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The Beach House Bailout

Another terrible idea from the folks who brought you Obamacare.

May 10, 2010, Vol. 15, No. 32 • By ELI LEHRER
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The fundamental unfairness of the bill has attracted centrist organizations like the American Consumer Institute and Taxpayers for Common Sense to join the opposition as well. In fact, two parts of the bill—intended to provide a federal backstop for existing state catastrophe funds—would benefit only Florida and California. (Other states don’t have the legal structures to receive the guarantees the bill provides.) Likewise, the main beneficiaries would be people who live near the beach, and, as Dan Sutter of the University of Texas Pan-American has shown, coastal counties in hurricane prone states are generally wealthier than inland counties. In Klein’s hometown of Palm Beach, in fact, the State of Florida provides subsidized insurance through the Florida Citizens Property Insurance Corporation for waterfront mansions worth up to $2 million—many of them second homes.

While some California and Florida Republicans support Klein’s effort, most of its supporters come from the Democratic caucus mainly because the House Democratic leadership—interested in boosting the vulnerable Klein—has gotten strongly behind the bill. On the other hand, a similar bill to add wind coverage to the national flood insurance program went down to a 74-19 defeat in the Senate in 2008. And although Barack Obama supported a different version of Klein’s measure on the campaign trail and in the Senate, his administration has come out against the wind proposal and remains silent on Klein’s current bill.

For all of the manifest flaws of Klein’s proposal and its uncertain future in the Senate, it passed out of committee last week and seems likely to move towards the House floor. The bill presents a classic case of a public policy with diffuse, difficult-to-calculate costs and concrete, easy-to-measure benefits. On one hand, the U.S. Treasury will end up owing billions of dollars (that it will eventually have to collect in taxes)—but only after a major storm hits. On the other hand, the proposal will deliver immediate increases in profits to some insurance companies, open up new opportunities for developers, and shave a few dollars off the insurance premiums for owners of hazard-prone properties—i.e., beach houses.

The Homeowners’ Defense Act is one of the very worst pieces of public policy with serious support in the current Congress, and that’s saying something.

Eli Lehrer is national director of the Center on Finance, Insurance, and Real Estate at the Heartland Institute.

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