Bernie Sanders, Common Sense, and Moral Hazard

September 9, 2019 by Dan Mitchell @ International Liberty

 

Something really strange is happening. Yesterday, I wrote about how I agreed with Trump on a trade issue.

Today, I’m going to agree with Crazy Bernie about a moral hazard issue.

Shocking, but true. The Vermont socialist actually understands that it makes no sense to subsidize new homes in flood-prone areas.

"If people want to rebuild in an area which will be devastated by the next storm, they're certainly not going to get federal assistance from my administration." -Sen. Sanders on changing FEMA rules to spur a retreat from properties suffering repeated losses. #ClimateTownHall pic.twitter.com/BC47QBZupm  CNN (@CNN) September 5, 2019

I’ll probably never again have a chance to write this next sentence, so it deserves an exclamation point. Bernie is completely correct!

Flood insurance encourages people to take on excessive risk (i.e., it creates moral hazard). And the subsidies often benefit rich people with beachfront homes (which may explain why Senator Sanders is on the right side)

If nothing else, politicians are very clever about doing the wrong thing in multiple ways.
So we’re not merely talking about luring people into flood-prone areas with subsidized insurance.
Sometimes government uses rental subsidies to put people in flood-prone areas.
Here are some excerpts from a story in the New York Times.

When a deadly rainstorm unloaded on Houston in 2016, Sharobin White’s apartment complex flooded in up to six feet of water. She sent her toddler and 6-year-old to safety on an air mattress, but her family lost nearly everything, including their car. When Hurricane Harvey hit the next year, it happened all over again: Families rushed to evacuate, and Ms. White’s car, a used Chevrolet she bought after the last flood, was destroyed. …But Ms. White and many of her neighbors cannot afford to leave. They are among hundreds of thousands of Americans — from New York to Miami to Phoenix — who live in government-subsidized housing that is at serious risk of flooding… But the Department of Housing and Urban Development, which oversees some of the at-risk properties, does not currently have a universal policy against paying for housing in a designated flood zone. …Nationwide, about 450,000 government-subsidized households — about 8 to 9 percent — are in flood plains…

While FEMA and government-subsidized flood insurance wouldn’t even exist in my libertarian fantasy world, I’m willing to acknowledge that government sometimes does things that aren’t completely foolish.

For instances, it’s better to subsidize people to move out of flood-prone areas instead of subsidizing them to rebuild in those areas.

Nashville is trying to move people…away from flood-prone areas. The voluntary program uses a combination of federal, state and local funds to offer market value for their homes. If the owners accept the offer, they move out, the city razes the house and prohibits future development. The acquired land becomes an absorbent creekside buffer, much of it serving as parks with playgrounds and walking paths. …While a number of cities around the country have similar relocation projects to address increased flooding, disaster mitigation experts consider Nashville’s a model that other communities would be wise to learn from: The United States spends far more on helping people rebuild after disasters than preventing problems. …research shows that a dollar spent on mitigation before a disaster strikes results in at least six dollars in savings. There are many reasons more people end up rebuilding in place than moving away. Reimbursement is relatively quick, while FEMA’s buyout programs tend to be slow and difficult to navigate.

While it’s encouraging to see a better approach, we wouldn’t need to worry about the issue if government got out of the business of subsidizing flood insurance.

Which helps to explain why the Wall Street Journal expressed disappointment last year when Republicans blew a golden opportunity to fix the program.

One disappointment you can count on is a GOP failure to fix one of the worst programs in government: taxpayer subsidized flood insurance. …The Federal Emergency Management Agency’s flood insurance program was set to expire on Nov. 30, and Congress rammed through a temporary extension to buy more time. Congress was supposed to deal with the program as part of the end-of-the-year rush. The program runs a $1.4 billion annual deficit, which comes from insurance priced too low to compensate for the risk of building homes near water. Congress last year forgave $16 billion of the program’s $24 billion debt to Treasury, not that anyone learned anything. The program then borrowed another $6 billion. …If Republicans can’t fix this example of failed government because it might upset parochial interests, they deserve some time in the political wilderness.

In other words, Bernie Sanders is better on this issue than last year’s GOP Congress.  I’ve criticized Republicans on many occasions, but this must rank as the most damning comparison.  But let’s set aside politics and partisanship.  What matters is that the federal government is operating an insanely foolish program that puts people at risk, soaks taxpayers, and destroys wealth.

Gee, maybe Reagan was right when he pointed out that government is the problem rather than the solution.