Congress created the National Flood Insurance
Program in 1968 as a way to reduce the expense of federal disaster
assistance. The idea was that those choosing to live in harm's way
should contribute ahead of time to their own assistance. Instead, the
program has grown into a disaster of its own, currently $18 billion in
debt.
Putting flood insurance completely into the private market might actually reduce costs, even in the absence of a subsidy. Disputes arise after every hurricane over whether damage is caused by flood or wind. The existence of the National Flood Insurance Program allows both insurers and state insurance commissions to avoid the obvious solution of private policies that combine both flood and wind coverage.
The destruction of Gulf Coast wetlands, which had acted as a buffer from hurricanes, magnified the impact of Hurricane Katrina. We can debate the role of Washington in protecting the environment, but at a minimum we can all agree we should not be actively subsidizing its destruction with tax dollars.
The flood insurance program not only places the environment in harm's way, but does the same to the very people it attempts to benefit. By under-pricing flood risk, the program makes it cheaper to live in a flood plain than it would be otherwise. Unquestionably, that distortion gives families who would not have done so an incentive to live in the path of a potential flood.
If we should have learned one lesson from the financial crisis, it is that gross under-pricing and the subsidization of risk will result in individuals making choices that will harm them and taxpayers. We must begin today to roll back the various subsidies toward housing. The National Flood Insurance Program is an easy and reasonable place to start.
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