Moral Hazard ~ A Deceitful Double Standard

An economic concept called “moral hazard” divides Americans and helps to define political philosophies.

After Sunday school last week, I carpooled with other members of our church up to Dallas. We went to help serve the noon meal at The Bridge, the homeless shelter there. What a powerful experience. Without exception, the clients were respectful and appreciative, especially when they themselves were shown respect in any way. Several actually offered me blessings as I filled their glasses with ice water. Many bowed their heads in silent prayer before eating.

When the meal was over and the clients had all left the dining facility, I spoke for awhile with the supervisor of the “Stew Pot” mission team which volunteers to run the dining facility. The facility, by the way, is aptly named The Second Chance Cafe. Our discussion led me to deep introspection about the plight of a growing number of homeless in this economy.

Our youngest son, suffering from a laundry-list of psychological problems, is a homeless person notwithstanding how much we continue trying to help him. Our granddaughter, a high school graduate and trained cosmetologist, still reeling from the aftermath of an abusive relationship with the father of her little girl, has told us that she too would most likely be in a shelter if it were not for our intervention and on-going help. So, if it can happen in our family, it can happen in yours.

On my way out to return home, I picked up a printed copy of the local version of an international publication, Street Zine. It was filled with thought-provoking articles about the poor, the homeless and disabled – the sheep I believe Jesus was talking about when He told his disciple, Simon son of John, also known as Peter, to take care of them (John 21:16). One particular article, from which I have borrowed title of this post, struck me hard. You can read the whole thing for yourself on-line if you wish. It’s at Below, combined with my thoughts on the subject, is an abstract of the article which was written by Domink Jenne, a citizen of Freiburg, Germany.

The term, “moral hazard,” according to Herr Jenne, means something similar to moral temptation. It’s actually an abstract term from the insurance industry. In economic theory, it describes a situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk According to the theory, a driver with insurance, for example, will drive with less care because he knows he won’t have to pay in the event of an accident. The term has now become a social slogan among conservatives who refer to it as a destructive mentality that results from knowing someone will take care of you.

The welfare state, conservatives claim, promotes “moral hazard” because it removes personal responsibility and diminishes the motivation to search for work whilst living comfortably on welfare. Cutbacks are therefore necessary, even perhaps the complete removal of spending on social programs to eliminate the danger of moral temptation and damage to the economy. But you know what? I’d bet that most, if not all, of the clients I served in the Second Chance Café Sunday would jump at the chance to have a job that would pay them enough to just get by on. Unfortunately, most have issues, their own fault, somebody else’s fault or nobody’s fault, that prevent them from successfully competing in the job market.

Didn’t Jesus say that the poor would always be with us (Matthew 26:11)?

To conservatives, who perceive themselves to be the injured party, “moral hazard” threatens to affect not only those who apparently don’t want to find employment, but also those who are lucky enough to have a job – this to justify the surveillance of employees who might pilfer from stock shelves and cash drawers. So broad is conservatives’ perception of the danger of moral temptation, according to the article’s author, that it is necessary to introduce counter measures against it. Anyone who tries to counter the argument with terms such as “mutual trust” or “social responsibility,” is likely to be laughed at as a worldly innocent. Mistrust is the foundation of the argument.

The concept not only encompasses the malicious viewpoints of social deceivers and hypochondriacs, it also affects the financial sector and is a concern for us all. Consider the executives of too-big-to-fail investment banks and insurance companies who have made such horrible decisions in recent months and years, even committing fraud but not being held accountable. Still, they continue to receive huge bonuses and severance packages! Is this too not “moral hazard”?

When banks with millions, even billions in debt are saved from collapse, then it actually becomes possible that the lack of regulation and oversight encourage a high risk attitude. But conservatives don’t seem to see it this way. In Congress they resist the passage of laws and the enactment policies to prevent future fraud. The difference here is that the amounts stolen from investors by investment bankers are significantly higher than the amounts paid to alleged welfare fraudsters. Is this not A Deceitful Double Standard?

The Nobel Prize winner Kenneth J. Arrow – the man who first popularized the concept of moral hazard back in 1990 – has written and said much about the importance of spending on social programs And he should know.

Please feel free to post a comment whether you agree or disagree.

Published in: on August 17, 2011 at 7:50 am  Comments (8)  

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8 CommentsLeave a comment

  1. Thanks for your insight Kent. unfortunately in the war we are in the casualties are mounting. Returning vets both men and women unable to find employment, people that have lost their jobs with no financial reserves, the 99’ers that have exhausted their benefits, mental patients that are released on the streets to save money, the list goes on and on. Someone that will have an interest in their fellow man typically not an conservative. therefore our fight to check the coming onslaught of unraveling the Constitution and starting class warfare.great story..

  2. From my exposure to various media sources I have not received the impression that many or even some conservatives support the banking bailout or the resulting executive bonuses.

    There does seem to be some confusion about who is at fault for the bonuses. Perhaps this is oversimplification, but liberals are portrayed as blaming corporate greed (the 1%) and conservatives are portrayed as blaming heavy-handed government action (Obama). To be clear, not all conservatives blame only Obama, because although he supported the banking bailout as a senator it was the prior administration who signed it into law.

    When you ask whether the bank’s distribution of bailout money was a moral hazard, I would agree. But I don’t see this issue as entirely partisan. Perhaps the vast majority of conservative members of the House disagree with the majority of liberal members over legislation like Dodd-Frank. However, an overwhelming majority of the public regardless of their political affiliation appear to be upset with the handling of the bailout package. I believe this discrepancy between office holding conservatives and “regular, everyday Americans” weakens your double standard argument.

    Although I do not have your economic knowledge I think the social welfare issue is much more pertinent and I totally agree with you that, sadly, there is partisan disagreement over what these programs fundamentally provide for our society. Perhaps our government spending is reaching dangerous percentages of GDP, but that does not mean we should exaggerate the small downsides of largely beneficial programs.

  3. Some thoughts.

    1) Apparently, when airbags were introduced, while injuries went down, accident rates went up. My economics teacher has a suggestion to eliminate accidents all together, or at least reduce them dramatically. I should be sure to point out that he is kidding when he suggests a big spike in the center of the steering wheel. People get really careful when a big spike is pointed at them. (At least I think he was kidding.)

    2) There are a number of problems with extending the insurance company moral hazard to a complex system like the economy. In the case of insurance, the variables are few and well controlled. The individual can be identified and repeated occurrences are apparent. In the case of unemployment and homelessness, it feeds back on itself. Long term unemployment is inherently depressing. And, without benefits, it leads to homelessness. A homeless person lacks sufficient resources to be an effective job hunter and candidate. Any “moral hazard” is minimal by comparison.

    3) The double standard is an ingroup/outgroup and actor/observer affect. “When he did it, it made me mad. When I did it, I had a good reason.” “We are moral, they are lazy.” “When it happened to me, it was bad luck. When it happened to him, it was his fault.” “He was just lucky, I worked hard to get what I have.”

    There is also confirmation bias. “I can think of examples that prove I am moral. I can think of an example that proves they are just lazy.”

    4) Perhaps I’m not quite getting the point.

    “They have a double standard.” “They” refers to that group of people to which the remaining of the statement applies. After going over Robert’s comment, I believe that we agree it refers to conservatives that voted for the bank bailout, oppose Dodd-Frank and well-fair programs. It would be interesting to detail exactly who “they” are.

    I am left with the impression that conservatives reluctantly and appropriately voted for the bailout. They also deregulated the banks by dismantling Glass-Steagle, oppose Dodd-Frank, and also oppose all well-fair programs. By their own choice, they are a homogeneous group and as such, are rightfully held accountable as a group. See item 3 above. It was, in fact, the conservatives that gave me a real world example of exactly what that all means.

    5) There is a nifty trick in #4. I am only responsible to the minimal standard that the other employs. If they function as a group and group others, I get to treat them as a group. I don’t have to use the minimum standard, I just get to. I have to be nice to nice people, the minimal standard that they set. I get to be mean to mean people, the minimal standard they set. It’s not disingenuous because they set the standard. And it opens up the really nifty trick of them calling themselves out by trying to call me mean. It works great with climate change denialists. They change standards at will, so I just use it against them. It is the tit-for-tat model of behavior. It’s been proven in computer modeling as the most effective method.

    6) The free-market, even the ideal free-market, guarantees that if a living can be eked out by digging through trashcans for recycling, someone will be doing that. That is just how free-markets function. They seldom maximize profit by fully supplying all “potential demand”.

    Kent can check me on this last point. I haven’t had the resources to prove it. It may be due to the fact that we always have an over supply of labor.

    Lastly, my respect to Robert and thanks to both he and Kent. This stuff is more along my lines. I apparently am a micro and behavioral economics person.

  4. The reason demand is never fully met is that it precedes supply, which lags because of the built-in latency in the feedback process you have identified, John. Because of corporate exploitation of foreign, lower cost-labor these days, our national economy is seeking a new higher unemployment level to define as baseline “full employment.” I suspect it’s now somewhere near 8 percent. Sad state of affairs, what?

  5. Glass Stegal was repealed by Clinton, the same Clinton of the Savings and Loan Scandal. Sponsored in Congress by two Democrats.

  6. Yes, I know. They were deceived by prominent economists of the time, including Larry Summers, Clinton’s Secretary of the Treasury, and Alan Greenspan. Back then, I wouldn’t have argued with these two heavy hitters either. But clearly, they were wrong.

  7. I read an article on Alternet that said the disagreement between conservative and left wing economic policies are not about economics; they boil down to fundamental disagreements over human behavior. Is this true? What are some examples of these disa…

    A couple issues have very different assumptions behind them. Lets look at Obamacare which seems to be a bit of a divide between Conservatives and Liberals. Assumptions are: 1: The government (acting on behalf of society) must provide a basic level of c…

  8. In light of the economic and social consequences from the enactment of supply-side and libertarian regulatory, monetary and fiscal policies, I can think of no rational justification for conservative economic ideology. But to answer your question, yes, I do think it is human behavior masquerading as economic theory. The great John Kenneth Galbraith summed it up back in the 1920s when he said, “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”

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