Moral Hazard: Corrosively Dissolving Democracy From The Inside

“I know the Alt-A mortgages we’ve been shoveling at Fannie Mae are a disaster waiting to happen, but a few more bonus checks like this and I can retire before they implode.”

“I know I lied on my mortgage application and can never make the payments, but look at this four bedroom house I got for no money down.”

“I know trading campaign contributions for government handouts is suspect, but all my competitors are doing it.”

“I know I’m not disabled, but see how many of my neighbors are collecting disability checks.”

“I know pay-as-you-go entitlements will bankrupt the country, but I have to tell voters these programs are sound if I hope to win re-election.”

“I know, but”—words that may one day be engraved on Democracy’s tombstone.

What hope is there for Democracy when a nation’s laws and civil society’s mores get so twisted that they feed a downward spiral of dysfunction, deceit, and denial? What happens when a nation of independent citizens pursuing their rational self-interest—honestly exchanging the fruits of their labor and growing the economy as each trade creates value—gives way to an array of warring interest groups, each seeking to leverage the government to live at the expense of others, even as the economy withers?

I don’t know. But if we want to find out what it’s like to live through the dying days of Democracy, all we have to do is stay the course.

Moral hazard—an insurance industry term meaning the “lack of incentive to guard against risk when one is protected from its consequences”—arises whenever rules and policies reward value-destroying behavior, shifting the cost to others. Behaviors once rare become commonplace. Then, as social opprobrium is displaced by acceptance followed by imitation, unproductive dependence becomes a way of life. Once a tipping point is reached, restoring a culture of self-reliance and integrity becomes nearly impossible.

Each bailout, new entitlement, or act of redistribution is usually justified by emotional appeals to “ensure the stability of the system,” “help the needy,” or, more recently, “promote fairness.” Meanwhile the aggregate costs are destabilizing entire currency blocks, threatening to immiserate everyone. It makes no difference whether it is corporations or individuals who are raiding the public purse, the political process is the same. Only the voting blocs change.

In recent days, we have seen the first glimmer of a genuine economic debate, which both parties have long preferred to bury. Misinformation abounds and the air is thick with PAC-fueled demagoguery. But perhaps the electoral calculus has shifted enough to make debating these genuinely challenging issues an act of courage rather than of foolhardiness.

Perhaps citizens are waking up to the fiscal catastrophe that lies ahead. Perhaps there is enough time to carefully analyze the claims and counterclaims bandied about by politicians willing to say anything to hold onto power. Perhaps a transition plan that restores fiscal sanity while cushioning the impact on the truly needy can be worked out before the needy end up getting stiffed when Uncle Sam can’t pay his bills—much as Greeks both needy and otherwise are getting stiffed by their bankrupt government.

Or perhaps the seeds of self-destruction are wired too deeply into democracy. Perhaps the best we can hope for is to hunker down and look out for ourselves, trying to enjoy what’s left of a historically unprecedented prosperity we may never see again.

Bill Frezza is a fellow at the Competitive Enterprise Institute and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here. If you would like to have his columns delivered to you by email, click here or follow him on Twitter @BillFrezza.