Moral Hazard

Moral hazard. It’s an insurance term. It’s also a fundamental concept in political philosophy. It means what happens when you let someone get off without paying in full for the risks he is exposed to, such as offering a cut rate on health insurance or a pension plan. Insurance companies may be tempted to do this in order to get a contract now, and worry about the costs later. Eventually, moral hazard ends in tears: the insurance company goes bankrupt, or the pensioner winds up with too little or nothing for his retirement, or both.

Moral hazard exists when people discount the future. People naturally tend to do this. What happens in twenty years seems a long time away, especially when we’re talking about risk, the chance of something happening rather than the certainty. Yet in the long run there seems nothing as certain in this world than that moral hazard, eventually, comes home to roost.

The world’s greatest producers of moral hazard are governments. Governments consist of people who, in theory, control a big chunk of everybody else’s money, lives, welfare. The people who make up governments are tempted to use those resources to achieve what they passionately desire today.

Democratic governments desire to be reelected. They are tempted to promise the people things now, leaving the payment to the future, when they will no longer be in office or even alive. Non-democratic governments aren’t immune. The Soviet Union wanted, more than anything else, enough military power to bully the West into submission, and they sacrificed everything to that. The result was the biggest political and economic implosion in history.

The headlines these days are about moral hazard. Americans have made a mess of their economy through neglecting moral hazard. Thirty years ago the American government promised everyone cradle-to-grave, government-guaranteed welfare. It couldn’t keep the promise. Taxes went up, growth went down, and there weren’t enough resources to keep the promises. Then things changed for a while. The Reagan Revolution came in. Instead of the failures of government, the free market was going to be given its head. Businessmen are entrepreneurial and good at creating wealth, so went the story. They’re hardheaded and don’t believe that something can be had for nothing.

For a while this worked quite well. But then it turns out that businessmen are pretty good at smelling out a sweet, government-guaranteed deal, especially if that is the quickest way to make a profit. Businessmen love it when the government guarantees that their deals can’t fail. When government does that, businessmen are as good at anyone else at throwing caution to the winds and taking on dodgy deals for the sake of immediate income. The result is this week’s headlines: Millions of people have taken on risks they cannot sustain, millions are in trouble and, yep, Uncle Sam has stepped in to take off the pressure. With just whose money?

The fact is that American civilization as a whole has spent the last twenty years taking on a monumental bad bet. Americans don’t save. They spend. They take out loans on their houses to fund spending beyond their income. And now the rest of the world looks upon the once-almighty dollar the way Americans used to look upon Mexican pesos. If and when America gets out of this, Americans are going to have to live a lot less well, spend a lot less and save a lot more. That will affect everybody, from Shanghai to Syracuse, who wants an American to buy something.

Moral hazard is not just about money. There was once a leader who was very careful about public money—so obsessed by it, in fact, that it blinded him to every other danger. So careful was Neville Chamberlain with pennies and pounds that when he went to Munich he found himself facing the biggest air force and army then in the world, with none of his own. His prudence turned out to be a rather poor investment for the British people, and for many others besides.

After every episode of catastrophe arising from moral hazard, people are careful for a while. Regulators get tough with private interests and prevent them from taking a free ride. For a decade, for a generation. Then special interests get to work again: They make or buy friends in government, the regulations get watered down, and we all get set up again. And of course, there are no “regulations” or regulative authorities in foreign policy.

The true defense against moral hazard is not regulation (though regulation can help). It’s an attitude of mind and soul, once called “prudence” or “character.” It means a disposition of the soul to be suspicious of momentary pleasures, to guard against them. At its highest, it means cultivating a sense of responsibility for the future, for the world around you—a sense that its welfare is in your care. It is not the same thing as simply being conservative, since prudence requires being alive to changes in the world around you, taking advantage of emerging opportunities and precautions against emerging risks.

The key to developing this kind of attitude on a society-wide basis appears to be religious belief and values, the sense that one is subordinate to a Creator, and responsible to Him for the welfare of His world, His people, and His soul—that is, the one He gave to you to guard and improve. This attitude of prudence and responsibility seems to be what modern (and postmodern) civilization is set up to destroy. Watch out, or it’ll take you—us—with it.