Hazardous Moral Hazard

The concept of moral hazard can be so confusing that even a very good article in the New York Times that clarifies some of it gets it wrong as well.*  The article starts by talking about money given Katrina victims by the federal government and where some have spent the money on non-essentials.  This is actually a bad example of moral hazard because it is not about providing people with insurance or the equivalent which then leads to risky behavior but more about people just frittering away money they have received.

* Thanks to Beth D for pointing that out.

The classic stylized fact (I don't know if it is true or not) of moral hazard is that far more houses burn down per capita in the US than in Europe since Americans are insured against fire while Europeans are not.  The idea is that Americans are less careful because they know they have a safety net.  The book, Traffic, by Tom Vanderbilt, is chock full of tales of how innovations such as anti-lock brakes often do not lead to fewer accidents because people who have them drive more recklessly thinking that they have better brakes (I just have no clue as to how to use my new car's antilock brakes). 

In politics, this has become very relevant as folks have argued that social safety nets make people less risk averse, leading to risky behavior that leads to bad outcomes, such as buying homes they cannot afford.  Of course, as the NYT piece points out, there are moral hazard problems on both sides--for the house buyer and for the banks but the politicians tend to focus on the home buyer.

The article also points out quite well that insurance is not the only thing that drives behavior.  That failing to pay for one's house has all kinds of consequences that a bailout may not cover--humiliation, the costs of moving, etc that Malcolm Gladwell addressed a while ago.

Why should I care about this?  Besides my frustration at where the US is these days in terms of recovering from the housing mess, the moral hazard problem has been raised frequently when it comes to intervention in ethnic conflict and civil wars.  Alan Kuperman has made quite a career (see here and here) of arguing that the western impulse to intervene makes things worse.  That folks in the world will engage in conflict, including provoking the government they oppose to use excessive force against civilians to get outside attention and then intervention.  There is, yes, something to this, as the Kosovo Liberation Army is probably the best case of a movement that seemed to be focused on getting outside intervention and sought to provoke Milosevic to get there. 

There are many problems with this moral hazard account:

• Mostly, such accounts ignore the fact that such movements might be motivated by real grievances.
• That people might be willing to fight oppression even if international assistance is not forthcoming.
• That doing nothing may be pretty damned unappealing, regardless of what the group is doing.
• That whatever an organization may be trying to do, the reality is that they often only a small part of a larger group, and we might happen to care about the larger group.

This is very relevant this winter as it may be the case that Syrians are engaged in combat against the Syrian government because they hope to make the news enough to get outside support, just as the West did in Libya.  The problem is that the Syrians were protesting peacefully, and thus became subject of severe repression, which led to defections from the army and violence.  The Syrians have been resisting for about a year, so they cannot merely be hoping and waiting for rescue from outside.  They have sincere grievances, real fears about the Syrian government, and are not just engaging in risky behavior because they have a high degree of confidence that they will be bailed out.  Indeed, the West long sent signals of Syrian not being just like Libya.  The engine for this conflict is NOT hope for intervention, but the nature of the Asad government.  Did the international community help out thirty years ago when Asad's father leveled an entire city?  No.  Perhaps that might be the salient lesson for most Syrians, not Libya? 

I am not advocating for intervention in Syria today--there are no good solutions at hand.  The point here is just that the moral hazard argument is easy to raise, but applies far more rarely than folks argue.  There may be others who gamble due to being highly insured but those folks do not get criticism because they are powerful.  We ought to take seriously people's stated motivations.  Finally, when talking about Katrina and where the aid went, we might also consider other stuff in play like .... racism.