In light of events surrounding Hurricane/Frankenstorm Sandy, and John's post calling for reductions in federal subsidies for flood insurance in repeated flood zones, I thought it would be a good time to dig through the archives and find what John and I said about flood insurance in the aftermath of Hurricane Katrina. So here's a link to an article John and I wrote for the Milken Institute Review on the National Flood Insurance Program back in 2006. While the whole article is obviously well worth the read (despite a few typos), here's a particularly prescient excerpt:
I sure am glad people listened to us back then...sarc.
While it would be irresponsible to abandon federal flood insurance overnight after providing financial incentives for coastal development for more than 35 years, it would be equally irresponsible to subsidize fl ood insurance on new construction. If a developer wants to build in a flood zone, the real cost of insuring against flood damage should be built into the market value – much the way location in a poor school district or a high-crime area is built into the value.
Lack of information on the true likelihood of floods might still lead property owners to make bad decisions. Requiring them to buy unsubsidized flood insurance as a condition for obtaining a federally insured mortgage would be one way to solve the problem. But one could imagine a less coercive approach in which the best available information of flood risks is provided to every person buying or developing property in flood zones.
A well-intentioned government program has encouraged millions of Americans to live and play in places – often very beautiful places – that are accidents waiting to happen. It would be fitting to use the same program to tame this risky behavior gradually, at minimal cost to property owners and taxpayers.