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May 8, 2013
Concepts borrowed from economics and applied to politics can be useless.
Take the concept of "moral hazard," for example. The name suggests a pitfall
that lurks in the course of our daily lives. It's nothing like that.
Rather, it's a situation where one side of a transaction benefits from
risk-taking and the other pays the cost. Economist Paul Krugman defines it as:
“any situation in which one person makes the decision about how much risk to
take, while someone else bears the cost if things go badly.”
Insurance involves moral hazard when the insured person's behaviour becomes more
risky. Let's say that you own an expensive ring and as long as it's not insured,
you carefully safeguard it. But once it's insured, you become more careless
knowing that the insurance company will cover any loss. Your risky behaviour is
borne by the insurance company.
Moral hazard perfectly describes the reckless behaviour before the Great
Recession of 2008. In the U.S. sub-prime mortgage fiasco, mortgage companies
encouraged low-income families to take out loans that would never be repaid
because someone else - - the banks - - took the risk.
Bryne Purchase, professor of public policy at Queen's University, says that bad
corporate behaviour is inevitable. "The problem, deeply embedded in the
architecture of our decision making, is that in the pursuit of economic growth
we privatize reward and socialize downside risk."
As long as private corporations know that taxpayers will bail them out when
things go badly, they will continue making risky investments. It's the "too big
to fail" argument.
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Not to worry, says Professor Purchase. After all, capitalism is what makes
our society dynamic, he claims. "Modern market capitalism is how we
engineered our escape from the Malthusian trap, the subsistence living that
has characterized human history, enforced by periodic outbreaks of war,
famine, and disease."
In fact, continues Purchase, regulation stifles capitalism and all the good
things it spawns. If you take away the punch bowl just when the fun gets
started, the merry capitalists will never get into mischief and mischief is
just what the economy needs. He admits there is a limit but that is only
when countries are on the verge of collapse.
Moral hazard even applies to politics, says Purchase. Politicians promise
the world and spend like drunken sailors knowing that they won't have to pay
for their risky behaviour. The mess will be left for whomever succeeds them.
Political life is short, so party while you can.
That's the position that the next government of B.C. will find itself in.
According to economist Erik Andersen, per capita debt has doubled under the
current Liberal government and when contractual obligations, such those to
Independent Power Producers, are included it's five times as much.
While the impending train wreck of capitalism may be predictable, the risky
behaviour of politicians is not. There is nothing inevitable about the
actions of politicians that compels them to engage in risky spending with
the knowledge that future governments will bear the costs.
Voters have a role to play. We should stop rewarding the cult of personality
and focus on performance in politicians. It may be dull, but politicians
should be picked for the same virtues you would find in a banker. The moral
hazard of politics can be reduced if politicians were elected on sustainable
policies, not celebrity.
David Charbonneau is the owner of Thompson Studio
He can be reached at
dcharbonneau13@shaw.ca
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