Paying for Harvey

Hurricane Harvey has been mind-boggling, and the costs for the people in Texas, and beyond as Harvey moves east, will be massive.  Now is probably not the best time to talk about flood insurance, but Congress’s failure to address it when there wasn’t a national emergency means we have to deal with it now.

Because private insurance companies have been unwilling to provide flood insurance, or at least have been unwilling to provide flood insurance at prices people are willing to pay and/or at prices state governments are willing to approve (in those states where the state has the right to approve insurance rates), the federal government provides flood insurance.  Unfortunately, there are two problems with the federal government’s flood insurance program.  First, it is set to expire at the end of September. 

Second, because its rates are set so low, it doesn’t have enough money to pay claims out of the premiums it receives.  Therefore, it has to borrow money from the Treasury to pay claims.  But there is a limit on the amount it is allowed to borrow, and that amount is just about used up.

An aside:  The concept of one part of the federal government “borrowing” money from another part of the federal government to pay benefits is just bookkeeping hocus pocus.  In this case, there is no borrowing because there will never be any paying back.  The reason there is a huge deficit in the flood insurance program is because the premiums are too low.  Since the premiums will never be set high enough to even cover current costs, let alone pay back any accumulated deficits, this is just a matter of the federal government paying the money.

A second aside:  This means, in effect, the whole country is paying to provide subsidized flood insurance, i.e., flood insurance with premiums set below the amount necessary to pay claims over time, to people who want to live where there is a big chance of hurricanes.  While I realize Hurricane Harvey is historic, hurricanes along the Gulf of Mexico are not.  The Houston Astros are currently playing “home” games in Tampa because of Hurricane Harvey.  They played “home” games in Milwaukee in September of 2008 because of Hurricane Ike.

Even more amazing, though, is the number of people who did not buy flood insurance, even at subsidized low rates.  Some could not afford it.  Others probably did not want to afford it, in the sense that they wanted to buy something else instead.¹  While we must provide food, shelter, and comfort to these people, what do we owe them for the house and possessions that they lost?  If they could have bought flood insurance, but decided they wanted to buy something else, what do we owe them?  It is a tough question.  And now is a terrible time to be answering it.  Which is why Congress should have addressed the question before the rains came.  But they didn’t, and now we will be answering it at the worst possible time.
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¹ Please understand, I am not talking about food or healthcare.  I’m talking about fancier cars, bigger TVs, etc.  Given the number of people who did not buy flood insurance, there are clearly some in this category.