The latest Commentary includes an interesting piece from James Glassman of the World Growth Institute about the growing danger of “moral hazard” associated with the federal government’s massive intervention in the economy.
The most dangerous kind of moral hazard is produced not from explicit insurance policies (on which, after all, the insurer can raise premiums) but from implicit ones. If your teenager thinks you will bail him out of jail or fix it with the judge if he gets arrested, then he will be more apt to drive drunk. …
Over the past three decades, the world has been awash in just this kind of moral hazard, as governments have become more adept at economic rescue and as practitioners of the art have won praise for seeming to pull the world back from the abyss.
What’s the answer to the moral hazard problem?
The best way to dampen moral hazard … is for politicians and regulators to resist the urge to act, act, act. They do have to maintain confidence in financial markets, but that confidence is being undermined by repeated economic crises that are caused, in large part, by the expectations raised by the interventions themselves. Never have expectations been raised so high. …
At the very least, policymakers need to take moral hazard ? in all its permutations ? into their calculations. They did so in the past. [Peter L.] Bernstein refers to the “hue and cry” that used to arise when “governments took steps to cushion the adverse consequences of bubbles for particular companies or sectors of the economy.” Today alarms are being raised about cost. But about the impact on behavior there is barely a peep.
