January 2012

Ethanol in The Wall Street Journal

by Brian McGraw on October 26, 2010 · 1 comment

in Energy, Ethanol

The editorial staff at The Wall Street Journal have not been kind to ethanol over the past months. They ran two editorials (one in July — “Survival of the Fattest“, one last week — “The Ethanol Bailout“) criticizing U.S. biofuel policy.

The most recent editorial sparked a letter to the editor from Agriculture Secretary Tom Vilsack. The letter reiterates many of the talking points Vilsack made in his recent address. The title, “Ethanol is a Step to More Biofuels,” almost implicitly acknowledges that corn ethanol itself is not the tell-tale solution the ethanol industry markets it as. Though his letter isn’t as bad as much of the propaganda put forth by the industry recently, his ending comment is misleading:

Don’t forget, the petroleum industry receives billions of dollars in tax breaks each year from the federal government.

I don’t think anyone has forgotten that. But two wrongs don’t make a right. Furthermore, a significant portion of the tax breaks received by the petroleum industry are part of a larger portion of the tax code that is not industry specific. You can credibly argue about the inefficiencies created by the U.S. tax code, but you can’t demonize the petroleum industry for taking advantage of credits available to a large portion of businesses in the U.S. (though there are also petroleum specific subsidies).

Additionally, as summarized (.pdf) by the EIA in 2007, while petroleum subsidies look BIG, on a BTU (subsidy per unit of energy provided) basis they’re miniscule in comparison to biofuel subsidies. The report calculates subsidies at $0.03 per million BTU’s for natural gas/petroleum compared to $5.72 per million BTU’s for ethanol/biofuels. Biofuel subsidies are 190 times larger than natural gas/petroleum subsidies on a per unit of energy basis (not sure why they couldn’t separate these out).

And then onto the commentators. Commentators on the Internet are generally known for their thoughtfulness and accuracy. Just kidding. But the WSJ letter includes comments from real live employee’s of the ethanol industry.

Ben Butterfield writes:

I work for Growth Energy, the coalition of ethanol supporters that filed the E15 waiver with the EPA. I agree with Secretary Vilsack that the EPA’s decision is the right step in the right direction. Moving to E15 is the first crack the blend wall – that artificial limit on the ethanol market. It is the one step we can take today to reduce our dependence on foreign oil, create jobs here in the US and improve our environment.

These types of comments are frustrating because they’re so incredibly misleading. The ethanol industry as a whole relies on government mandated biofuel production. Are they being “artificially limited” by restrictions on the amount of ethanol that can be blended into fuel? In a way, yes. But they also artificially exist, and will artificially grow, because of the EISA mandates on biofuel production. So they aren’t allowed to complain about all these unfair restrictions the government has placed on their industry. I’m willing to bet they wouldn’t trade unfettered market access (via tossing out the EPA and allowing fuel stations to sell ethanol blends as they desire) in exchange for killing the Renewable Fuel Standard.

Another, from Scott Miller — a bio-blogger:

Growth Energy (and their chief spokesman, Gen. Wesley Clark) champions the Fueling Freedom Plan ( see http://bit.ly/bZho2I ) which promotes the phasing out of ethanol subsidies to invest in the build-out of flexible fuel infrastructure – primarily the installation of blender pumps and ethanol pipelines – to provide a level playing field for market entry. Part of the problem of market entry of ethanol of all types has been that there are few blender pumps, so people have little reason to buy flexible fuel vehicles (FFVs). Conversely, there is little reason to install pumps if there are no FFVs

This isn’t the “phasing out of ethanol subsidies.” It’s the changing of ethanol subsidies from tax credits on production to subsidizing infrastructure and creating yet another artificial market by mandating FFVs. How can anyone take the “level playing field” stuff seriously? The real problem for the market entry of ethanol is that there isn’t any real demand for it because it isn’t consistently price competitive with gasoline. If oil prices rise back to previous highs ethanol will be price competitive again, and individuals will demand FFVs on their own. Though don’t forget the price of corn ethanol is also volatile and heavily tied to the price of corn and natural gas.

Miller was offended that the integrity of the ethanol industry was called into question. I’m not here to assault their integrity, maybe they genuinely believe ethanol is the fuel of the future. But its fair to attack their actions when they’re benefiting from taxpayer money and are fighting like hell to keep Brazilian sugarcane ethanol from reaching the United States.

Hugo Chavez Steals More Productive Sectors of the Venezuelan Economy

by Lee Doren on October 26, 2010

in Economy, International

CBS is reporting today that Hugo Chavez “ordered the expropriation of U.S.-based glass maker Owens-Illinois Inc.’s unit in the South American country.” This is just a fancy way of saying that Chavez stole another company. Moreover, Chavez isn’t too concerned that he is impoverishing his citizens and that Caracas is running out of milk and eggs.  If he was remotely concerned, he wouldn’t be nationalizing the entire country.

What is so depressing about all of this is that the American media largely ignores, or doesn’t understand, the economic ramifications of what Chavez is doing. For example, last month The New York Times printed a glowing article on Chavez’s new government-run coffee shops. Here are two relevant excerpts:

The planners behind the cafes have multiple objectives: to provide food and conviviality at democratic prices, to serve as commercial linchpins to renew some of the city’s most run-down districts and, not incidentally, to remind satisfied patrons of the government’s populist program in an election year.

Judging by the long lines that snake from the counter onto the sidewalk on most days, they are a hit.

The reporter doesn’t seem to understand that the long lines are due to the fact that Chavez instituted massive price controls on the coffee, using subsidies and government force at his disposal to undercut all private coffee shops. Moreover, the reporter laughably mentions the shortage of eggs and milk, but can’t seem to figure out that the price controls on those products are what caused the shortages in the first place:

The government’s entry into the restaurant business is part of its effort to alleviate shortages of basic foods like milk and eggs, which weighed heavily on voters in 2007, when Mr. Chávez lost a referendum about overhauling the Constitution, his only major electoral defeat since rising to power in 1998.

So here we have an example of the reporter supporting policies and programs based on good intentions rather than results.  However, I do not give Chavez the benefit of the doubt that he has good intentions behind what he is doing.  There is too much evidence that his policies are a recipe for disaster.   Instead, he will continue to accumulate power and the people will get poorer.  Eventually, violent force will be the only way to prevent Chavez’s democratic opposition, which  may have already started.

Link to photo.

Stalled Korea FTA May Get a Boost

by Fran Smith on October 26, 2010

in Agenda for Congress, International, Trade

U.S. Trade Representative Ron Kirk is scheduled to meet today with Korean Trade Minister Kim Jong-hoon in San Francisco to discuss the pending U.S.-Korea Free Trade Agreement.  Hopes are high that with this discussion some lingering issues (autos and beef) holding up the pact could be resolved before President Obama’s upcoming meeting with South Korean President Lee Myung-bak at the G-20 Summit in Seoul in mid-November.

The National Association of Manufacturers has focused on the importance of the FTA in building market share for U.S. manufacturers, who, with the stalled trade agreement, are losing out to countries that have already signed trade agreements reducing tariffs for their goods and services exported to South Korea.  An earlier post at OpenMarket made that point as well.

South Korea has not been shy about entering into trade deals.  Just this month, the European Union and South Korea signed a trade agreement that opens up both markets.  According to the Korea Herald,

South Korea has so far signed six FTAs with 17 countries including Chile, Singapore, the four-member European Free Trade Association (Norway, Switzerland, Iceland and Liechtenstein), the 10-member ASEAN, India and the U.S. All of them except for the one with the U.S. have taken effect.

As Gabriel Sahlgren wrote in a 2007 CEI Issue Analysis:

The agreement is expected to abolish about 95 percent of tariffs on all industrial and consumer goods within three years, and remove most of the lingering 5 percent within a decade. According to a study by the U.S. International Trade Commission, the deal would increase U.S. GDP by $10.1-11.9 billion, and may boost annual trade between the countries by as much as $17.8 billion.  But critics ignore those gains.

* * * * *

The KORUS-FTA is not a perfect agreement, but it would generate so many economic and political gains for the U.S. that the benefits appear greater than its attendant problems. It would increase U.S. GDP by $10.1- 11.9 billion and bilateral trade by $17.8 billion annually, boost America’s standing in the region, and generate momentum for the cause of global free trade. Finally, to ratify it would bolster good relations with South Korea, an important ally, which negotiated and renegotiated the agreement in good faith.

An agreement that would make sense economically and politically — what’s not to like?

Something (Useful) for the FTC to Do

by Alex Schibuola on October 26, 2010

in Economy, Legal, Regulation

I took a class at George Mason University with economist Tyler Cowen on industrial organization (IO).1 My apologies to Dr. Cowen if I misstate anything he said,2 but he summed IO up like this: there are two schools of thinking within IO, the “Chicago” school and the “New-New IO” school.

The Chicago school argues that monopolies arise from government regulations that prevent potential competitors from entering an industry. This allows incumbent businesses to avoid competition and charge higher prices. The New-New IO school uses game theory models to show that monopolies can arise without government intervention.

At an anti-trust conference I attended last Friday, the argument of the pro-FTC panelists was basically that: “Yes, it is extremely difficult for the FTC to identify monopolistic practices. We may do more harm than help. But, we’re still going to do it anyway.” I suspect the FTC has a New-New IO focus but ignores the Chicago side. We know that government supports monopolistic practices via tariffs, price fixing, licensing, etc., so why not go cannibal on bad government practices if consumers are truly the FTC’s concern?

The FTC should sue the FCC over their broadband spectrum allocation and licensing policies. They should take on the florists and state government in Louisiana. The incumbent florists lobbied for a law that allows them to administer a “floral arrangement examination” to potential competitors.3 The FTC should take-up a Chicago school attitude: identify and eliminate barriers to entry. They can (and should, as long as they exist) do some definite good for consumers.

Notes:
1 IO asks questions why some industries have large companies whereas others have small companies, whether or not monopolies exist in particular industries, etc.

2 Please note that my thesis on the FTC may or may not be that of Dr. Cowen’s.

3 For more details on this abomination click here, see p. 38.

The Nobel Case for Immigration

by Ryan Young on October 26, 2010

in Deregulate to Stimulate, Economy, International, Labor

Over at The American Spectator, my colleague Alex Nowrasteh and I make the case for expanding skilled immigration. Our main points:

  • 1 in 8 Americans are foreign-born, but 1 in 4 American Nobel laureates since 1901 are foreign-born. Immigrants, it seems, are chronic overachievers. America would benefit by letting more in.
  • The H-1B visa for skilled immigrants is capped at 85,000. In non-recession years, those 85,000 spots are typically filled in a single day.
  • Genius-level intellects are missing out on the chance to flower at the world’s best universities. They’re also missing out on one of the world’s best entrepreneurial environments. And Americans are missing out on cutting-edge jobs in high-tech fields. Consumers lose out on products that are never invented.
  • The number of Nobel-caliber intellects who have lost their opportunity to do research in this country is unknown. What is known is that the U.S. government has kept out millions of the most inventive, brilliant, and entrepreneurial people in the world for no good reason.

Read the whole piece here.

Another Reason Why Fannie Mae and Freddie Mac Need to Go

by Alex Schibuola on October 26, 2010

in Bailout Watch, Economy

The monthly payments a home mortgage has depend on two variables (among others): the initial down payment and interest rates. A larger down payment means a lower mortgage balance; this results in lower monthly payments. Lower interest rates lead to lower monthly payments.

A 2006 study by Fannie and Freddie finds that, by virtue of their existence, homeowners pay 30 basis points (bps) less on interest rates (e.g., a 5 percent interest rate = 500 bps).* The study also highlights how they permit greater homeownership by offering mortgages that require lower down payments. Further, they “estimate the total savings to homeowners from Freddie Mac and Fannie Mae activities reach the $18.8-26.9 billion range.”

That’s an interesting number. But what does this mean for an individual homeowner? I created an amortization table to see:

In World A^, without Fannie and Freddie, a homeowner purchases a $200,000 home with a $40,000 down payment and takes out a $160,000 mortgage with a 5 percent interest rate.

World A monthly payment: $858.91

In World B^, with Fannie and Freddie, a homeowner does the same as in World A, except he or she pays a 4.7 percent interest rate instead (30 bps lower because Fannie of Freddie exist).

World B monthly payment: $829.82

In World C^, with Fannie and Freddie, a homeowner purchases the same home with a lower $20,000 down payment and takes out an $180,000 mortgage at a 4.7 percent interest rate.

World C monthly payment: $933.55

Between World A and World B, which have different interest rates but the same down payment, the homeowner saves $29.09 per month ($349.09 per year). This is ludicrous. At the individual level, one cannot justify saving $29 per month after incurring losses of hundreds of billions of dollars at the expense of all taxpayers.

Between World A and World C, our prospective homeowner is actually worse off because of Fannie Mae and Freddie Mac. Because the down payment is smaller, the mortgage balance is larger thus increasing monthly payments. The homeowner ends up paying an extra $74.64 per month ($895.68 per year) because of Fannie and Freddie. This is super-ludicrous.

Not to be naïve, the homeowner in World C, might not be a homeowner at all, because he or she may not be able to raise $40,000 to buy a home in today’s World A. However this person would be better off renting and saving up for a down payment in the future. In either event, given that the micro-level effect of Fannie Mae and Freddie Mac’s existence is so small or even harmful, they need to go.

*The Federal Reserve estimates (Passmore 2005) that it’s actually only a 7 bps advantage bestowed by Fannie and Freddie. I’m being nice, though, and giving Fannie and Freddie the benefit of the doubt.

^Assumptions: 30-year fixed-rate mortgage. $200,000 is purchase value of home. 5 percent and 4.7 percent are annual interest rates which are then adjusted for 12 monthly periods.

Morning Media Summary

by Lee Doren on October 26, 2010

in Economy, Energy, Environment, Legal

Tech:

“Fabric” To Weave Security Into Code:
“As we become increasingly dependent on computers to manage our lives and businesses, our money and privacy become less and less secure. But now, Cornell researchers offer a way to build security into computer systems from the start, by incorporating security in the language used to write the programs.”

Wi-Fi Direct provides P2P wireless sans hot spots:
“Wi-Fi Direct officially became a concrete technology today with several new laptop components certified by the Wi-Fi Alliance. That threshold was reached even before most people even understand what Wi-Fi Direct is.”

Does Facebook leak what profiles:
“It turns out Google’s Street View cars found out more about Internet users than previously acknowledged. Last Friday, the company said the cars, which roam the world taking pictures for its location-based applications, scarfed up e-mail addresses, URLs and passwords from residential Wi-Fi networks they passed by in dozens of countries.”

Local newspaper boasts ultimate passive-aggressive paywall policy:
“The North County Gazette, a regional paper covering upstate New York, offers its articles online with a sort of an honor system instead of a standard paywall. OK, but instead of a straight-up honor system or “tip jar” (you read stuff, then drop a micropayment in the bucket), they are totally aggro and threatening about it..

Global Warming / Environment / Energy:

Storm To Be Among Worst In 70 Years:
“A combination of strong thunderstorms, followed by violent and destructive winds, will make for one of the Midwest’s most dangerous storms in 70 years.”

Insurance / Gambling:

UK Changes Rules about Gambling Online from Abroad:
“the UK’s National Lottery will no longer pay winners who purchased their lottery tickets over the internet from abroad. The current rules allow for players to buy tickets while overseas using their internet accounts at the National Lottery’s website, but this will all change in a couple of months.”

Health / Safety:

Nurse caught on CCTV turning off paralyzed patient’s life support machine:
“Violeta Aylward, an agency nurse working for the NHS, was caught on camera turning off the ventilator keeping quadriplegic Jamie Merrett alive.”

Economics:

Pelosi: Things were going great for us until these outside groups started spending money:
“Serious question: Is this just desperate eleventh-hour excuse-making or … is she actually starting to believe it?”

Texas Sends Amazon a $269 Million Sales Tax Bill:
“As states grapple with increasingly squeezed budgets, one simmering battle — trying to collect sales taxes from retailing behemoth Amazon (AMZN) — has heated up considerably over the past year. The jury’s still out on how much money states like Rhode Island and North Carolina (which is thick in litigation with Amazon over this very issue) will get from online sales-tax initiatives. But Texas has issued its own bill to Amazon — to the tune of $269 million.”

Gas prices rise, breaking pre-election pattern:
“Gasoline prices haven’t gotten much attention amid all the other bad economic news for Democrats heading into a final week of campaigning, but the price per gallon has climbed nearly 15 cents since Labor Day – a surprising jump, given that prices usually plummet before an election.”

Cuba self-employed to pay taxes up to 50 percent:
“Cuba has set income tax rates at 25 to 50 percent for its soon to be expanded private sector, with the biggest earners paying the most taxes, according to official decrees published on Monday.”

Bernanke Asset Purchase Risk Unleashing 1970s Inflation Genie:
“For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.”
FDIC Head Sounds Alarm on Foreclosure Litigation:
“Federal Deposit Insurance Corp Chairman Sheila Bair said she did not believe legislation would be needed to address concerns over whether the paperwork was properly done so long as investigations show the issue was mostly “procedural.”
Greece Likely to Default By 2013 as Debts Remain, El-Erian Says:
“Greece is likely to default over the next three years because budget-cutting won’t be enough to reduce the nation’s debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said.”

U.S. slips to historic low in global corruption index:
“Somalia was judged the most corrupt country, followed by Myanmar and Afghanistan at joint second-worst and then by Iraq, in the Berlin-based watchdog TI’s annual corruption perceptions index (CPI).”

The Mortgage Morass:
“The mortgage mess just keeps getting messier. Last week, Bank of America announced that it had performed a “thorough review” of its processes, found nothing amiss and would soon restart 102,000 pending foreclosures. On Sunday, the bank acknowledged that it had in fact found errors in its filings, and would resume foreclosures only in a deliberate manner as new and corrected paperwork was submitted to the courts.”

Legal:

Dem congressman: Hey, let’s impeach John Roberts:
“Via the Blaze, the logical conclusion to weeks of Democratic demagoguery aimed at the Supremes’ decision in the Citizens United case, which of course made it safe for swarthy foreigners to buy the election this year by donating to the Chamber of Commerce or something. This is almost too stupid to dignify with a response, but content is content.”

TRENDING: Aide fired over Florida debate foul:
“Alex Sink’s campaign violated rules Monday evening at the CNN/St. Petersburg Times Florida gubernatorial debate when her make-up artist delivered a message during a television break.”

NPR Affiliate Managers Voice Discontent with Firing of Juan Williams:
“Executives at NPR affiliate stations across the United States have begun publicly voicing discontent in the aftermath of the network’s dismissal of news analyst Juan Williams, with several station managers openly questioning the actions and judgment of NPR President and CEO Vivian Schiller.”

More Democracy, More Incarceration:
“The numbers are staggering. In 1970 one in 400 American adults was behind bars or on parole. As of 2008, the number was one in 100. Add in probation, and it’s one in 31. The number of people behind bars for drug crimes has soared from 40,000 in 1980 to about half a million today. States today spend one of every 15 general fund dollars on maintaining their prisons. According to the King’s College World Prison Population List (PDF), the U.S. is home to 5 percent of the world’s population but nearly a fourth of its prisoners. Judging by these official numbers, America’s incarceration rate leads the developed world by a large margin, although it’s doubtful that authoritarian regimes such as China’s are providing accurate data, especially about political prisoners. But among liberal democracies, the competition isn’t even close: As of 2008, the U.S. incarceration rate was 756 per 100,000 people, compared to 288 for Latvia, 153 for England and Wales, 96 for France, and 63 for Denmark.”

Treasury hiring FOIA officers ‘to withhold information from release to public’:
“Officials at the Treasury Department’s Office of Financial Stability contracted with a small consulting firm that has given nearly $25,000 to Democratic candidates since 2005 (and no money to Republicans) to hire “Freedom of Information Act (FOIA) Analysts to support the Disclosure Services, Privacy and Treasury Records.” The firm is currently advertising a job opening for a FOIA analyst with experience in the “Use of FOIA/PA exemptions to withhold information from release to the public” (emphasis mine, and if that link goes down, The Examiner has kept a copy for its records).”

Obama’s turnout pitch to Latinos: Get out there and punish your “enemies”:
“I wonder how this rhetoric squares with his standard condescending line about Republican-leaning voters not thinking clearly because their minds are clouded by economic anxiety. Does economic anxiety also explain why Latino turnout isn’t quite where the Democrats need it to be (although, per this new Politico poll, it’s getting there)? Or is this the first, last, and only case this year of The One admitting that his own failures — specifically, the failure to pass amnesty — might be even partly responsible for the Democrats’ predicament? And what about those supposed “enemies” that Latinos should be turning out to punish? Are they actual enemies like those shadowy bastards donating to the Chamber of Commerce or, as Obama himself once famously suggested, are they merely bitterly clinging to xenophobia to soothe their own economic frustrations?”

Labor:

New Jersey Governor Chris Christie responds to O’Keefe video:
“New Jersey Republican Governor Chris Christie’s spokesperson responded to videos conservative activist James O’Keefe released Monday apparently showing unionized educators at a New Jersey Education Association conference attacking the governor and his policies in crude language.”

Transportation/ Land Use:

Virginia gets $45 million for high-speed rail:
“The state has been awarded $45.4 million in federal transportation grants toward the development of a high-speed passenger rail service between Richmond and Petersburg and Washington.”

Regulation of the Day 154: Potatoes in School Lunches

by Ryan Young on October 25, 2010

in Nanny State, Personal Liberty, Regulation, Regulation of the Day

The federal government is considering limiting, or even banning potatoes from school lunches. Officials fear the tasty tubers are causing childhood obesity. They would rather children eat more leafy greens instead.

The children are not pleased. One child told the Associated Press, “That would be so not cool. I love tater tots.”

Critics of the nanny state’s slow but steady mission creep often ask, “What’s next, a law saying eat your vegetables?” Well, apparently it is next. Freedom advocates need to find a new reductio ad absurdum.

In fact, the USDA already has a temporary regulation in place disallowing food stamps to be used to buy potatoes. The rule may be made permanent next year. Poverty has more important indignities than losing some choice of what you buy at the grocery store. But what a way to treat adults.

Eat your vegetables. Or else. They’re good for you.

Most Important Brands for Women: Marketing Works!

by Kathryn Ciano on October 25, 2010

in Economy, Odds & Ends

Today NBC Universal releases the results of their survey tallying the most important brands for women. Wal-Mart, Target, and eBay are women’s favorite brands:

September results for its new monthly brand index rates — in order, after Wal-Mart, Target, and eBay — Verizon, Ford, Coca-Cola, iPhone, AT&T, Honda, Pepsi, iPod, Amazon, Toyota, Sears, Similac, Bank of America, Microsoft, Netflix, Tylenol, McDonald’s, Sprint, Kohl’s, Chevrolet, Samsung, and Comcast.

Perhaps more interesting than which brands women prefer is the advertising methods that best capture women’s attention. Evidently whatever brands satisfy women’s default preferences in the summertime, television reruns doldrums fall to the wayside as soon as prime time reminds us what we really prefer:

Getting a big push from the start of the broadcast TV season, a number of brands showed lift. Dr. Pepper, was one of the biggest gainers moving up, gaining 19 places to 64th-best brand for women from 83. The soft drink had a high-profile mention on Fox’s “Glee,” for example. Sears, a major sponsor CBS’ “Survivor: Nicaragua,” gained 5 spots from 19 to 14. Netflix, with a big overall NBC Universal online video sponsorship, gained 2 spots from 20 to 18.

We’re all just keeping up with the Joneses, yo. Says NBCU Women & Lifestyle Entertainment Networks strategic research insights vice president Tony Cardinale: “Social media campaigns continue to spark a lot of dialogue and move the needle, and television remains a powerful influence. We saw multiple cases where strategic TV exposures corresponded with more brand activity.”

Good for Ford, Verizon, Coca Cola, et al. for boosting sales via product placement rather than tax-funded bailouts!

Insurance Lessons from Alabama

by Michelle Minton on October 25, 2010

in Insurance, Precaution & Risk, Regulation

While Alabama certainly has some ambiguous laws and archaic regulations, the federal government ought to take a lesson from Alabama when it comes to property insurance.

In an effort to keep the state’s insurer of last resort solvent (meaning it will have enough money to pay the claims people are likely to file), Bob Groves, manager of the state-run insurer, announced that they will no longer issue policies for homes built over or standing in water.

People who currently hold policies on a building in or over water can keep the insurance as long as they own the building and pay the premiums. But the association will not cover the new owners, and it will drop coverage when water encroaches on a building that is now on land.

While this will only affect 400 out of the 18,000+ policies held by the Alabama Insurance Underwriting Association, over time this policy will make the state-run insurer more stable and could potentially shrink the facility a little.

This is policy the federal flood insurance facility should emulate. As I wrote back in August, when it comes to the National Flood Insurance Program, a division of FEMA, some in Congress have been doing just the opposite. They are attempting to expand coverage so not only are homes that repeatedly flood covered, but also homes that are likely to suffer wind damage.

One of the results of NFIP’s covering high-risk properties and undercharging premiums is that its debt has ballooned and it requested a bailout to the tune of about $20 billion.

The problem occurs when the government, either state or federal, starts underwriting property insurance at reduced rates. This encourages people to continue risky behavior, to forgo mitigation efforts (like cutting down trees, raising property, hardening roof structures), to continue building in risky areas, and it pushes out private insurers who can not compete with taxpayer-funded insurance facilities.

While the best case scenario is that the Alabama state-run insurer gets completely out of the market, this is one small step toward solvency. At least they are less likely now to need a bailout from the federal government (the American taxpayers). Hopefully those in Congress will learn a little something from the Yellowhammer State.

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