Law, Economics & Cycling: Flood Insurance as Welfare for the Wealthy

Hurricane Sandy, now ranked as the second most costly natural disaster in US history (after Katrina), provided a stark reminder that living along the ocean can be very dangerous. So, why do people build there? Here are what I think are the top three reasons:

1. The ocean is often very beautiful, and sea breezes in the summer are delightful.

2. Property values along the ocean front are high.

3. The federal government subsidizes coastal development by providing below-market flood insurance through FEMA's National Flood Insurance Program.

Of those three reasons, the third is far and away the most important. If the federal government did not provide below-cost flood insurance in coastal areas there would be much less building in the coastal zone, hence much less damage from coastal storm surges.

So, why does the federal government subsidize coastal construction via flood insurance? Because of the political influence of development interests, who demanded the federal government fill the void left by private insurers who refused to provide coverage in flood-prone areas because it made no economic sense to do so. ? ?The private insurance industry understood better than members of Congress that it made no sense to insure construction on shorelines that were under constant threat of inundation and erosion.

FEMA contends that the National Flood Insurance Program was not created to subsidize development of coastal properties but to "control" coastal development. As evidence, FEMA points to rules that prohibit it from providing flood insuring in certain designated areas. But the incentives created by the National Flood Insurance Program are inconsistent with any expressed desire to curtail coastal development.

In short, taxpayers are subsidizing the building and rebuilding of coastal dwellings to the benefit mainly of the wealthy who can afford coastal properties. At least as far as coastal regions are concerned, the National Flood Insurance Program constitutes welfare for the wealthiest Americans, including many who are now calling for cuts in federal programs that help the least advantaged in our society. Even before allowing the Bush tax cuts to expire, Congress should stop the subsidies that encourage the wasteful cycle of coastal building, destruction, rebuilding, destruction, and more rebuilding.

Source: http://cyclingprof.blogspot.com/2012/11/flood-insurance-as-welfare-for-wealthy.html

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