Government Insurance Subsidies Beach Front Properties

'Save the Post Office' Movement Defends 'the Human Side of Government' | The ...

When I started covering politics, Jennings Randolph was completing his tenure as the grand old man of Capitol Hill. The last sitting member of Congress to have arrived with Franklin Roosevelt in 1933 (as a member of the House), he was still sitting as a senator from West Virginia more than fifty years later. Perhaps as importantly, he had been born only a little more than a century after the Constitution was adopted.

Randolph recognized the connection between the Constitution and the New Deal, seeing in both an element of nation-building that focused on the affirmative role of government and the necessary role of the extension of the federal government that could be found in every hinterland hamlet and urban neighborhood: the post office.

Randolph was the great defender of the postal service that Ben Franklin had established and that the framers of the Constitution had seen fit to recognize as an essential project of the federal endeavor.

Randolph waxed poetic about the post office, respecting the local facility, be it a frame building at a country crossroads or a brick-and-mortar monument at the center of the largest city. It was, he said, more than a purveyor of packages and mail, more than a source of employment, more even than a meeting spot and focal point for community.

The post office, Randolph explained, was the friendly and honorable face of a government that could otherwise seem distant and, at times, ominous.

As a true Jeffersonian Democrat, and a faithful New Dealer, Randolph argued that those who understood the positive role that government could play in the lives and communities of Americans had better make the defense of the post office a high priority.

“When the post office is closed, the flag comes down,” he said. “When the human side of government closes its doors, we’re all in trouble.”

Randolph spoke the faith of the small-“d” democrat with those words—and, at least in his time, that of the large-“D” Democrat.

Harvard Law and Policy Review » Hurricanes and Moral Hazard

This weekend very hype hurricane did not happen with the expected revenge, but she managed to do considerable damage to property throughout the Mid-Atlantic and the North. Flooded homeowners find themselves in two very different categories: those with insurance against floods and others. Like most private insurers will not provide insurance against floods as too risky, the government's actions in the gap and provides insurance.

Insurance against floods is a strange creature. In areas where flooding is likely to occur, the government subsidizes the insurance in order to stimulate development.  Suzy Khimm argues that subsidized insurance creates an incentive for overdevelopment of flood-prone regions, since owners in those areas do not have to pay the full cost of the insurance.  Khimm has several good points about problems with the way this insurance is handled, but the subsidy regime is even more perverse than Khimm recognizes.

First, flood-prone property is often beach-front property, which makes it quite expensive. Subsidized flood insurance not only encourages development, but it props up the values of the already developed homes, since the owners don’t have to worry about losing their investment.   When floods happen, the insurance program payout includes the bump in house value from the subsidized insurance.  Therefore, the government is paying for the benefit it bestows on the homeowners.  Second, because the insurance is only subsidized in flood-prone areas, residents of other areas see something closer to market rates—and given the low chances that they will be flooded out, probably won’t buy flood insurance.  When an extreme weather event like Irene causes substantial inland flooding , the people living outside of flood-prone areas lose their houses and their savings, while the ones who were living dangerously get a check for their troubles.

The problem with Khimm’s argument for eliminating the flood insurance subsidy is that it won’t end the subsidy to people living in the flood-prone areas.  Edward Prescott and Finn Kydland won a Nobel Prize in Economics in 2004 in part for their discussion of this problem in their 1977 paper, “ Rules Rather than Discretion: The inconsistency of optimal planning .” In the paper, Prescott and Kydland point out that governments are not credible actors and use the example of homeowners building houses in a flood plain despite the government’s stated refusal to provide flood-control measures.  The authors point out that homeowners, as rational agents, will realize that once they have build the houses, the government will have no choice but to take the flood control measures, thereby subsidizing development in flood prone areas.  Without subsidized flood insurance, we will only see increased pressure to provide costly flood protection in advance of every major storm or some other expensive flood countermeasure.

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