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Charting a Path To Reauthorizing Free Markets and Ending Statism

When it comes to free-market fiscal policy, Republicans are always manufacturing excuses to exempt themselves from their own doctrine on numerous issues.  There are always excuses why specific industries must be recipients of government interventions.  They say that exporters cannot function without the Ex-Im Bank; farmers cannot subsist without government welfare despite record high prices; the financial markets cannot survive without bailouts.  The latest exception to free-market doctrine that is being considered in Congress is the flood insurance program.

The National Flood Insurance Program (NFIP) was created in 1968 to provide insurance to those living in flood-risk areas.  Ever since the last long-term NFIP reauthorization expired, Congress has passed 17 stop-gap extensions.  Not surprisingly, the program has racked up $18 billion in debt during that tumultuous time.  The latest extension expires at the end of May.  There will be a need for another short-term extension, but Congress must not pass a long-term extension that does not contain significant reforms.

We must understand that there is an imbalance of power in the political system of any democracy in that the forces of statism have an innate advantage over the defenders of freedom. It takes but one legislative or administrative victory for statism to succeed in guiding society on an indelible path towards dependency.  We cannot perpetuate the free-market, but we can perpetuate statism by creating inveterate dependency constituencies.  Statism enjoys the inherent advantage of self-perpetuation through its own pernicious activities that engender a continued need for the government programs.

Decades’ worth of government incentives to live in flood-prone regions have enticed thousands of homeowners into purchasing houses in areas that will forever necessitate more subsidies.  80 years’ worth of farm subsidies and crop insurance have created near-immutable levels of dependency in our farming communities.  Decades’ worth of housing subsidies have created a reality in which 90% of all mortgages are backed by Fannie and Freddie.

Restoring our economy to a system governed by the free market – as the Founders envisioned – will not be an easy task.  We understand that we cannot eliminate all government interventions overnight.   However, we must not squander the reauthorization opportunities by reflexively extending the programs with little or notional reforms.  Every reauthorization of farming, housing, flood insurance, and numerous other interventionist programs must set us on a trajectory towards privatization with the ultimate intent of ending government involvement, not perpetuating it.

An insightful model for the flood insurance and farm programs is what Rep. Jeb Hensarling (R-TX) is attempting to do with Fannie Mae and Freddie Mac.  Hensarling’s bill, The GSE Bailout Elimination and Taxpayer Protection Act (H.R. 1182), recognizes the fact that the GSEs cannot be abolished tomorrow.  However, it mandates an end to the GSE conservatorship after 2 years and charts a definitive course towards privatization after 6 years.  Moreover, it enacts some significant and consequential reforms immediately, such as reducing the market share and portfolios of the GSEs, shrinking subsidies, and contracting – not expanding – their mission.  At the end of the transition period, the law explicitly makes the GSEs compete in the private market or go away altogether.  The bill doesn’t mandate a GAO study to contemplate privatization; it actually privatizes them, albeit at a gradual pace.

There is no reason why we can’t do the same thing with the flood insurance program.  Let’s make some immediate reforms; stop expanding the coverage, end the subsidies for the premiums, and limit the scope of the program (second homes and vacations homes).  Let’s stop distorting the market by incentivizing people to build homes in areas where the private sector would not support the risk.  But most importantly, we must chart a definitive path to wind down the program, not just study it.  We need to stop offering coverage for homes built in the future after a specific date.  While the House extension being considered this week (H.R. 5740) offers some minor reforms and GAO studies on privatization, it fails to protect taxpayers from immediate losses and does not shrink the program.  The Senate bill (S.1940) is even worse.  It’s a clean 5-year extension with no reforms.

The same thing goes for farm subsidies.  Congress is working on the 5-year Farm bill which is up for reauthorization at the end of the fiscal year.  You might be wondering why we need a farm bill to begin with.  Well, we shouldn’t need one, but the federal government has been supporting and intervening in agriculture since the New Deal programs of the 1930s.  The government has pumped billions into direct subsidies, crop insurance, conservation subsidies, marketing loans, disaster aid, trade barriers, commodity price supports, and production controls.  The distorting effect on the market has been nothing short of disastrous.

We all understand that the entire structure of farm dependency will not end overnight, but we must work towards that end.  The current draft legislation being proposed by House Agriculture Committee Chairman Frank Lucas (R-OK) and Senate Agriculture Committee Chairman Debbie Stabenow (D-MI) is nothing but a rope-a-dope strategy.  With food commodities at record highs, they are giving up some direct subsidies in exchange for expansion of the crop insurance program.  This is not the direction we should follow.

Restoring the free-market from the irrepressible grip of government is no small task; nonetheless, it must be the ultimate goal of any reauthorization bill.

We didn’t start these public policy problems in the first place; we certainly are not obligated to rubber-stamp the statist solutions.  Let’s stop reauthorizing failure.

Cross-posted from The Madison Project

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