This article originally appeared in Regulation. Click here to read the full article.
By Ike Brannon and Elizabeth Lowell
The National Flood Insurance Program (NFIP) expired last September 30, but Congress passed a temporary measure reauthorizing the program until November. That gave the House and Senate more time to battle over their own versions of longer-term reauthorization bills.
Ideally, flood insurance would be provided by the private market, with actuarially sound rates that would discourage building in flood-prone areas. But it is unlikely that will happen in the United States, as generations of homeowners have purchased taxpayer subsidized flood insurance, resulting in hundreds of thousands of homes and other buildings now located in flood zones. Besides, a private insurance market would invariably exclude the homes facing the gravest flood risk, with the result that government would feel obligated to provide financial assistance to any uninsured flood victims—a conundrum elegantly captured in the seminal 1977 paper by Finn Kydland and Ed Prescott that won them the Nobel Prize.
Having a national flood insurance program acknowledges this reality. If designed and administered effectively, the program would at least minimize the need for large future disaster aid outlays as well as force those who own buildings susceptible to flooding to bear the brunt of the costs via insurance prices that reflect the risk of flood damage. Unfortunately, that is not the sort of program the United States now has; instead, taxpayer subsidies have encouraged building in flood-prone areas.