Just Say No to Bailing Out Beach Houses

Looks like Congress is again cooking up a bill that would send over taxpayer money to cover the poor financial decisions of others.

It's officially called the "Homeowners' Defense Act" but Competitive Enterprise Institue (CEI) has dubbed it the "Beach House Bailout:

So how did we get here?

Higher premiums serve to discourage investment and development in disaster-prone areas, such as Florida with it's hurricane season, however the higher prices are not politically popular and may appear unfair when the seas are calm and the weather clear. That may cause the government to attempt to drive prices down artificially, which serves as a market signal for more investment and development on the high-risk lands.

In Florida, politicians created a state-run insurance company with artificially low property insurance premiums backed by an implicit guarantee which encouraged people to build, like the celebrities building elaborate mansions on beaches in hurricane paths. This distortion in the marketplace drove many private insurance companies out of the state, leaving the state of Florida as the largest insurance provider.

When natural disasters hit, like a hurricane, the damage costs are higher, and thus insurance claims greater, than they would have been if the original premium signals had been obeyed and the beach houses not been built. Instead of spreading the risk throughout the private insurance sector, taxpayers are left footing the bill for massive claim payouts.

To cover their behinds so their constituents don't hold them accountable on this self-inflicted mess, many politicians like those in Florida want to spread the risk throughout the rest of the country through the "Homeowners' Defense Act," i.e. pass the buck on and seek a federal bailout. Of course, this would merely recreate the Florida model on a massive scale: the federal government will provide a guarantee and national taxpayers will be on the hook for payouts.

This idea is attractive to other states and localities that face increased natural disaster risks, but is unfair to low-risk states and taxpayers who choose to live and build in stable, safe areas who will end up having to bailout their irresponsible and risky neighbors.

To join CEI in saying "No Beach House Bailouts," sign their citizens petition here.

Originally posted at the American Issues Project Blog