On Moral Hazard

Posted on October 19, 2019
Filed Under: politics, society

As I write this, America in embroiled in the Ukrainian impeachment crisis. The claim is that Donald Trump withheld military aid to Ukraine in exchange for a political favor – he wanted them to investigate Joe Biden's son, who is (or was) likely to be Trump's democratic opponent in the 2020 election.

The claim is that their was a “quid pro quo” between Trump and the Ukrainians. You do this thing for me, and I'll do something for you.

This isn't necessarily wrong, until it involves interfering in a United States election. Then it's a very big problem.

The Trump Administration has claimed that absolutely no quid pro quo existed ... until August 17, when Mick Mulvaney, the acting White House Chief of Staff, blew everything up by saying this in a press briefing:

“I was involved with the process by which the money was held up,” Mulvaney told reporters. There were "three issues for that," he explained: “the corruption of the country; whether or not other countries were participating in the support of the Ukraine; and whether [Ukrainian officials] were cooperating in an ongoing investigation with our Department of Justice.”

Whoops. Then he said this:

“I have news for everybody: Get over it,” he said. "There is going to be political influence in foreign policy."

What he's saying is that “everyone does this,” with the implication that "Democrats have done this too."

Okay, sure. I don't doubt this is true. I'm sure other presidents have traded political favors for policy, and I have no doubt that Democrats have done this.

But here's a base, foundational truth: if you get caught for this, you get punished.

If not, we have moral hazard

In economics, moral hazard occurs when someone increases their exposure to risk when insured, especially when a person takes more risks because someone else bears the cost of those risks.

More simply: “we will do stupid things when there are no consequences.”

  • If you have great car insurance, you might not lock your doors because you no longer bear the risk of theft, your insurance company does.
  • When the banks were bailed out after the 2007 financial crisis, people complained that the banks would now do whatever they wanted, because they knew that if things got bad enough, they'd get bailed out, and the American taxpayer would suffer the consequences.

And from the opposite direction:

  • My teenager has an 11 p.m. curfew. She hates it, and thinks she should be able to stay out as late as she wants. The only thing that gets her home at 11 p.m. is the threat of punishment.

Consequences are what keep humans in line when they have no compunction about doing something they should not do.

So, back to Mulvaney's comment –

If we accept that “everyone does this” or even that "Democrats do this too" (my words) as a reason to let it go, then we have completely abandoned the guardrails that try to ensure good behavior from our politicians. Politicians love to get re-elected, and, if there are no consequences, then we're essentially saying they should be able to do whatever they want to achieve that.

Yes, other people have probably done what it's claimed Trump did, yet didn't get caught. But if they had, there would have been consequences. And to some extent, this puts a limit on the illegal behavior politicians are willing to risk.

It's one thing to say “Everyone does this.” It's quite another to add, "...and so we're just going to stop punishing it altogether."

Mulvaney is demonstrating what American politics has become. Nothing matters in objective terms anymore. Seemingly, the only necessary response to wrongdoing is, “The other guy does it too.” It doesn't matter what someone does, so long as they can claim their opponent is just as bad.

Trump may claim he was only doing what everyone else did. Fine. But he knew what he was risking if he got caught.

It's not perfect, because lots of people do get away with a lot of stuff, but it's the only backstop we have to total chaos.