The self-defeating cycle of floods and US federal aid

By STEPHEN MIHM / Pic By BLOOMBERG

After two weeks of nonstop coverage of massive hurricanes, the blame game has only begun, beginning with climate change and unregulated growth — for good reason. But the situation would not be nearly so dire without decades of well intentioned but deeply flawed federal programmes.

It was impossible to purchase insurance policies to cover floods until 1895. This offered some protection until 1927, when the Mississippi River overflowed its banks across several states. Firms walked away from the business entirely.

Despite the inability to hedge risk, people continued to move into flood-prone areas. So, the federal government stepped in.

As the historian Michele Landis Dauber has shown, the idea of “disaster relief” — federal aid for people caught up in catastrophes like floods — had become an uncontroversial prerogative of the national government beginning in the 19th century. After floods devastated areas along the Rio Grande in 1897, Joseph Cannon, chair of the Appropriations Committee, endorsed disaster relief, arguing that “in matters of this kind, involving the appropriation of money, Congress has unlimited power”.

The “New Deal” enshrined this idea on an unprecedented scale, making the idea of disaster relief central to the modern welfare state. Anyone living in a flood plain could reasonably expect that the federal government would act to minimise losses in the event of a catastrophic flood. In effect, the government became the insurer of last resort.

Unfortunately, this went hand in hand with other programmes that encouraged people to settle in high-risk areas. These included public works projects — levees, dams, and other interventions — that signalled the national government would control flooding in high-risk areas. The federal government also began building infrastructure — new roads, primarily — that opened up development in these very same areas.

In 1942, Gilbert White, the nation’s leading expert on disaster relief and an outspoken critic of the government’s approach to flood control, lambasted national flood policy as “essentially one of protecting the occupants of floodplains against floods, of aiding them when they suffer flood losses, and of encouraging more intensive use of flood plains”.

White counselled a far more comprehensive approach, one that recognised the need to regulate land use in flood plains. He pushed the idea that any future federal flood mitigation projects be tied to local commitments to reduce population pressures in flood plains.

It was a novel idea, but implementation proved problematic in the 1950s and 1960s. In the end, Congress crafted a series of programmes that subsidised the risk of living in flood plains, but did little to guarantee that property owners, never mind local governments, took the necessary steps to protect themselves.

In 1965, Hurricane Betsy hit the Gulf Coast and Florida, wreaking over a billion dollars in damage. Congress opened its coffers to help, but it also moved forward with a long-debated plan to address the flood control problem. At the same time, White helmed a newly created “Task Force on Federal Flood Policy”.

In its final report, the task force argued for a comprehensive approach to floodplain management. It also raised concerns about an increasingly popular idea: Government-backed flood insurance.

“For the federal government to subsidise low premium disaster insurance or provide insurance in which premiums are not proportionate to risk would be to invite economic development in floodplain areas,” the report warned.

Nonetheless, Congress charged ahead in 1968, creating the National Flood Insurance Programme, or NFIP. This programme offered heavily subsidised premiums for existing homes; new homes, by contrast, would be charged premiums that reflected the full risk — or at least that was the intent.

White endorsed the idea, hoping it would proceed on “an experimental pilot basis”, as two historians of this episode have noted. Instead, the newly created Flood Insurance Administration (FIA) attempted to launch the programme on a national scale with insufficient resources.

Under the NFIP, private insurers wrote the policies, but assumed none of the risk. That fell to the government to assess, but it still didn’t have accurate flood maps to do so.

As a consequence, it began enrolling communities into the programme without having a precise idea of the risks involved; at the same time, rampant development in floodplains continued, making it next to impossible for the government to keep up.

Moreover, while the NFIP tried to force local communities to avoid reckless development in exchange for getting access to insurance, it didn’t turn out that way. One Government Accountability Office (GAO) report from 1976 found that the FIA lacked an “effective system” to insure that local communities took the necessary steps to mitigate flood risks by restricting development and imposing zoning regulations.

Consequently, “the federal government had no assurance that the communities’ flood-prone land were being developed wisely”.

The same GAO report found that the government wasn’t able to keep up with new development. It noted that for the FIA to map all the nation’s at-risk communities, it would need to pick up the pace, completing 2,600 studies a year. At the time, it was averaging 91. And this didn’t even address the fact that many of the maps generated by these studies have proven woefully poor guides to the likelihood of flooding.

No less troubling, the NFIP found that many communities didn’t want insurance at all; they preferred to take their chances with flooding instead of accept limitations on development. This wasn’t entirely irrational: Every time a catastrophic hurricane hit the US, Congress appropriated more money to help residents.

But when Congress amended the programme to anyone with a federally insured mortgage to buy flood insurance, things went awry, too. Part of the problem was that this restriction went into effect just as banks started to securitise mortgages.

Once sold, to out-of-state financial institutions, homeowners no longer faced pressure to maintain flood insurance. One recent study found that most homeowners who buy insurance only do so for a few years before letting it expire.

A separate study has shown that the premiums paid in different states over the past three decades do not accurately reflect risk, with land-locked states like Colorado, Wyoming and Idaho paying far more for insurance than is warranted by their risk profile, while many Gulf states — Mississippi, Louisiana, Alabama, and Texas — pay heavily subsidised rates.

Congress attempted to fix this mess by passing an overhaul of the NFIP in 2012. This would have updated flood maps and forced existing properties to pay premiums commensurate with the real risks faced by flooding. But Congress watered down the legislation two years later in response to the pleas of legislators from the Gulf Coast.

Massive infusions of federal money and resources will help rebuild areas hobbled by the recent hurricanes, and continue subsidising development in flood-prone regions without extracting restrictions on further development. That will make everyone feel good for a bit.

But it won’t last. The waters will return, and the country will eventually have to confront an inconvenient truth: For the past century, the government has unwittingly adopted policies that have encouraged people to settle in areas that can no longer keep them safe and dry. No amount of disaster relief will change that.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.