Legislation meant to stabilize the finances of the federal government’s flood-insurance program has put a big dent in the Berry family budget.
The federal governments's flood insurance program is the National Flood Insurance Program (NFIP). John and I have both railed against NFIP before (That cover picture still cracks me up). The legislation being referred to is the Biggie-SmallsBiggert-Waters Flood Insurance Reform Act.
Debi Berry, 57, and her husband, Rick, 64, live in the village of LaRue, a flood-prone area in Marion County. They used his first Social Security check to pay their flood-insurance premium, which has nearly doubled this year to $1,089, from $622 in 2013.
Flood insurance premia doubled in the past year due to the removal of many NFIP subsidies for flood insurance by the Notorious B.I.G. Biggert-Waters Flood Insurance Reform Act.
“I could have thought of better uses for that money,” Mrs. Berry said.
Like Ohio State Buckeye Football season tickets! Or a bunch of scratch-offs!
But the couple needs the coverage. Floodwater from the Scioto River crept into their basement in 2011 and came close in December, and their home lender requires them to carry flood insurance.
The Scioto (pronounced Sigh-OH-ta) River is best described as a murky stream of brownish muck--sometimes a torrent after a lot of rain, or snow melt, that meanders through central Ohio, eventually merging with the Olentangy (pronounced OH-lin-tan-jee) River in downtown Columbus.
“I’m not sure I’d want to chance it without it,” she said. “We’ve been on the edge too often. I’m not sure I’d want to play that lottery game.”
But I could've used that extra money to play the Ohio lottery.
Dean Colby, 66, and his wife, Jan, 56, also of LaRue, weren’t as lucky as the Berrys. They have no basement, so in December the water rose 16 inches in their one-story home — for the second time since 2011.
"Fool me once, shame on — shame on you. Fool me — you can't get fooled again."
They can’t use the $37,000 government check they just got for repairs until they learn if they're eligible for a second fund to raise the structure. They haven’t checked their escrow, but if their premium went up, they have no choice but to pay. They still have a mortgage, and houses in the village do not sell, Mrs. Colby said.
Maybe that's because they keep getting filled with water?
But now, the couples might be in line for a break on their premiums. Last week, Congress sent to President Barack Obama legislation meant to roll back some of the increases that homeowners across the country have experienced since Congress passed a flood-insurance-reform act in 2012.
Ummm...the new legislation did not roll back any price increases, because the Big Daddy Kane Biggert-Waters Flood Insurance Reform Act (BWFIRA) didn't RAISE prices. The BWFIRA removed subsidies in the NFIP that were responsible for establishing prices LOWER than were efficient. The BWFIRA simply took a step towards eliminating inefficient subsidies and returning prices to their efficient, unsibsidied, socially more deisrable levels.
Now back to the snark.
The 2012 act aimed to shore up a program that is $24 billion in the hole.
...because he remembers as a kid how much fun it was to build a sand castle on the Hawaiian beaches and then watch the tide roll in to wash the sand castle away, only to start anew anew tomorrow.
That's the childhood equivalent of the incentives built into the NFIP subsidies.
One aim of the 2012 law was to roll back some of the federal subsidies that critics say have spurred private insurers to largely avoid the flood-insurance market.
Because private insurers know that the low premia the government charges are NOT FISCALLY VIABLE.
But the law resulted in huge increases in flood-insurance costs at a time when prices of regular homeowner policies were on the rise anyway because of extraordinary losses caused by tornadoes and other powerful storms in recent years.
There may be ways to live with a permanently drier Colorado, but none of them are easy. Finding more water is possible — San Diego is already building a desalination plant on the Pacific shore — but there are too few sources to make a serious dent in a shortage.
Working to reduce water consumption by 20 percent per person from 2010 to 2020, Southern California’s Metropolitan Water District is recycling sewage effluent, giving away high-efficiency water nozzles and subsidizing items like artificial turf and zero-water urinals.
The new flood insurance rules, which went into effect on Oct. 1, are intended to make the deeply indebted NFIP solvent by no longer charging government-subsidized rates on homes in flood-prone areas. The hikes will affect about 20 percent of the 5.5 million people who have NFIP policies around the country, as well as thousands more who live in areas that didn’t used to be considered flood-prone but who now must buy insurance under the new FEMA map.
The NFIP subsidized rates have allowed people for years to build in flood-prone areas that, in some cases, probably never should have been built on in the first place. But the feds’ solution to this — hiking up rates over four years until they reach market price — could leave millions of homeowners unable to afford the steep new prices. If these homeowners try to sell their houses, they’ll most likely find it tough to find a buyer, who would inherit the new insurance rates. (People with mortgages are required to purchase the insurance — those who’ve paid off their homes can skip it.)
For years, the federal government has subsidized flood insurance premiums for people whose homes are built in flood-prone areas. One can speculate as to the motivation (real or otherwise) for the subsidization--those with low income can't afford to build elsewhere, private insurance markets overprice insurance in flood prone areas,...--but one thing is certain: flood insurance priced below the efficient market price will lead to too much construction in flood prone areas. Perhaps worse, if the insurance rates are too low--as was the case with the National Flood Insurance Program--there is an incentive to rebuild in areas likely to flood again.
It seems the federal government learned some lessons after Hurricane Katrina and has decided to raise the price of flood insurance by removing subsidies for rebuilt homes in the wake of Super-duper Storm Sandy. While well-intended, and the right move from an economic efficiency point of view, the removal of an inefficient policy is going to create short-term hardships for a significant number of people.
Don't get me wrong. I applaud the move toward actuarily efficient pricing of flood insurance.
I just feel bad for those who made decisions based on bad policy only to see it changed midstream.
Warning: Spoiler Alert below the jump. If you haven't read 'Inferno' yet, don;t read below the jump, I'm going to give away the plot and ending.
I recently finished reading Dan Brown's (author of The Da Vinci Code) newest book 'Inferno.' As a casual reader of the book, I found it entertaining. Brown does his typical job of keeping the action moving, mixing in some interesting conspiracy theories, making me want to visit some cities I've never been to, and making it seem like being a college professor might be cool (although I have my doubts). I didn't enjoy it as much as The Da Vinci Code, which I didn't enjoy as much Angels and Demons, but still a good read (and I refuse to accept that The Lost Symbol was written).
But, as an economist, I found the book to be complete nonsense.
Here I go, trying to be all Aguanomics on you and all:
Louisville Water Co. officials never talk about conservation — not that it has mattered. Water use has declined on its own.
While that may sound like a good, green development for a city seeking a more sustainable future, there’s a downside to the declining consumption: It’s helping to drive up customers’ rates — raising them more than 80 percent since 1999.
As Louisville’s economy has shifted from a water-needy industrial base to a service-based one, and as water efficiency increasingly has become a national priority, the declining consumption has helped raise rates even faster than the rate of inflation.
And that’s an issue, since the water company still must maintain its basic infrastructure, including treatment plants and distribution system, even as increasingly stringent water-quality standards require upgrades, said James Brammell, the new water company president.
So now, water company officials are looking at other ways to hold down rates, including cutting costs and looking to add more customers farther away. ...
Water rates have risen a combined 81.6 percent since 1999, while the Consumer Price Index (measuring inflation) during that same period has risen just 38.3 percent, according to a water company analysis.
Last November, the company’s board approved its third straight year of 3.75 percent rate increases, which followed rate increases of 5 percent to 6.5 percent annually for much of the past decade.
Only with a natural monopoly could we see a decrease in demand lead to higher prices. Firms that compete end up charging prices equal to marginal cost, even if price falls below average total cost so that they aren't covering all of their fixed costs (e.g., infrastructure). Natural monopolies can try to cover their total costs with higher prices.
Water conservation (i.e., the moving away from water-intensive industry) has caused water demand to fall from D1 to D2. Consumption falls from Q1 to Q2. Water revenues fall by area A. The water company raises price and, since water demand is inelastic, the revenue increase (area C) is greater than the revenue decrease (area B) [note: It would be easier to see if I drew a steeper demand curve]. Yet, C < A + B, so they keep raising rates.
Thanks, now I partially understand what might be going on.
Bear with me, this might take a minute to get to the point. In 2005, John and I started Env-Econ with the following mission:
The Environmental Economics blog is dedicated to the dissemination of
economists’ views on current environmental and natural resource issues.
We hope this blog will help bring economists’ views on environmental
issues further into the mainstream. The intended audience includes the
general public and students. Posts are non-technical. [emphasis added]
I added the emphasis to that in light of a comment I received this morning on this post from yesterday. As background: in the post, I asked an academic colleague to give me a back of the envelope calculation of the social value of beach renourishment. At the end of the post I linked to the academic article on which my colleague based the back of the envelope calcualtion--mainly to give credit where credit is due and also to let any reader so inclined to take a look at what goes into making the sausage that is Env-Econ. Anyway, one of our readers was so inclined--and apparently didn't like what they saw in the sausage factory:
tried to read and understand Sathya Gopalakrishnan's abstract and I
can't. I need an interpreter. I'm pretty sure it's English. Maybe
someone could get a "grant" to find out just what percent of the US
adult population accurately understands her language? Maybe I'm just
dumb. I do have a B.S. degree from a highly regarded university but that
was a long time ago.
A few points:
What percentage of the US adult population accurately understands her language is irrelevant for the abstract. The abstract is intended for an audience of academic environmental economists and as such the relevant question is 'What percentage of the world population of those interested in academic issues relevant to environmental economists understand her language?' Based on almost 20 years of experience (including a stint co-editing the journal in question), I would venture a guess that the percentage is very high--but the denominator in that percentage is pretty small.
The commenter has discovered one of the dirty little secrets of academics. We academics like to use jargon, big words and complicated phrasing to make it intentionally difficult to understand what we are trying to say. In doing so we create a nice barrier to entry into the profession. It takes years of additional education just to be able to learn the language of our discipline. That education is costly both in terms of resources and time expended. But for those who clear the barrier, the level of complication helps to keep the supply of academics who can make things as unnecessarily complicated as we do, and more importantly understand that complication, low. And we all know that decreased supply increases prices (in this case wages). So, you see, unnecessary complication is necessary. It's a means to self-preservation and higher wages.
There are usually less complicated ways to explain highly technical stuff without losing the basics of what is being said. That is the purpose of this blog. Allow me to illustrate. Here is an excerpt from the academic abstract in question:
We use the empirical results to parameterize a dynamic optimization
model of beach nourishment decisions and show that the predicted
interval between nourishment projects is closer to what we observe in
the data when we use the estimate from the instrumental variables model
rather than OLS. As coastal communities adapt to climate change, we find
that the long-term net value of coastal residential property can fall
by as much as 52% when erosion rate triples and cost of nourishment sand
To the non-academic (hopefully many of our readers), that reads as follows:
We use the [blah] to [blah-blah] of beach nourishment decisions and show that the [blah] between [blah] is closer to [blah] when we use the [blah-blah] from the [HOLY S***]. As coastal communities adapt to climate change, we find
that the [blah] of coastal residential property can fall
by as much as [a bunch of made-up crap].
So in good Env-Econ fashion allow me to interpret the abstract:
bunch of complicated statistics and math that no one else has thought to
use, we find that beach house prices fall when beaches wash away or
when the cost of putting more sand on the beach goes up.
That, our dear readers, is why we started this blog.
Sathya...Do you have any idea
(rough guess will do) of the welfare gains per dollar spent on renourishment?
haven't seen any estimates of return on nourishment investment.
back of the envelope calculation based on just the hedonic valuation in NC
would be $3 per dollar spent.
an average ocean front property valued at approx $800000, the semi log hedonic
coeff (accounting for endogeneity of width) of 0.11 suggests a value of $8800
per foot of beach width. With the cost of nourishment sand is approx $5 per
cubic meter and fixed cost of $1000000. The cost per foot of nourishment per
ocean front home would be approx 2300 (assuming costs are distributed across 50
homes along a 1km stretch of the coastline, and a limiting nourishment depth of
10m). That would be $6500 net gain, which is approx a $3 for every dollar
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