Location, Location, Dislocation

So the .gov has been running ads about flood insurance. Perhaps you've seen them? Some guy stands there with a roof floating over his head and explains how he's a home, and homes need flood insurance, and you should buy some flood insurance.

I'll be honest. Flood insurance infuriates me. Well, flood insurance in the abstract doesn't bother me a bit. The National Flood Insurance Program disturbs me greatly. Here's how it works. You pay a pittance to the feds to insure your house. When your house floods, the feds write you a check. This would be all well and good except the premiums the fed takes in don't cover the checks the feds have to write. The advertisements are so the feds can drum up new revenue sources to help cover the losses instead of robbing the general revenue.

I'd be in favor of the program if it were actuarially sound. It's not. Insurance rates aren't based on risk, they're based on politics. Flood insurance rates are set artificially low. Apparently, pricing the insurance accurately would lead to people moving or not getting flood insurance. Either one works for me if we don't bail people out when bad shit happens. Unfortunately, we do.

Any insurance that is subsidized by the government leads people to make stupid choices. In this case, building houses in floodplains. If Joe and Jane Homeowner had to bear the real cost of their flood insurance themselves, we wouldn't see many houses built below sea level in a swamp.

So what do we get instead? We subsidize flood insurance to make it cheaper to build houses on floodplains. So more people build houses on floodplains, thus ensuring more losses when the inevitable flood happens. We've created a lovely feedback loop of bad decisions. When the program blows up fiscally, do we ever start to rethink the initial bad decision of subsidizing insurance? Nope. Our legislators and bureaucrats tweak the margins in a perpetual attempt to keep the game going. Revisiting the initial assumption of providing subsidized insurance never enters the debate.

If you look around, you can see plenty of examples of similar dynamics at work in a lot of federal programs. So we keep throwing money down ratholes, and we're rapidly going broke. I wonder why?

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