How the National Flood Insurance Program Wastes Taxpayer Dollars

An expensive tutorial on the perils of government interaction.

In 1967, Pete Seeger composed a protest song that said: "We're waist deep in the Big Muddy, and the big fool says to push on." It was a poke at President Lyndon Johnson, in an allegory about Vietnam. That war is long past. But Johnson led us into another, more literal Big Muddy that we have yet to escape.

Hurricane season is underway in North America, with the worst storms likely between August and October. Americans who live inland may think they have nothing to worry about, because their homes will not be drowned in salt water. But they are at high risk anyway.

That's because they will have to shoulder a large share of the cost of helping homeowners who live in the path of tropical storms. The National Flood Insurance Program, created in 1968 under LBJ on the theory that the private insurance market couldn't handle flood damage, presumed that Washington could. Like many of his Great Society initiatives, it has turned out to be an expensive tutorial on the perils of government intervention.

The program is set to expire at the end of July, but Congress will undoubtedly renew it sooner or later. Correcting its perverse incentives, however, may be a bridge too far.

Hurricane Harvey inundated a house in Kingwood, Texas last year—the 22nd time it has flooded since 1979. You might think that after the first or second disaster, those in charge of the insurance program would have offered to pay for the owner to rebuild—somewhere else.

But it was allowed to remain in harm's way. As of 2015, the government had paid $2.5 million in claims—"at last eight times what the house is worth," according to the Houston Chronicle.

A house outside of Baton Rouge, La., assessed at $56,000, has soaked up 40 floods and over $428,000 in insurance payouts. One in North Wildwood, New Jersey has been rebuilt 32 times.

Nationally, some 30,000 buildings classified as "severe repetitive loss properties" have been covered despite having been swamped an average of five times each. Homes in this category make up about one percent of the buildings covered by the flood insurance program—but 30 percent of the claims.

Their premiums don't cover the expected losses. But as National Resources Defense Council analyst Rob Moore told The Washington Post, "No congressman ever got unelected by providing cheap flood insurance."

That's one reason the program is $25 billion in debt. By underpricing coverage, the government encourages people to build in places that are doomed to go underwater. It also leaves other taxpayers high and dry, and not in a good way.

One explanation for the pattern is that the NFIP rules allow rebuilding only if the damage is less than half the value of the home. Otherwise, the owners must move or elevate their homes.

But local officials find it unpleasant to deliver such unpleasant news to flood victims, so they "lowball damage estimates, putting people and homes back in vulnerable places." The Chronicle found that in Galveston, after Hurricane Ike in 2008, dozens of properties had assessed damage of less than 50 percent—despite getting between eight and 15 feet of water.

If private insurers were providing coverage, you can be sure they would limit repeat claims in places vulnerable to costly storms. It would be less expensive if those whose homes keep flooding took buyouts so the land could be given over to frogs and sawgrass.

The federal program allows owners to choose that option. But it can take years for local governments to get the needed money from the Federal Emergency Management Agency. And there is no guarantee that owners will get buyouts in the end. The delay pushes them to swallow hard, fix the damage, and stay put.

The root of the problem is a familiar one: the people responsible for these decisions are not spending their own money. They find it easier to indulge the relative handful of flood victims than to attend to the interests of millions of taxpayers in general.

In a private program, an insurer that didn't enforce its rules with care and resolve would soon find itself out of business. Local, state, and federal agencies almost invariably survive no matter how poorly they manage their budgets.

Barring good luck, some coastal communities will soon be coping with torrential rains, high winds, and storm surges. But thanks to the flood insurance program, we're already in over our heads.