99049701 MINORITY REPORT
Moral hazards WALTER
Antelope Valley Press, 7 April 1999, B4;Jewish World Review March Dr. Williams is an
31, 1999 /14 Nissan, 5759, (JWR) ---- economics
(http://www.jewishworldreview.com) professor at
ONE OF MY CHILDHOOD RESPONSIBILITIES with money University. He is
earned on after-school and weekend jobs was to pay for my school also a frequent
lunches. It didn't always work out that way. I regularly squandered guest host on
money on weekend fun, and come Tuesday or Wednesday I'd go to radio and
Mom seeking a school lunch bailout. television.
One time, Mom lectured, "You knew you needed money for
lunch when you spent it. No, I'm not giving you money!" I thought Mom was the cruelest woman on the
face of the Earth. I had no idea that she was coping with what's known as the "moral hazard" problem.
Moral hazard arises when people behave in ways to satisfy themselves, but because they don't bear the
full cost, their behavior comes at the detriment of others. Moral hazard is a pervasive problem, and it's only
relatively recently that economic and legal scholars have begun to pay attention to it.
For example, if the contents of my car are fully insured against theft, I will be less diligent in locking it
up and taking other precautions against theft. I might even make false theft claims. That's a problem for
insurance companies. They can't tell whether the theft was a random insurable event, or something readily
avoidable with reasonable precautions, or fraud. Auto insurance companies cope with this problem, and not
that effectively, by writing policies with high deductibles, thereby requiring me to pay, say, the first $1,000
of a loss.
Government programs like Social Security and Medicare create moral hazard problems. If people
know they can squander their earnings during their younger years and still receive income and health care
in their older years, then why make sacrifices in order to save? Other taxpayers, not them, bear the
consequences of their short-sighted behavior. Plus, if senior citizen handouts are guaranteed, why go
through unpleasantries of instilling in children the values and responsibility of taking care of an elderly
parent in need?
Today, when there's an illegitimate birth, it is possible that neither the mother, the father nor the
families will bear the full consequences of the irresponsible behavior because there's welfare, food stamps
and other handout programs. Since the cost of the couple's behavior can be shifted to taxpayers, we
shouldn't be surprised to see more irresponsible behavior. And costs have been lowered in another way --
today there's little or no social stigma to illegitimacy.
CEOs, being managers of other people's money rather than their own, don't bear the full consequences
of unwise decisions, as would a company owner.
One stockholder strategy to fight the moral hazard problem, and encourage CEOs to behave as owners,
is to make company stock a large part of their compensation.
It would be great if we could somehow do something similar with politicians. They, too, are managers
of other people's money and don't bear the full consequences of unwise decisions. The best time to waste
money and be "compassionate" is when it's with other people's cash. I can't think of any way to address the
political moral hazard problem other than by trying to keep more of our money in our own pockets and out
Getting back to Mom's approach to the moral hazard problem, today's touchy-feely society would see
Mom as a cruel person and might charge her with child abuse. After all, what kind of parent could stand to
watch a growing kid come home starved and virtually inhale the refrigerator?
To see me hungry couldn't have been any more pleasant for Mom than it was for me. But the bottom
line is that I never squandered lunch money again. Long-run compassion sometimes requires short-run