacation homes. Other recommendations include requiring coverage in more areas, enforcing tougher building and land-use policies and updating old flood maps so homeowners know their true risks.
All of these reforms would be helpful. But the simplest solution would simply be to abolish the program. If you want to construct your home in a flood plain, go ahead. But don't run to Washington demanding a bail out if you do.