'Moral Hazard' in Politics

What is the best way to increase the frequency of poor decision making in society?  If you guessed 'government subsidies,' you're correct; they're the best way to punish the good for being the good.

One of the things that makes it tough to figure out how much has to be charged for insurance is that people behave differently when they are insured from the way they behave when they are not insured.
In other words, if one person out of 10,000 has his car set on fire, and it costs an average of $10,000 to restore the car to its previous condition, then it might seem as if charging one dollar to all 10,000 people would be enough to cover the cost of paying $10,000 to the one person whose car that will need to be repaired.

But the joker in this deal is that people whose cars are insured may not be as cautious as other people are about what kinds of neighborhoods they park their car in.
The same principle applies to government policies. When taxpayer-subsidized government insurance policies protect people against flood damage, more people are willing to live in places where there are greater dangers of flooding. Often these are luxury beach front homes with great views of the ocean. So what if they suffer flood damage once every decade or so, if Uncle Sam is picking up the tab for restoring everything?
Television reporter John Stossel has told how he got government insurance "dirt cheap" to insure a home only a hundred feet from the ocean. Eventually, the ocean moved in and did a lot of damage, but the taxpayer-subsidized insurance covered the costs of fixing it. Four years later, the ocean came in again, and this time it took out the whole house. But the taxpayer-subsidized government insurance paid to replace the whole house.
This was not a unique experience. More than 25,000 properties have received government flood insurance payments more than four times. Over a period of 28 years, more than 4,000 properties received government insurance payments exceeding the total value of the property. If you are located in a dangerous place, repeated damage can easily add up to more than the property is worth, especially if the property is damaged and then later wiped out completely, as John Stossel's ocean-front home was.
Although "moral hazard" is an insurance term, it applies to other government policies besides insurance. International studies show that people in countries with more generous and long-lasting unemployment compensation spend less time looking for jobs. In the United States, where unemployment compensation is less generous than in Western Europe, unemployed Americans spend more hours looking for work than do unemployed Europeans in countries with more generous unemployment compensation.
People change their behavior in other ways when the government pays with the taxpayers' money. After welfare became more readily available in the 1960s, unwed motherhood skyrocketed. The country is still paying the price for that — of which the money is the least of it. Children raised by single mothers on welfare have far higher rates of crime, welfare and other social pathology.
San Francisco has been one of the most generous cities in the country when it comes to subsidizing the homeless. Should we be surprised that homelessness is a big problem in San Francisco?
Most people are not born homeless. They usually become homeless because of their own behavior, and the friends and family they alienate to the point that those who know them will not help them. People with mental problems may not be able to help their behavior, but the rest of them can.
We hear a lot of talk about "safety nets" from big-government liberals, who act as if there is a certain pre-destined amount of harm that people will suffer, so that it is just a question of the government helping those who are harmed. But we hear very little about "moral hazard" from big-government liberals. We all need safety nets. That is why we "save for a rainy day," instead of living it up to the limit of our income and beyond.
We also hear a lot of talk about "the uninsured," for whose benefit we are to drastically change the whole medical-care system. But income data show that many of those uninsured people have incomes from which they could easily afford insurance. But they can live it up instead, because the government has mandated that hospital emergency rooms treat everyone.
All of this is a large hazard to taxpayers. And it is not very moral.

Thomas Sowell is a Senior Fellow at The Hoover Institution at Stanford University in California. He has published dozens of books on economics, education, race, and other topics. His most recent book is The Housing Boom and Bust, from April 2009.

2 comments from readers  

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In the Florida Keys we know something about government subsidized flood insurance. Basically, we know that nobody except Henry Flagler (who was abundantly self-insured!) and the Navy, dared to build on the beach before 1972. That's the year that government flood insurance appeared.

The other day, in Key West, I happened upon a woman I had known at least ten years. She was panhandling in front of the supermarket. It occurred to me she had worked damn hard to be homeless at age 55!

When I first met her, she was the editor/publisher of Key West's first free gay "night life" publication. This was a no-brainer. Hearst would have retired on it. And it was her idea, her money, her work! She was a genius and I was in awe.

Some years later, the newspaper was defunct and she had moved on to a new project: a clothing-optional condominum island in the Keys! She said dogs would not be allowed, so count me out.

Next she had an island in the Bahamas. It was going to be all-lesbian, libertarian, condominum. I forget what happened next. It was gone. Somebody else's fault.

Then, she was living in a studio near my Chicken Store, and she owned an AM TV station! She was selling programming and ads. I tried to put a reality together where two immigrants, one Argentinian and one Polish, would discover the KW night life AND each other's culture while cameras rolled. But the next thing I knew she was selling the station and she didn't have money for the rent...

(Sigh) and now she is living at the homeless shelter and she's asking me for money. And I know nobody starves in the US of A and she is going to use it for alcohol or worse but I pull out $20...

...and all the time I'm kicking myself. Now she knows who to hit for a few easy bucks!
I lost count of how many times you have surprised me with, to me, unexpected applications of economic principles - that have surprising results that on reflection seem obvious. I suppose that would be like writing a very good novel - filled with logical, but unexpected surprises. Thank you for this, you have given me a new way to think about unintended consequences.
To post comments, please log in first. The Atlasphere is a social networking site for admirers of Ayn Rand's novels, most notably The Fountainhead and Atlas Shrugged. In addition to our online magazine, we offer a member directory and a dating service. If you share our enjoyment of Ayn Rand's novels, please sign up or log in to post comments.