Friday, September 11, 2009

Uwe Reinhardt's lame defense

Hurricane Ike: They got the beachfront views, you got the bill

Over at the Economix blog Princeton economist Uwe Reinhardt uses the example of federal flood insurance to justify big government. I kid you not:
Another term for “government risk management,” of course, is “social insurance.”

It is a social contract with government that Americans quietly love, but in the shouting matches that now pass for our “national conversation” on public policy so often profess to hate — as when they cry for government to stay out of Medicare, or when they sit on their beachfronts in the Hamptons waxing worried about government intrusion in the economy, all the while basking in the security of federal flood insurance.

...Perhaps the argument is that individuals should make their own financial arrangements in the private market for risk management to protect themselves against the financial risks of illness. But then it can be asked why states in disaster-prone areas — e.g., Florida and other states along the Gulf Coast — should not be required to tax themselves on a regular basis for the purchase of private insurance to cover the cost of their fairly predictable calamities, or to set aside adequate rainy-day funds to meet that cost.

Why is it the American way that I in New Jersey should feel obliged to give financial help to a family whose beach house in Mississippi was blown down by a hurricane, but it is socialist and un-American to help a Mississippi woman struck by breast cancer?
That's great, except federal flood insurance is an awful program that is an example of everything wrong with government interventions. By privatizing the benefits while socializing the costs of waterfront property, the government encourages people to place themselves and their property in harm's way. When something goes wrong the rest of us -- who don't enjoy waking up to ocean views -- get to pick up the tab.

As John Stossel says:
In 1980 I built a wonderful beach house. Four bedrooms -- every room with a view of the Atlantic Ocean. It was an absurd place to build, right on the edge of the ocean. All that stood between my house and ruin was a hundred feet of sand.

My father told me: "Don’t do it; it’s too risky. No one should build so close to an ocean."

But I built anyway.
Why? As my eager-for-the-business architect said, "Why not? If the ocean destroys your house, the government will pay for a new one."

What? Why would the government do that? Why would it encourage people to build in such risky places? That would be insane.
But the architect was right. If the ocean took my house, Uncle Sam would pay to replace it under the National Flood Insurance Program.

Since private insurers weren’t dumb enough to sell cheap insurance to people who built on the edges of oceans or rivers, Congress decided the government should step in and do it. So if the ocean ate what I built, I could rebuild and rebuild again and again -- there was no limit to the number of claims on the same property in the same location -- up to a maximum of $250,000 per house per flood. And you taxpayers would pay for it.


I did have to pay insurance premiums, but they were dirt cheap -- mine never exceeded a few hundred dollars a year.
Moreover, who do you think builds on property next to the water? Hint: not the poor. If big government is so easy to justify, why are its supporters like Reinhardt and Steven Pearlstein forced to mount such weak defenses? Maybe it's just hard to defend the indefensible.

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