"It's Their Own Damn Fault"
Lying at the root of a lot of the talk about austerity and spending cuts is the idea of "moral hazard", a formerly obscure term used by the insurance industry to describe how behavior patterns can be altered when people don't have to bear the full brunt of the consequences of their actions. This idea, whether described as moral hazard or not, has a powerful hold on the American psyche, likely because it can be made to fit in so easily with other cherished concepts such as personal responsibility and self-reliance.
Politicians use these concepts to manipulate the electorate all the time. An earlier example is the (discredited) anecdote that was often told by Ronald Reagan of food stamp recipients driving Cadillacs. A more recent example are the largely fictitious accounts of Hurricane Katrina victims using government-provided disaster aid debit cards for luxury items and visits to strip clubs. Such abuses do a great deal of damage to public support for social safety nets and very often the damage done is completely out of proportion with the seriousness of any particular offense.
Malcolm Gladwell (author of The Tipping Point) wrote an article for the New Yorker that explores the idea of moral hazard as it relates to the debate over universal health care. More recently, the New York Times published an analysis of how concerns over moral hazard undermine efforts to resolve the current housing crisis, which in turn is holding back a broader economic recovery.
I am not trying to argue (nor are these articles trying to argue) that moral hazard doesn't exist or that it isn't a concern. It's hard to deny that some people engage in bad behavior and keep repeating mistakes that make a mess of their lives. At some point, there is a legitimate concern that if we continue to absolve people of the consequences of their bad behavior, they will have no incentive to try to behave better.
But life is not black and white. Life is full of nuance and in the moral hazard argument, we see a lot of the type of all-or-nothing thinking that causes so many problems in other areas as well. The problem is not so much taking moral hazard into consideration; the problem is that many people want to cling to a narrow focus on moral hazard to the exclusion of all else. Moral hazard is simply one factor among many that has to be considered in trying to find practical solutions to problems.
When we focus only on moral hazard or only on instances of abuse of the social safety net, the ability to find solutions is impaired because our thinking becomes distorted. The most obvious problem is the obvious double standard. The moral hazard argument is applied most consistently to the least powerful members of society, which seems to be the opposite of how it should actually work. We are reluctant to help someone who bought more house than they could actually afford but more tolerant of coming to the aid of banks whose shortsighted policies and hyper-aggressive encouragement of such purchases to serve their own needs arguably had a more direct effect on the broader economic meltdown.
Another problem is the unstated assumption that everything that happens in an individual's life is under the direct control of that individual and, thus, that individual bears all responsibility for all events. This idea is, of course, patently absurd when stated this way, and yet, it is an underlying hidden assumption in so many discredited and yet still influential economic theories. It is not unreasonable for the purchaser of a house to rely on their mortgage banker's expertise and advice. Nor is it unreasonable to assume that that mortgage banker knows more about the ins and outs of finance, just as anyone would assume that their doctor knows more about medicine.
The biggest problem of all with moral hazard, however, is something far simpler. Suppose you win the moral hazard argument. Suppose you prove beyond any possible shadow of a doubt whatsoever that people's difficulties are their own damn fault and they are undeserving of any help. Where are you at that point? Well...nowhere. You've won the argument, but you haven't contributed any knowledge to the discussion, nor have you moved any closer to a solution.
It might be all well and good to say that people's problems are their own damn fault, but that won't accomplish much in the the broader economic reality that we have to deal with. The economy is a complex system where no man is an island and your neighbor's problems are usually deeply interconnected with yours. You might think it's just to punish the irresponsible person who wasn't as wise as you in the purchase of their home or the management of their debts. But you are paying a price for punishing that person: the value that you're losing because your own property values aren't going up due to a broader housing market that's stagnant. It seems that too few people are even aware that that price exists, to say nothing of asking themselves if the price of punishment is worth it.
Politicians use these concepts to manipulate the electorate all the time. An earlier example is the (discredited) anecdote that was often told by Ronald Reagan of food stamp recipients driving Cadillacs. A more recent example are the largely fictitious accounts of Hurricane Katrina victims using government-provided disaster aid debit cards for luxury items and visits to strip clubs. Such abuses do a great deal of damage to public support for social safety nets and very often the damage done is completely out of proportion with the seriousness of any particular offense.
Malcolm Gladwell (author of The Tipping Point) wrote an article for the New Yorker that explores the idea of moral hazard as it relates to the debate over universal health care. More recently, the New York Times published an analysis of how concerns over moral hazard undermine efforts to resolve the current housing crisis, which in turn is holding back a broader economic recovery.
I am not trying to argue (nor are these articles trying to argue) that moral hazard doesn't exist or that it isn't a concern. It's hard to deny that some people engage in bad behavior and keep repeating mistakes that make a mess of their lives. At some point, there is a legitimate concern that if we continue to absolve people of the consequences of their bad behavior, they will have no incentive to try to behave better.
But life is not black and white. Life is full of nuance and in the moral hazard argument, we see a lot of the type of all-or-nothing thinking that causes so many problems in other areas as well. The problem is not so much taking moral hazard into consideration; the problem is that many people want to cling to a narrow focus on moral hazard to the exclusion of all else. Moral hazard is simply one factor among many that has to be considered in trying to find practical solutions to problems.
When we focus only on moral hazard or only on instances of abuse of the social safety net, the ability to find solutions is impaired because our thinking becomes distorted. The most obvious problem is the obvious double standard. The moral hazard argument is applied most consistently to the least powerful members of society, which seems to be the opposite of how it should actually work. We are reluctant to help someone who bought more house than they could actually afford but more tolerant of coming to the aid of banks whose shortsighted policies and hyper-aggressive encouragement of such purchases to serve their own needs arguably had a more direct effect on the broader economic meltdown.
Another problem is the unstated assumption that everything that happens in an individual's life is under the direct control of that individual and, thus, that individual bears all responsibility for all events. This idea is, of course, patently absurd when stated this way, and yet, it is an underlying hidden assumption in so many discredited and yet still influential economic theories. It is not unreasonable for the purchaser of a house to rely on their mortgage banker's expertise and advice. Nor is it unreasonable to assume that that mortgage banker knows more about the ins and outs of finance, just as anyone would assume that their doctor knows more about medicine.
The biggest problem of all with moral hazard, however, is something far simpler. Suppose you win the moral hazard argument. Suppose you prove beyond any possible shadow of a doubt whatsoever that people's difficulties are their own damn fault and they are undeserving of any help. Where are you at that point? Well...nowhere. You've won the argument, but you haven't contributed any knowledge to the discussion, nor have you moved any closer to a solution.
It might be all well and good to say that people's problems are their own damn fault, but that won't accomplish much in the the broader economic reality that we have to deal with. The economy is a complex system where no man is an island and your neighbor's problems are usually deeply interconnected with yours. You might think it's just to punish the irresponsible person who wasn't as wise as you in the purchase of their home or the management of their debts. But you are paying a price for punishing that person: the value that you're losing because your own property values aren't going up due to a broader housing market that's stagnant. It seems that too few people are even aware that that price exists, to say nothing of asking themselves if the price of punishment is worth it.