How Cronyism Made Harvey Worse

The flood waters from Harvey not even stopped rising before pundits began casting blame. And the blame focused on man-made causes: climate change, the failure of city and county officials to control or mitigate flooding, and Houston’s lack of zoning.

The pundits got it partly right. There is a man-made factor that contributed to Harvey’s devastation: cronyism.

While it is true that Houston’s lack of zoning allowed development in flood prone areas, that development was largely encouraged by the policies of the federal government. By subsidizing flood insurance, the government has encouraged developers to build in areas prone to flooding.

As the economist Walter Williams has pointed out, when we subsidize something we get more of it. When government subsidizes the cost of living in a flood plain, we get more development in flood plains. More development in flood prone areas leads to more flooded homes and businesses when significant rainfall occurs.

Congress has repeatedly attempted to reform the government’s flood insurance program, but intense lobbying from real estate interests have derailed those efforts. Developers and realtors are among the most powerful lobbying groups in Washington, and they have used their political clout to protect policies that help them sell homes. And one of those policies is subsidized flood insurance.

Real estate interests deliver votes and campaign donations. Politicians deliver favorable legislation for those who provide electoral support. That is cronyism—the exchange of political support for political favors.

Cronyism has encouraged developers to build in flood prone areas. And it has encouraged individuals to buy homes in those areas. For those who think short-term, cronyism seems to be a win-win. Developers, realtors, and home owners get subsidies, and politicians get campaign contributions and votes. But in the long-term, cronyism leads to disasters like Harvey.

It is unlikely that we will ever completely prevent flooding in Houston. But a first step in mitigating flooding is to prevent the flood of money from special interests that allows them to buy political favors. This doesn’t mean restricting campaign contributions; it means getting the government out of the insurance business. It means ending cronyism.

The federal government dominates the market in flood insurance. Few private companies offer flood insurance, because they price their policies to reflect the actual risk. The government doesn’t, and that is why the National Flood Insurance Program (NFIP) is currently $25 billion in debt. If a private company priced its policies like the government does, it would have gone out of business long ago.

In pricing flood insurance below rational standards, the NFIP reduces the cost of living in a flood plain. And that encourages more development in flood prone areas.

If the government got out of the insurance business, the market would determine the rate for flood insurance. When those rates reach a point that the market won’t bear, developers will quit building in flood prone areas because they won’t be able to sell homes. And if they do build in those areas, the buyers (and insurance companies) will be the ones assuming the risk, not taxpayers.

Subsidies discourage rational decision making. Indeed, the very purpose of subsidies is to encourage individuals to undertake economic activities that would otherwise be irrational. A $3,000 flood insurance policy may prevent an individual from buying a home. Reduce that cost to $500 and he might be willing to buy the home. The risk of flooding hasn’t changed, but the cost of that risk has.

If a developer wants to build in a flood prone area, he should be free to do so. If an individual wants to buy a home in a flood prone area, he should be free to do so. But they—not taxpayers—should bear the responsibilities of those decisions.

Houston’s relative freedom in land use has been one of the primary motors of its economic success. Regulations might solve the problem in the short-term, but they will undoubtedly create greater problems in the long-term.

The free market has served Houston well. It’s time we let the free market serve us just as well in flood insurance. It’s time to end the cronyism.

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