While yesterday marked the beginning of a new semester, many students are far more eager for the beginning of a new party season, starting this weekend. Some, however, will be relegated to the thankless duty of designated driver. Yet the presence of a DD allows everyone else in the group to party without abandon, making questionable choices that wouldn’t have been made otherwise. Without the presence of this designated driver, students are far more cautious of their behavior.
This is an illustration of an economic concept known as “”moral hazard.”” A person protected from risk behaves far more dangerously than someone without protection. That protection provides a disincentive for caution. Moral hazard is why insurance rates increase with the number of accidents a driver is involved in – otherwise, there would be no incentive to drive safely.
Yetthe principle holds outside of Friday night shenanigans, and in fact is useful when considering some of last year’s important stories, Take, for instance, the subprime mortgage “”crisis.”” Rather than the unpreventable disaster that it was made out to be, the subprime loan situation is an amalgamation of poor choices made by both borrowers and lenders. A third of the borrowers affected qualified for far less risky loans, yet still opted for their riskier subprime cousins. Furthermore, a recent study has estimated that as many as 70 percent of lenders committed fraud, largely by lying about their incomes. Many others simply didn’t bother to read the fine print. And while many pundits and politicians decry “”predatory”” lending, its worth remembering that a full 100 percent of the lenders were not forced into loans, but willingly signed the papers.
Lending companies, however, made many faulty decisions of their own. They often overestimated the ability of their customers’ ability to pay; ubprime loans, after all, were mostly offered as an option for those with low credit. Individual lenders themselves also acted rashly, often encouraging fraud in order to make the deal. National corporations with heavy investments in these loans, such as Countrywide, also rushed into these investments, ignorant of their fragile nature.
Many pundits and politicians have called for a bailout. Democratic
presidential candidates have even been one-upping each other on the size of their bailout proposal. Yet by instituting any form of relief, the government risks moral hazard. Since the parties involved will be relieved of bearing the brunt of their bad decisions, they will be less inclined to avoid them in the future. In fact, the bailouts of the Savings & Loans crisis in the 1980s may have very well contributed to some of the financial techniques used to fuel this situation. The government’s intervention decades ago continues to cause economic problems today.
While the concept of moral hazard is best illustrated in economics, the principle is more relevant in an issue largely separated from the field: the war in Iraq. Commentators have puzzled over the fact that in spite of almost five years of occupation, a stable Iraqi government has yet to form. Factions continue to withdraw their support for the central government as it suits their own interest. Yet the real question is not why they won’t reconcile, but why they would bother. So long as the U.S. military is operating a de facto rule of the streets, a relative peace is maintained that allows Iraqi politicians to bicker and grandstand, without any risk of true civil disorder breaking out. Supporters of military occupation have argued that removing troops will lead to such a collapse of stability, which is accurate. But until such a collapse occurs, Iraqi politicians will have no incentive to make compromises to regain stability. So long as these politicians are protected from their rashness by the US military, petty politics will be the name of the game in Baghdad.
If you don’t make reckless individuals responsible for their actions, they’ll never wise up. Ordinary citizens understand this concept, yet politicians struggle. Drunk on power and a lack of accountability, they stare mindlessly at American taxpayers, who have been left holding the keys and shaking their heads in disbelief.
Evan Lisull is a sophomore majoring in economics and political science. He can be reached at letters@wildcat.arizona.edu.
