Saturday, February 8, 2014

On governing & moral hazard

Do you have any idea what “moral hazard” means?  Not long ago, it was popular among the chattering class as they discussed the news and ‘narratives’ of the day.  And just as quickly in the last year or two, it seems to have lost favor.

When we began this post, we intended to have it focus on one of our favorite truisms:

“You can govern, or you can spend.”

But the more we looked into how to come at the moral aspect, the more we realized that it should be our primary emphasis.  Moral hazard is a standard concept among those in the insurance and finance industries.  Here it is in the context of a contract:


Or you could try to visualize it in this slightly more obtuse and graphical form:


One of the ways we first heard the concept explained was in the context of rental cars.  How many times have you heard someone else say, or said yourself ‘don’t worry, it’s not mine; it’s a rental car.’

Here’s a nice straightforward verbal definition:

mor-al haz-ard; noun; economics

lack of incentive to guard against risk where one is protected from its consequences, e.g, by insurance.

for our purposes here, we’re adding ‘e.g, or by taxing authority and/or taxpayers’

Here’s a similar version:

In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could result will not be felt by the party taking the risk.

Now that our internal ‘hard drive’ is fully spun up, we’re recalling that ‘moral hazard’ probably reached its popularity apex during the great stimulus program and the so-called ‘housing bubble.’  Both are captured nicely in this right between the eyes editorial cartoon:


But let us give you an example that might bring the concept down your street and into your mailbox.  In the form of your property tax bill.

A moral hazard is exemplified by the structural ruination of Jordan Acres School caused by snow loading on the roof.  The individual(s) responsible for dealing with the snow on the roof, but who somehow didn’t, were not penalized, fired, or otherwise held accountable for this eminently preventable damage.  At least not that anyone has told us about.

We, on the other hand, as taxpayers, the always ready source of other peoples’ money, have to pay for a new school to replace the one that was lost for want of a snow shovel and someone to man it.  We have to “bail out” the School Department.

No skin off the back of the person(s) who created this risk and were protected from its consequences.  Conversely, lots of skin off the backs of those who had nothing to do with it and must now face the financial consequences.

Can you touch and feel that moral hazard?  Want some more lessons?  How about The McLellan cost growth from the starting point of $100,000 to the current price of $1 million plus, not including the untold sums that will be required to repair the exterior deterioration that was somehow ‘missed?’

How about the next two new schools we’ll be forced to pay for because taking care of what belongs to ‘us’ was never a priority?  Sinking floors, broken toilets, you name it.

Forgive us, but we’re drifting off into pedagoguery.  Although given what you’re paying for tuition at Side College, you really have no grounds for complaint.  You’ll just have to indulge us, or humor us, or go get another glass of wine or cup of coffee or wee dram of The McLellan.


Which takes us to this point, for which we thank the Mackinac Center for Public Policy:

What belongs to you, you tend to take care of;
what belongs to no one or everyone tends to fall into disrepair.

This essentially illuminates the magic of private property. It explains so much about the failure of socialized economies the world over.

If you want to take the scarce resources of society and trash them, all you have to do is take them away from the people who created or earned them and hand them over to some central authority to manage. In one fell swoop, you can ruin everything.


We’d like to appropriate the above wisdom and redesignate it “P. C. Poppycock’s The McLellan in One Lesson,” inspired by this gem:

Henry Hazlitt’s Economics in One Lesson: “The art of economics consists in looking not merely at the immediate but at the longer term effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”


Which conveniently enough allows us to transition into our discussion of “you can govern or you can spend.”  We found this definition of ‘govern:’

a :  to control, direct, or strongly influence the actions and conduct of

b :  to exert a determining or guiding influence in or over <income must govern expenditure>

c :  to hold in check : restrain

And when we think of the ‘tension’ between governing and spending locally, we think immediately of our beloved town council, who guide the destiny of the richest little town in America.



We’re reminded that until power comes from the barrel of a gun, as Mao said, it comes from the control of money.  In all the years we’ve been watching local politics, no matter what most candidates said when they first ran for office, they virtually all decided that they’d rather spend than govern.

What’s the fun in managing an enterprise to live within its means?  Where’s the pleasure in telling the folks they can’t have whatever new goodies they ‘demand?’  How can you be friends of the staff if you tell them they’re going to have to pay for a bigger share of their health insurance?  Who enjoys saying NO!!

It’s ever so much more rewarding to stand up in front of a crowd, or an event, or be quoted in the paper saying how happy you are to have ‘led the fight’ to bring this brand new blah-blah-blah to the great town of Brunswick.  It’s so much more fun to be liked for compelling the anonymous masses and ‘tax-haters’ to pay for whatever it is you here in this room told us you wanted.

So let them have trains.  Let them have a station.  Let them have back-in parking and then let them not have it anymore.


Let them have new schools, and new fire stations, and new police stations, and new town halls.  Let them have new recreation facilities.


Let them have all day kindergarten and pre-school.

Let them have a Taxi Company with bright shiny new vehicles.  Let them have pork.


Let them have Brunswick Sausage.


Let them have raised crosswalks.  Let them have brick sidewalks and granite curbs.  Let them have a lovely street through the college campus.

Let them have an aquatic center.


Let them trust the betters who ‘govern’ us.  Whether elected or hired.


For  the ‘we are the 99%’ers’ in town who think Government bailouts are criminal, it’s time you take a look at Cape Brunswick, your Subaru driving, peace-loving, kool-aid drinking, train-rding, collegial oasis amidst the overwhelming desert of fiscal foolishness..

Because we’re bailing the town out on the schools; on The McLellan; on the Times Record building; and even bailing out Brunswick Taxi.  And too many more consequences of moral hazard to count.


So as my old buddy Melvin Udall might say,         


And try, instead, to find a more local and pertinent target for your righteous indignation.


1 comment:

  1. If someone asked me to explain what was wrong with Brunswick in a nutshell, I would have them read this blog post.