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Archive for the ‘Subsidies’ Category

The Department of Agriculture should be abolished. Yesterday, if possible.

It’s basically a welfare scam for politically connected farmers and it undermines the efficiency of America’s agriculture sector.

Some of the specific handouts – such as those for milk, corn, sugar, and even cranberries – are unbelievably wasteful.

But the European Union’s system of subsidies may be even worse. As reported by the New York Times, it is a toxic brew of waste, fraud, sleaze, and corruption.

…children toil for new overlords, a group of oligarchs and political patrons…a feudal system…financed and emboldened by the European Union. Every year, the 28-country bloc pays out $65 billion in farm subsidies… But across…much of Central and Eastern Europe, the bulk goes to a connected and powerful few. The prime minister of the Czech Republic collected tens of millions of dollars in subsidies just last year. Subsidies have underwritten Mafia-style land grabs in Slovakia and Bulgaria. …a subsidy system that is deliberately opaque, grossly undermines the European Union’s environmental goals and is warped by corruption and self-dealing. …The program is the biggest item in the European Union’s central budget, accounting for 40 percent of expenditures. It’s one of the largest subsidy programs in the world. …The European Union spends three times as much as the United States on farm subsidies each year, but as the system has expanded, accountability has not kept up. …Even as the European Union champions the subsidy program as an essential safety net for hardworking farmers, studies have repeatedly shown that 80 percent of the money goes to the biggest 20 percent of recipients. …It is a type of modern feudalism, where small farmers live in the shadows of huge, politically powerful interests — and European Union subsidies help finance it.

Is anyone surprised that big government leads to big corruption?

By the way, the article focused on the sleaze in Eastern Europe.

The problem, however, is not regional. Here’s a nice visual showing how there’s also plenty of graft lining pockets in Western Europe.

P.S. I imagine British politicians will concoct their own system of foolish subsidies, but the CAP handouts are another reason why voters were smart to vote for Brexit.

P.P.S. The CAP subsidies are one of many reasons why the European Union has been a net negative for national economies.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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The great French economist from the 1800s, Frederic Bastiat, famously explained that good economists are aware that government policies have indirect effects (the “unseen”).

Bad economists, by contrast, only consider direct effects (the “seen”).

Let’s look at the debate over stadium subsidies. Tim Carney of the American Enterprise Institute narrates a video showing how the “unseen” costs of government favoritism are greater than the “seen” benefits.

Unfortunately, stadium subsidies are just the tip of the cronyism iceberg.

In a column for the Dallas Morning News, Dean Stansel of Southern Methodist University discussed some of his research on the topic.

While state and local economic development incentives may seem to help the local economy, the offsetting costs are usually ignored, so the overall effect is unclear. Furthermore, from the perspective of the nation as a whole, these policies are clearly a net loss. …In a new research paper, my colleague, Meg Tuszynski, and I examined whether there is any relationship between economic development incentive programs and five measures of entrepreneurial activity. Like the previous literature in this area, we found virtually no evidence of a positive relationship. In fact, we found a negative relationship with patent activity, a key measure of new innovation. …A recent study by the Mercatus Center found that 12 states could reduce their corporate income tax by more than 20 percent if incentive programs were eliminated. That includes a 24 percent cut in Texas’ business franchise tax. In six states, it could either be completely eliminated or reduced by more than 90 percent. These are big savings that would provide substantial tax relief to all businesses, both big and small, not just those with political influence. …That would provide a more level playing field in which all businesses can thrive.

And here’s a Wall Street Journal editorial from earlier the year.

Amazon left New York at the altar, turning down a dowry of $3 billion in subsidies. Foxconn’s promised new factory in Wisconsin, enticed with $4 billion in incentives, has fallen into doubt. …Now add General Electric , which announced…it will renege on its plan to build a glassy, 12-story headquarters on Boston’s waterfront. …The company reportedly…pledged to bring 800 jobs to Boston. In exchange, the city and state offered $145 million in incentives, including tax breaks and infrastructure funds. GE’s boss at the time, Jeff Immelt, said not to worry: For every public dollar spent, “you will get back one thousand fold, take my word for it.” …two CEOs later, a beleaguered GE won’t be building that fancy tower at all. There won’t even be 800 jobs. …GE will lease back enough space in two existing brick buildings for 250 employees. …what a failure of corporate welfare.

Let’s wrap this up with a look at some additional scholarly research.

Economists for the World Bank investigated government favoritism in Egypt and found that cronyism rewards politically connected companies at the expense of the overall economy.

This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms’ innovation activities. …The analysis finds that the probability that firms invest in products new to the firm increases from under 1 percent for politically connected firms to over 7 percent for unconnected firms. The results are robust across different innovation measures. Despite innovating less, politically connected firms are more capital intensive, as they face lower marginal cost of capital due to the generous policy privileges they receive, including exclusive access to input subsidies, public procurement contracts, favorable exchange rates, and financing from politically connected banks. …The findings suggest that connected firms out-rival their competitors by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce…long-term growth potential by diverting resources away from innovation to the inefficient capital accumulation of a few large, connected firms.

For economics wonks, here’s Table 2 from the study, showing how subsidies are associated with less innovation.

The World Bank also found awful results because of cronyism in Ukraine.

But this isn’t a problem only in developing nations.

There’s some depressing research about the growing prevalence of cronyism in the United States (ethanol handouts, the Export-Import Bankprotectionismtax favoritismbailoutssubsidies, and green energy are just a few examples of how the friends of politicians get unearned wealth).

Cronyism is bad under Democrats and it’s bad under Republicans. Time for separation of business and state!

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Something really strange is happening. Yesterday, I wrote about how I agreed with Trump on a trade issue.

Today, I’m going to agree with Crazy Bernie about a moral hazard issue.

Shocking, but true. The Vermont socialist actually understands that it makes no sense to subsidize new homes in flood-prone areas.

I’ll probably never again have a chance to write this next sentence, so it deserves an exclamation point. Bernie is completely correct!

Flood insurance encourages people to take on excessive risk (i.e., it creates moral hazard). And the subsidies often benefit rich people with beachfront homes (which may explain why Senator Sanders is on the right side)

If nothing else, politicians are very clever about doing the wrong thing in multiple ways.

So we’re not merely talking about luring people into flood-prone areas with subsidized insurance.

Sometimes government uses rental subsidies to put people in flood-prone areas.

Here are some excerpts from a story in the New York Times.

When a deadly rainstorm unloaded on Houston in 2016, Sharobin White’s apartment complex flooded in up to six feet of water. She sent her toddler and 6-year-old to safety on an air mattress, but her family lost nearly everything, including their car. When Hurricane Harvey hit the next year, it happened all over again: Families rushed to evacuate, and Ms. White’s car, a used Chevrolet she bought after the last flood, was destroyed. …But Ms. White and many of her neighbors cannot afford to leave. They are among hundreds of thousands of Americans — from New York to Miami to Phoenix — who live in government-subsidized housing that is at serious risk of flooding… But the Department of Housing and Urban Development, which oversees some of the at-risk properties, does not currently have a universal policy against paying for housing in a designated flood zone. …Nationwide, about 450,000 government-subsidized households — about 8 to 9 percent — are in flood plains…

While FEMA and government-subsidized flood insurance wouldn’t even exist in my libertarian fantasy world, I’m willing to acknowledge that government sometimes does things that aren’t completely foolish.

For instances, it’s better to subsidize people to move out of flood-prone areas instead of subsidizing them to rebuild in those areas.

Nashville is trying to move people…away from flood-prone areas. The voluntary program uses a combination of federal, state and local funds to offer market value for their homes. If the owners accept the offer, they move out, the city razes the house and prohibits future development. The acquired land becomes an absorbent creekside buffer, much of it serving as parks with playgrounds and walking paths. …While a number of cities around the country have similar relocation projects to address increased flooding, disaster mitigation experts consider Nashville’s a model that other communities would be wise to learn from: The United States spends far more on helping people rebuild after disasters than preventing problems. …research shows that a dollar spent on mitigation before a disaster strikes results in at least six dollars in savings. There are many reasons more people end up rebuilding in place than moving away. Reimbursement is relatively quick, while FEMA’s buyout programs tend to be slow and difficult to navigate.

While it’s encouraging to see a better approach, we wouldn’t need to worry about the issue if government got out of the business of subsidizing flood insurance.

Which helps to explain why the Wall Street Journal expressed disappointment last year when Republicans blew a golden opportunity to fix the program.

One disappointment you can count on is a GOP failure to fix one of the worst programs in government: taxpayer subsidized flood insurance. …The Federal Emergency Management Agency’s flood insurance program was set to expire on Nov. 30, and Congress rammed through a temporary extension to buy more time. Congress was supposed to deal with the program as part of the end-of-the-year rush. The program runs a $1.4 billion annual deficit, which comes from insurance priced too low to compensate for the risk of building homes near water. Congress last year forgave $16 billion of the program’s $24 billion debt to Treasury, not that anyone learned anything. The program then borrowed another $6 billion. …If Republicans can’t fix this example of failed government because it might upset parochial interests, they deserve some time in the political wilderness.

In other words, Bernie Sanders is better on this issue than last year’s GOP Congress.

I’ve criticized Republicans on many occasions, but this must rank as the most damning comparison.

But let’s set aside politics and partisanship.

What matters is that the federal government is operating an insanely foolish program that puts people at risk, soaks taxpayers, and destroys wealth.

Gee, maybe Reagan was right when he pointed out that government is the problem rather than the solution.

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It seems like every Democrat in the country plans to run against Trump in 2020 and presumably all of them will feel compelled to issue manifestos outlining their policy agendas.

Which gives me lots of material for my daily column. I’ve previously written about statist initiatives from Bernie Sanders and bizarre ideas put forth by Elizabeth Warren.

Today, let’s review the two big ideas that have been unveiled by Kamala Harris, the Senator from California who just announced her bid for the White House.

We’ll start with her idea to create a federal subsidy for rent payments. I wrote about this new handout last year, and warned that it would enrich landlords (much as tuition subsidies enrich colleges and health subsidies enrich providers).

Here’s some of what Professor Tyler Cowen wrote for Bloomberg about the proposal.

One of the worst tendencies in American politics is to restrict supply and subsidize demand. …The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices. That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. …Consider Harris’s embrace of subsidies for renters, as reflected by her recent sponsorship of the Rent Relief Act of 2018. Given the high price of housing in many parts of the U.S., it is easy to see why the idea might have appeal. But the best and most sustainable way of producing cheaper housing is to build more homes and apartments. The resulting increase in supply will cause prices to fall… That is basic supply and demand, with supply doing the active work. The Harris bill, in contrast, calls for tax credits to renters. …There is an obvious problem with this approach. If you subsidize renters, that will push up the price of apartments. Furthermore, economic logic suggests that big rent increases are most likely in those cases where the supply of apartments is relatively fixed, a basic principle of what is called “tax incidence theory.” In sum, most of the gains from this policy would go to landlords, not renters.

In other words, this is a perfect plan for a politician who understands “public choice” theory.

Ordinary voters think they’re getting a freebie, but the benefits actually go to those with political influence and power.

Now let’s look at her $2.7 trillion tax cut. I believe that people should be allowed to keep the lion’s share of any money they earn, so my gut instinct is to cheer.

But it’s always good to be skeptical when a politician is offering something that sounds too good to be true.

Kyle Pomerlau of the Tax Foundation has done the heavy lifting and looked closely at the details. He has a thorough explanation of her plan and its likely impact.

The “LIFT the Middle-Class Act” (LIFT) would create a new refundable tax credit available to low- and middle-income taxpayers. …LIFT would provide a refundable credit that would match a maximum of $3,000 in earned income ($6,000 for married couples filing jointly). …The credit would begin to phase out for single taxpayers starting at $30,000 of adjusted gross income (AGI) and $80,000 for single taxpayers with children, and begin phasing out for married taxpayers at $60,000 of AGI. The phaseout rate for all taxpayers would be 15 percent. …LIFT’s impact on the economy is primarily through its effect on the labor force. LIFT phases in from the first dollar of earned income to the maximum credit of $3,000 per tax filer. It then phases out starting at different levels of income, depending on a tax filer’s marital status and whether they have children. These phase-ins and phaseouts create implicit marginal subsidies and tax rates that impact individuals’ incentive to work.

At the risk of oversimplifying, Harris is proposing a new version of the earned income credit.

And that means some taxpayers get subsidized for working and some taxpayers get penalized.

For taxpayers in the credit phaseout range, tax liability would increase by 15 cents for each additional dollar earned. This means that these taxpayers would face an additional implicit marginal tax rate of 15 percent, which would reduce these taxpayers’ incentive to work additional hours. In contrast, taxpayers in the phase-in range of the credit would get $1 for each additional $1 of income they earn. As such, these taxpayers would benefit from an effective marginal subsidy rate, or negative marginal tax rate, of 100 percent. A negative tax rate of 100 percent would increase the incentive for these taxpayers to work additional hours.

Kyle crunches the numbers to determine the overall economic impact.

While the positive labor force effects of the phase-in of the credit could offset the negative effect of the phaseout, we find that, on net, the size of the total labor force would shrink under this policy. This is primarily due to the large number of taxpayers that would fall in the phaseout range of the credit relative to the number of individuals that would benefit from the phase-in. …We estimate that the credit…would reduce economic output by 0.7 percent and result in about 825,906 fewer full-time equivalent jobs.

Here’s the relevant table from the Tax Foundation’s report.

This is remarkable. It would seem impossible to design a $2.7 trillion tax cut that actually hurts the economy, but Sen. Harris has succeeded in that dubious achievement.

For all intents and purposes, she has figured out how to have an anti-supply-side tax cut.

And there are two other problems that deserve attention.

  • First, as noted in Kyle’s paper, the tax cut is “refundable.” This means that money goes to people who don’t pay taxes. In other words, it is government spending being laundered through the tax code. So Harris claims to be cutting taxes, but part of what she’s doing is expanding redistribution and making government bigger (and encouraging more fraud).
  • Second, Harris is very cagey about how the numbers work in her proposal. Does she want the tax cuts (and new spending) financed by more borrowing? By printing money? By offsetting class-warfare tax increases? Some combination of the three? Whatever the answer, the negative economic damage will be substantially higher if financing costs are included.

Considering the poor design and upside-down economics of the rent subsidy scheme and the new tax credit, the bottom line is rather obvious: Kamala Harris wants to buy votes, and she has decided that it is okay to hurt the economy in hopes of achieving her political ambitions.

No wonder she fits in so well in Washington!

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Some departments of the federal government should be shut down because of federalism. High on that list would be the Department of Education and Department of Transportation.

Other departments should be shut down because there is simply no role for any government involvement at any level.

I usually cite the Department of Housing and Urban Development as an example, but the Department of Agriculture also should be terminated.

It’s a rat’s nest of special interest favors. I’ve previously written about inane intervention to enrich Big Dairy, Big Sugar, and Big Corn.

But I confess that I was unaware of Big Cranberry.

The Wall Street Journal opines about the nonsensical nature of cranberry intervention.

As you dip into the Thanksgiving cranberry sauce, here’s a tart story that may make you want to drain the bog. This fall the U.S. Agriculture Department gave cranberry growers its approval to dump a quarter of their 2018 crop. Tons of fruit and juice—in the ballpark of 100 million pounds—will be turned into compost, used as animal feed, donated or otherwise discarded. The goal is to prop up prices.

Needless to say, there’s nothing about propping up cranberry prices in Article 1, Section 8, of the Constitution.

This is also a common-sense issue, as the WSJ explains.

The USDA rule caps growers’ production based on their historical output, with some exemptions. Small cranberry processors aren’t covered, and neither are those that don’t have inventory left over from last year. The trouble is that this reduces everyone’s incentive to downsize… Among the many economic perversities of agricultural policy, this is merely a vignette. Still, America is growing 100 million pounds of cranberries and then throwing them away to raise prices per government order. Wouldn’t it be better—and easier—to let the market work?

By the way, Trump’s protectionism is also part of the problem.

President Trump’s trade war hasn’t helped. About a third of production usually goes overseas. But in June the European Union put a 25% tariff on U.S. cranberry-juice concentrate in retaliation for U.S. steel tariffs. A month later, China bumped its tariff on dried cranberries to 40% from 15%. Mexico and Canada also added duties.

A typical Washington cluster-you-know-what.

Though I don’t recommend thinking about it too much, lest you get indigestion.

The solution is to copy New Zealand and get rid of all agriculture handouts.

P.S. If you like Thanksgiving-themed libertarian humor, the image at the bottom of this column augments the image to your right.

P.P.S. And if you like Thanksgiving-themed videos with libertarian messages, here’s one option and here are two others.

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With Florence about to hit, it’s time to preemptively explain how the federal government makes damage more likely and why post-hurricane efforts will make future damage more likely.

There are just two principles you need to understand.

  1. When Washington subsidizes something, you get more of it, and the federal government subsidizes building – and living – in risky areas.
  2. When Washington provides bailouts, you incentivize risky behavior in the private sector and “learned helplessness” from state and local governments.

If I wanted to be lazy (or to be merciful and spare readers from a lengthy column), this satirical image is probably all that’s necessary to explain the first point. The federal government’s flood insurance program gives people – often the very rich, which galls me – an incentive to build where the risk of flooding and hurricanes is very high.

But let’s look at additional information and analysis.

We’ll start with this excellent primer on the issue from Professor William Shughart.

Disaster relief arguably is, in short, something of a public good that would be undersupplied if responsibility for providing it were left in the hands of the private sector. If this line of reasoning is sound, the activity of the Federal Emergency Management Agency (FEMA) or something like it is a proper function of the national government. …even if disaster relief is thought of as a public good—a form of “social insurance” against fire, flood, earthquake, and other natural catastrophes—it does not follow that government provision is the only or necessarily the best option. …both economic theory and the historical record point to the conclusion that the public sector predictably fails to supply disaster relief in socially optimal quantities. Moreover, because it facilitates corruption, creates incentives for populating disaster-prone areas, and crowds out self-help and other local means of coping with disaster, government provision of assistance to disaster’s victims actually threatens to make matters worse. …Government agencies are created by legislation, overseen by elected officials, and operated by huge bureaucracies. Public employees’ fear of being blamed for doing something wrong (or failing to do something right) produces risk aversion…the people who set priorities and make decisions are often separated by multiple layers of management from those on the ground who know what really needs to be done.

Professor Shughart explains that “public choice” and “moral hazard” play a role.

FEMA has been shown to be responsive more to the political interests of the White House than to the needs of disaster victims on the ground. …federal emergency relief funds tend to be allocated disproportionately to electoral-vote-rich states that are important to the sitting president’s reelection strategy. …The term moral hazard refers to the reduction in the cost of carelessness… The prospect of receiving federal and state reconstruction assistance after the next hurricane creates an incentive for others to relocate their homes and businesses from inland areas of comparative safety to vulnerable coastal areas. …The expectation of receiving publicly financed disaster relief may explain why 69 percent of the residents of Mississippi’s Gulf Coast did not have federal flood insurance when Katrina hit. …the immediate reactions of for-profit businesses, nongovernmental organizations large and small, and countless individual volunteers amply demonstrate that the private sector can and will supply disaster relief in adequate and perhaps socially optimal quantities

Barry Brownstein has a sober assessment of the underlying problem.

…federal flood insurance was amplifying the impact of storms by encouraging Americans to build and rebuild in areas prone to flooding. …the case against subsidized flood insurance is not a case against growth; it is a case against distorted growth. Federally supported insurance overrides the risk-reducing incentives that insurance premiums provide and results in building in vulnerable areas. …In a free market, insurance premiums on cars, for instance, tend to settle toward an “actuarially fair price.” …If you have a history of drunk driving, that increases the chances you’ll make an insurance claim on your car – so your premiums will be higher, and that encourages you not to drive in the future (or to drive sober in the first place). …Getting the government out of the flood insurance business and having insurance companies determine actuarially sound premiums is the only way for homeowners, businesses, and builders to know the real risk they are assuming.

And here are excerpts from a column by David Conrad and Larry Larson.

…the Great Flood of 1993 in the upper Midwest. After that disaster, the Clinton administration directed an experienced federal interagency task force to report on the flood and its causes. That report…made more than 100 recommendations for policy and program changes… The government found that many policies were encouraging — rather than discouraging — people to build homes and businesses in places with increasingly high risks of flooding… That often compounded the costs and problems caused by floods. …Experts and policymakers have known for a long time that we need to change the way we approach flood mitigation and prevention, but that hasn’t stopped the nation from making the same mistakes over and over. …substantial benefits for property owners and taxpayers could be gleaned by simply removing damaged buildings, rather than repairing them only to see them flooded out again. …many flood insurance policies were heavily subsidized and underestimated risk, leading to premiums that were far too low. …Americans facing some new devastation in the future will be looking back at Harvey and wondering why we didn’t act now.

Even the Washington Post has a reasonable perspective on this issue.

National Flood Insurance Program…an…increasingly dysfunctional program. Enacted 50 years ago…, the program made a certain sense in theory…in return for appropriate local land-use and other measures to prevent development in low-lying areas and for actuarially sound premiums. Politics being what they are, the program gradually fell prey to pressure from developers and homeowners in the nation’s coastal areas. Arguably, the existence of flood insurance encouraged development in flood zones that would not have occurred otherwise. …Ideally, more of the costs of flood insurance would be shouldered by the people and places who benefit most from it; modern technology and financial tools should enable the private sector to handle more of the business, too. Such radical reform is not on Congress’s agenda, of course.

As you might expect, Steve Chapman has a very clear understanding of what’s happening.

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. …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.” …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.

Now let’s look at some of the perverse consequences of federal intervention.

Such as repeated bailouts for certain properties.

Brian Harmon had just finished spending over $300,000 to fix his home in Kingwood, Texas, when Hurricane Harvey sent floodwaters “completely over the roof.” The six-bedroom house, which has an indoor swimming pool, sits along the San Jacinto River. It has flooded 22 times since 1979, making it one of the most flood-damaged properties in the country. Between 1979 and 2015, government records show the federal flood insurance program paid out more than $1.8 million to rebuild the house—a property that Mr. Harmon figured was worth $600,000 to $800,000 before Harvey hit late last month. …Homes and other properties with repetitive flood losses account for just 2% of the roughly 1.5 million properties that currently have flood insurance, according to government estimates. But such properties have accounted for about 30% of flood claims paid over the program’s history. …Nearly half of frequently flooded properties in the U.S. have received more in total damage payments than the flood program’s estimate of what the homes are worth, according to the group’s calculations.

Disaster legislation, Rachel Bovard explained, is often an excuse for unrelated pork-barrel spending.

In 2012, President Obama requested a $60.4 billion supplemental funding bill from Congress, ostensibly to fund reconstruction efforts in the parts of the country most impacted by Hurricane Sandy. However, that’s not what Congress gave him, or what he signed. Instead, the bill was loaded up with earmarks and pork barrel spending, so much so that only around half of the bill ended up actually being for Sandy relief. Consider just a handful of the goodies contained in the final legislation…$150 million for Alaska fisheries (Hurricane Sandy was on the east coast of the US; Alaska is the country’s western most tip)…$8 million to buy cars and equipment for the Homeland Security and Justice departments (at the time of the Sandy supplemental, these agencies already had 620,000 cars between them)…$821 million for the Army Corps of Engineers to dredge waterways with no relation to Hurricane Sandy (the Corps never likes to waste a disaster)…$118 million for AMTRAK ($86 million to be used on non-Sandy related Northeast corridor upgrades). …the Sandy supplemental represented the worst of special interest directed, unaccountable, pork-barrel spending in Washington.

And as seems to always be the case with government, Jeffrey Tucker explains that disaster relief subsidizes corrupt favors for campaign contributors.

Look closely enough and you find corruption at every level. I recall living in a town hit by a hurricane many years ago. The town mayor instructed people not to clean up yet because FEMA was coming to town. To get the maximum cash infusion, the inspectors needed to see terrible things. When the money finally arrived, it went to the largest real estate developers, who promptly used it to clear cut land for new housing developments. …It does seem highly strange that this desktop operation in Montana would be awarded a $300 million contract to rebuild the electrical grid in Puerto Rico. That sounds outrageous. But guess what? …Zinke claims that he had “absolutely nothing to do” with selecting the company that got the contract, even though the company is in his hometown and his own son worked there. And yet there is more. The Daily Beast discovered that the company that is financing Whitefish’s expansions, HBC Investments, was founded by its current general partner Joe Colonnetta. He and his wife were larger donors to Trump campaign, in every form permissible by law and at maximum amounts. …FEMA has long been used as a pipeline to cronies.

The ideal solution is to somehow curtail the role of the federal government.

Which is what Holman Jenkins suggests in this column for the Wall Street Journal, even though he is pessimistic because rich property owners capture many of the subsidies.

What’s really missing in all such places is…proper risk pricing through insurance. …Now we wonder if it can even be ameliorated. …our most influential citizens all have one thing in common: a house in Florida. An unfortunate truth is that the value of their Florida coastal property would plummet if they were made to bear the cost of their life-style choices. A lot of ritzy communities would shrink drastically. Sun and fun would still attract visitors, but property owners and businesses would face a new set of incentives. Either build a lot sturdier and higher up. Or build cheap and disposable, and expect to shoulder the cost of totally rebuilding every decade or two. Faced with skyrocketing insurance rates, entire communities would have to dissolve themselves or tax their residents heavily to invest in damage-mitigation measures. …With government assuming the risk, why would businesses and homesteaders ever think twice about building in the path of future hurricanes?

Katherine Mangu-Ward of Reason offered some very sensible suggestions after Hurricane Harvey.

Many of the folks who take on the risk of heading into an unstable area do so because they are driven by the twin motivations of fellow-feeling and greed. These people are often the fastest and most effective at getting supplies where they are most needed, because that’s also where they can get the best price. This is just as true for Walmart as it is for the guy who fills his pickup with Poland Spring and batteries. Don’t use the bully pulpit to vilify disaster entrepreneurs, small or large. …by trying to control who gets into a storm zone to help, governments can wind up blockading good people who could do good while waiting for approval from Washington in a situation where communications are often bad. Ordinary people see and know things about what their friends and neighbors need and want that FEMA simply can’t be expected to figure out. …Emergency workers and law enforcement shouldn’t waste post-storm effort rooting around in people’s homes for firearms. Law-abiding gun owners do not, by and large, turn into characters from Grand Theft Auto when they get wet.

Amen to her point about so-called price gouging. The politicians who demagogue against price spikes either don’t understand supply-and-demand, or they don’t care whether people suffer. Probably both.

Sadly, FEMA, federal flood insurance, and other forms of intervention now play a dominant role when disasters occur.

That being said, let’s wrap up today’s column with some examples of how the private sector still manages to play a very effective role. We’ll start with this article from the Daily Caller.

Faith-based relief groups are responsible for providing nearly 80 percent of the aid delivered thus far to communities with homes devastated by the recent hurricanes… The United Methodist Committee on Relief, which has 20,000 volunteers trained to serve in disaster response teams, not only helps clean up the mess and repair the damage inflicted on homes by disasters, but also helps families… The Seventh Day Adventists help state governments with warehousing various goods and necessities to aid communities in the aftermath of a disaster. …Non-denominational Christian relief organization Convoy of Hope helps to provide meals to victims of natural disasters by setting up feeding stations in affected communities.

And I strongly recommend this video by Professor Steve Horwitz, my buddy from grad school.

The famous “Cajun Navy” is another example, as noted by the Baton Rouge Advocate.

The Pelican State managed Sunday to avoid most of Harvey’s fury. But around Baton Rouge, Lafayette and other parts of the state, members of the Cajun Navy sprung into action… Many who spent last August wading around south Louisiana’s floodwaters in boats packed them up Sunday and headed west to help rescue Texans caught in the floods. …”I can’t look at somebody knowing that I have a perfect boat in my driveway to be doing this and to just sit at home,” said Jordy Bloodsworth, a Baton Rouge member of the Cajun Navy who flooded after Hurricane Katrina when he lived in Chalmette. “I have every resource within 100 feet of me to help.” Bloodsworth was heading overnight on Sunday to Texas to help with search and rescue. …Others arrived in Texas earlier on Sunday. Toney Wade had more than a dozen friends…in tow as he battled rain and high water to get to Dickinson, Texas. Wade is the commander of an all-volunteer group of mostly former law enforcement officers and former firefighters called Cajun Coast Search and Rescue, based in Jeanerette. They brought boats and high-water rescue vehicles with them, along with food, tents and other supplies.

There’s also the “Houston Navy.”

Here’s another good example of how the private sector – when it’s allowed to play a role – acts to reduce damage.

Increasingly, insurance carriers are finding wildfires, such as those in California, are an opportunity to provide protection beyond what most people get through publicly funded fire fighting. Some insurers say they typically get new customers when homeowners see the special treatment received by neighbors during big fires. “The enrollment has taken off dramatically over the years as people have seen us save homes,” Paul Krump, a senior executive at Chubb, said of the insurer’s Wildfire Defense Services. …Tens of thousands of people benefit from the programs. …The private-sector activity calls to mind the early days of fire insurance in the U.S., in the 18th and 19th centuries before municipal fire services became common. Back then, metal-plaque “fire marks” were affixed to the front of insured buildings as a guide for insurers’ own fire brigades.

It’s also important to realize that armed private citizens are the ones who help maintain order following a disaster, as illustrated by this video of a great American (warning: some strong language).

I imagine that guy would get along very well with the folks in the image at the bottom of this column.

Last but not least, here’s some analysis for history buffs of what happened after the fire that leveled much of Chicago in the 1800s.

…does the current emphasis on top-down disaster relief favored in the US and beyond represent the best strategy? Emily Skarbek, a professor at Brown University, approached this question by studying one of the most famous catastrophes of the 19th century, the Chicago fire of 1871. …scholars and laypeople alike are convinced that there is no substitute for the resources and direction that centralized governments can provide in the wake of a disaster. …This maxim was apparently inconsistent with the Chicago fire, however, as the Midwestern city was reconstructed in a remarkably short period of time, and without the supervision of an overbearing central government. …in 1871 there was no analogue to the present-day, Federal Emergency Management Agency (FEMA), meaning that relief efforts had to be decentralized. Moreover, there was no institutionalized source of government financial aid…it was up to Chicago’s residents to develop solutions to the calamity that they faced. …The Chicago Relief and Aid Society was founded, and set about coordinating the funds and efforts, including sophisticated bylaws regarding who merited support, and at what level. …the society exhibited the flexibility and adaptability necessary for it to expand dramatically immediately after the fire…and to subsequently contract once the needs for its services fell. This latter feature distinguishes Chicago’s relief efforts from those of 21st century government agencies.

Since I started with an image that summarizes the foolishness of government-subsidized risk, let’s end with another visual showing the impact of government.

Or, let’s apply the lesson more broadly.

Sadly, I predict that politicians will ignore these logical conclusions and immediately clamor after Hurricane Florence for another wasteful package of emergency spending, most of which will have nothing to do with saving lives and have everything to do with buying votes. Trump, being a big spender, will be cheering them on.

Which will then encourage more damage and risk more lives in the future. Lather, rinse, repeat.

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