Washington Wednesday: Flood insurance reform

MARY REICHARD, HOST: It’s Wednesday the 8th of August, 2018.

Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher.

This month marks one year since Hurricane Harvey slammed into the Texas Gulf Coast.

AUDIO: Sound of wind noise

Hurricane Harvey didn’t actually do that much damage for a Category 4 storm. But after it made landfall, the system churned over Southeast Texas for days. It dumped four to five feet of rain in and around Houston. It’s densely populated. In size, Houston is America’s fourth-largest.

ABC: Tonight the disaster in Texas in the wake of Hurricane Harvey is deepening. Houston is a city in crisis…

That crisis caused $125 billion in destruction. That includes damage to more more than 200,000 homes.

Government-backed flood insurance covers most of those homes. It’s the National Flood Insurance Program. I’ll refer to it later as the NFIP. And the agency responsible for it is FEMA, the Federal Emergency Management Agency.

Congress created the NFIP in 1968 after many private insurers pulled out of the flood-insurance market. It quickly began paying out more money than it took in. And when huge hurricanes like Katrina and Harvey, that only made things worse.

Congress forgave $16 billion of NFIP debt last year, and the program still owes the federal government another $21 billion.

Lawmakers are split on what to do now.

Some want to let the program collapse under its own weight. Supporters say that would crush homeowners who have no other options.

One supporter is Senator John Kennedy of Louisiana. His state has 400 miles of coastline on the Gulf of Mexico.

KENNEDY: Some people who don’t understand the importance and don’t understand the danger and the devastation caused by flooding say, well, if you live near water, just move. Give me a break. I mean, 50 percent of the jobs in this country are in or near water.

Kennedy happens to be a Republican, but flood insurance reform is not a strictly partisan issue. Differences most often split among those who represent states with few flooding problems and those from the 10 coastal states where property owners hold the vast majority of flood insurance policies.

Last week, after Congress passed its seventh temporary flood insurance extension since June of last year, Kennedy was pleased. But he acknowledged NFIP critics have legitimate complaints.   

KENNEDY: Their point is we need to reform the NFIP, and I couldn’t agree with them more. I’m not happy with crappy, either. But I don’t want there to be, at any point, a gap in eh—a gap in coverage.

Kennedy is one of several lawmakers to introduce bipartisan flood insurance reform legislation, but so far all of them have stalled.

Here to talk more about this is Chris Edwards. He was a senior economist on the congressional Joint Economic Committee and a former manager with PricewaterhouseCoopers. He’s now the director of tax policy studies at the Cato Institute. Chris, good morning.

CHRIS EDWARDS, GUEST: Thanks a lot for having me on the show.

EICHER: Chris, I doubt many people are familiar with the “National Flood Insurance Program.” I can imagine eyes glazing over. That is, unless they live in a coastal area, I guess. Explain why this program is important.

EDWARDS: Well, the private sector provides a lot of insurance in this country—auto insurance and basic home insurance, of course—but back in 1968, the federal government argued that private companies were not providing flood insurance, and so the federal government started a big national flood insurance program. So for the last 40 years or so, flood insurance has been kind of a government-controlled nationalized system, whereas most other insurance is private sector.

EICHER: And why do you suppose the federal government needs to be in that business? As you say, they’re not in the auto insurance business, home insurance. What’s the government’s best argument for being involved in the flood insurance business?

EDWARDS: Well, I don’t think there is a very good argument. There’s a basic thing that economists call “crowding out.” That once the government gets involved in an activity and starts subsidizing it, it prevents or dissuades private companies from coming in and offering that insurance. So the problem with the government running the system is that it was originally supposed to be self-financing and not cost taxpayers any money. That has not come to bear.

EICHER: We talked about the numbers involved earlier—$21 billion in debt even after a forgiveness of $16 billion by the Congress last year. When did the flood insurance program finances start going sideways? And tell me what you think is keeping them there.

EDWARDS: Well, two things, basically. Congress and special interest groups have prevented the program from raising the rates to more market-based levels to replenish the reserves. And over the last 15 years or so, we’ve had a succession of storms that have pushed up costs, starting with Hurricane Katrina. But the program, again, has never really been on financially sound footing because the rates it charges are artificially low. And which have, like I said, this bad effect of encouraging development in flood-prone areas.

EICHER: Are there any other policies that may be playing into this? Could it be local rebuilding policies or is the entire problem related to federal-government involvement?

EDWARDS: You actually put your finger on something that’s very important. The federal government for decades has taken all kinds of policy actions that are encouraging people to live in flood-prone areas along the Mississippi and along the tributaries as well as along dangerous places along the East Coast. So the classic example of this is Army Corps of Engineer of flood-controlled structures. New Orleans, a lot of the areas in New Orleans that are, frankly, too dangerous for people to live in were only developed because the Army Corps of Engineers going back to the 1960s and before, built these massive flood control structures that people assumed would make the place safe to live. So, and then there’s a beach replenishment all along the East Coast. The Army Corps of Engineers comes in and rebuilds beaches and flood control structures whenever a bad storm damages these places. And so up and down the East Coast in many places, you have a lot of wealthy people with second homes building right along the coast, and they’re just expecting that if there’s a storm and damages the home or wipes it out that the government will come in and help them and they’ll rebuild in the same place. It’s really a crazy system.

EICHER: And it’s reasonable and rational to believe that because it always happens.

EDWARDS: Well, that’s right. There’s an astounding statistic that in the national flood insurance program, 1 percent of the policies account for 30 percent of all the costs. In other words, these are multiple or repeated flood structures, homes, that when you get a storm, it’s damaged or destroyed. The government gives the homeowner money, he or she rebuilds, and this goes on and on and on. So the 1 percent of the policies account for a third of the cost.

EICHER: Congress passed a four-month extension of this program but almost didn’t. Do you know what the sticking points were for Congress and why they only rolled it over for four months?

EDWARDS: Well, on the House side, the chairman of the relevant committee, Jeb Hensarling from Texas, has long wanted to reform this program, but the problem is you get members of Congress such as Steve Scalise from Louisiana who resists any kind of reform to this program, so it’s a classic special interest story. It would be better for most Americans if this program didn’t cost taxpayers money, but you get a small group of special interest groups and the members that they support resisting any kind of reforms when the program’s obviously broken.

EICHER: And four months, I guess, only because that’s what they could get people to agree to?

EDWARDS: That’s right. So, we’re going to have this debate in Congress again in November, I guess, when Congress comes to renew this program again.

EICHER: Okay, so I’m thinking, Chris, that a listener to this conversation would fall into one or both of these following two categories: Either they have flood insurance themselves ‚ or they are taxpayers helping to cover the sea of red ink here. How concerned should anyone who falls into either or both of these groups be with what’s going on with this program?

EDWARDS: Well, I mean, for taxpayers, this is a microcosm of the general broad problem in Washington, is why we run such massive deficits because we can’t seem to reform any of these spending programs because a few special interests—they block reforms. For people who live in flood-prone places, yes, we can’t sort of leave people who rely on this program high and dry, but over time we’ve got to raise the rates on this program up to market level. We ought to make some deregulations like Jeb Hensarling wants to do to bring in private insurance companies into the markets, and that would provide proper signals for people in the future. More and more Americans are living in dangerous places along the coast, and if the concerns about climate change are right and ocean levels are rising, it’s a crazy thing we’re doing with government policy. Government policy is encouraging people to live in more dangerous places. That makes no sense.

EICHER: Chris Edwards is the director of tax policy studies at the Cato Institute. Chris, thanks so much for joining me.

EDWARDS: Thank you.

(AP Photo/David J. Phillip) In this Aug. 28, 2017, file photo, rescue boats fill a flooded street as flood victims are evacuated as floodwaters from Tropical Storm Harvey rise in Houston.

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