The ongoing economic crisis has churned up an important concept, “moral hazard.” The basic notion of moral hazard is easy enough to grasp. If certain institutions or individuals believe that they are insulated from the possible bad effects of their actions (e.g., if big banking firms know that the federal government will bail them out no matter what), they will tend to act in careless or risky ways (e.g., trading in subprime mortgage bonds, while having insufficient funds to cover these risky but high-yielding “investments”).
The “hazard” in moral hazard is that there’s no penalty for taking big risks. Even more hazardous, vice is rewarded, and virtue is punished. The CEOs and other executives still get their bonuses. Somebody else takes the soaking (in this case, not the government itself, but honest taxpayers, innocent investors, and solvent homeowners).
Sadly enough, the situation of moral hazard is not confined to the big banks on Wall Street, but has come to define every aspect of Main Street, and both streets came to such disrepair in part because they were paved with good intentions.
Our current housing woes began when nice guys in government wanted low-income folks (denoted as “sub-prime”) to have a house even though they couldn’t afford to pay a mortgage. Interest rates and borrowing standards were lowered. Soon, nearly everyone on the income spectrum was trying to buy a house he couldn’t afford. You didn’t even have to have a job—that’s how big the gap became between the old-fashioned virtues entailed in hard work and the reward of one’s labor. On the money-lending end of things, since the sub-prime mortgage bond market ended up being fantastically lucrative, why should banks and investment firms worry about taking a drunken walk on the risky financial edge when the government was there to catch them if they fell?
Let’s take a different example. The Social Security Act (1935) began as a way to help the elderly, widows, and fatherless children who were desperate, but it has become an entitlement that has expanded far beyond its original bounds. Sounds good. The unintended effect of Social Security itself is that very few save for old age, but have a “let’s spend everything now, because the government will take care of us later” attitude. Why practice the old-fashioned virtues of thrift and prudence? Welfare aimed at helping single motherhood actually ends up subsidizing, on a grand scale, out of wedlock births, and discouraging marriage for fear of losing benefits. Why should a man bother with the struggle of providing for a wife and children? Risk-free sex!—especially if you’ve got a government-subsidized abortion clinic nearby. Welfare aimed at the temporarily jobless has created a permanent welfare underclass. Why take a low-paying job without medical benefits, housing subsidies, and food subsidies for you and your kids? Not only is indigence risk-free, but industriousness is actually penalized.
And what about insurance? Insurance is a good thing. It’s meant to shield people from financial disasters. But alas, Medicare and Medicaid, along with too-generous employer health insurance programs, have had an unintended three-fold effect. First, the immediate effect of an enormous influx of government money is always the same: a drastic inflation of the price. That’s why you “pay” five to seven dollars for two Tylenol at the hospital. Second, in trying to insure against anything and pay for everything, no one saves for medical expenses; instead, there is every incentive for patients to run to the doctors for the slightest complaint and for the doctor to order a battery of expensive tests. Why be frugal if someone else is paying for it? Third, in our putting all the burden of our health upon medicine, we don’t take any of that burden on ourselves. We believe that there’s no risk in eating immoderately, and don’t want the bothersome pain of exercise. So we let our health go to pot, and expect doctors to continually resurrect our increasingly decrepit bodies. Medicine, so we believe, takes the risk out of the vices of gluttony and sloth.
There’s more. The government college loan program was designed to make college possible for those who couldn’t afford it. The unintended effects have been, to say the least, interesting. As we just noted, the immediate effect of an enormous influx of government money is always a drastic inflation in price. That’s why a college education today has a four-year $130,000 price tag. But why worry? The government loan programs will cover it.
As a former college professor, I’ve seen another interesting effect in regard to financial aid: the penalizing of the frugal, industrious, and self-sacrificing, and the rewarding of the prodigal and self-indulgent. Take two families, the Smiths and the Sliders. The Smiths pinch pennies, do without luxuries, live in a modest house, drive used cars, and manage to save $100,000 for their son’s college. The Sliders don’t save a dime, they max out their credit cards on TVs, computers, iPhones, new furniture, and expensive vacations, they live in an enormous McMansion with an even bigger mortgage, drive new cars, and save absolutely nothing for their daughter’s college. When the Smiths and Sliders go to fill out their financial aid forms, the result will be that the Smiths are asked to fork over the $100,000 and the Sliders will be given a generous supply of federal grants and loans. Virtue is penalized and vice rewarded.
Moral hazard is everywhere these days, but as we’re finding out, you can’t reward risky behavior and vice for long without ushering in self-destruction. What does this self-destructive situation teach us about God and morality?
First, the situation of moral hazard actually helps us understand why God did not create a risk-free world, and why it is best for us, if the ill effects of our bad actions immediately affect us (rather than having a government that tries to protect us from any and all harm, especially self-inflicted harm).
Second, we realize that if a society sets itself up, in any area, so that it rewards vice and punishes virtue, that society may seem to flourish awhile in its own feverish excesses, but will soon enough collapse, and the greater the fever, the more thorough and destructive the collapse will be. So much for the modern belief, rooted in atheism, that vice and virtue are merely arbitrary designations.
Third, contrary to many libertarian thinkers, purely economic considerations themselves are insufficient to ground and maintain a functioning society. No invisible hand can take the place of an invisible God who creates and sustains the moral order.
Fourth, contrary to the socialist-minded, giving everyone everything like some kind of indiscriminate god, is not only economically impossible, it destroys the moral character of the very people it attempts to benefit.
 
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