DANGER: (Morally) Hazardous Road Ahead

My original plans was to write my next BLOG entry about the URL "non-principled-guy" and why I chose that name. But then I saw an article by James Glassman in Commentary Magazine on "Hazard of Moral Hazard".


http://www.commentarymagazine.com/viewarticle.cfm/the-hazard-of-moral-hazard-15220)


I found that article fascinating and also fitting into the theme of the BLOG title "The Buck Stops Here". So I thought I will write about it briefly.




Glassman's point is that the rescue of financial sectors, GM-Chrysler and various homeowners who took on sub-prime loans and and now find themselves facing foreclosure presents a certain "moral hazard". This concern has been raised by others as well that if all these institutions and individuals feel that when they will be saved from the consequences of their reckless behavior by the tax payers, what incentive do they have of behaving prudently? What about those people/institutions that DID behave prudently and as a result did not get the temporary boost in their financial rewards but also did not suffer the downside? Why should they have to pick up the tab? Krugman calls it "Privatization of Profits and Socialization of Losses". This seems to be the worst of pure capitalistic and pure communist systems!



President Obama gave the analogy about one row house catching fire due to careless owners. We still want to put out the fire to keep adjacent houses from going up in smoke. In that, we are protecting the innocent not necessarily condoning reckless behavior.


I started thinking about many other places where individual reckless behavior is involved without any broader social consequences. I will list them below without comment:

• A two-pack-a-day smoker in his 50's requires a lung transplant or develops a lung cancer. Being in 50's, the danger of smoking was well identified and publicized. Various tools to help quitting have also been widely available.


• A blizzard is predicted and warning for not going skiing have been issued. Some skiers go out nonetheless to get the extra thrill. They get trapped and require heroic and dangerous efforts by rescue teams.


• (This is a true story) A young foreign graduate student does not get health insurance to save money and gets into a serious accident. The local community starts taking collection for paying the medical bills.

In the age of unlimited resources, there is no question that the society should protect the individuals from the worst consequences of their own action in the name of being a compassionate society. But we cannot even pretend to have unlimited resources. So when the society pays for cancer treatment for a smokers, it is probably cutting down on prenatal care for a poor woman or cutting arts classes from local schools.

What is the correct course of action in that case? Is there a way for these reckless institutions/people to somehow pay? Here are some ideas I heard about:

• In California some idiots went in a kayak down California river when it was flooded and had to be rescued. The park service or whatever did that, but sent them the bill.


• I understand there are proposals for the federal government to get a significant part of capital gain (if any) through taxes for home owners that were helped.


• Extra insurance premiums smokers etc as is done now except may be extending those even for people who are obese.

Everything said and done, it is still deeply disturbing that reckless behavior many times pays in short term and if things go really down, then there is a safety net there.

Am I missing something here? I am not sure. May be things are not this bad!