I’m finally getting around to reading Robert Kuttner’s great article on austerity and, more specifically, risk and moral hazard. The idea that government (and individuals) must be punished in order to shock them into “living within their means” is so ingrained in our national discourse that its proponents hardly need to articulate it any longer. We glamorize those in the corporate and financial world who take bold risks, who embody the entrepreneurial ideal, but in reality they take those “risks” knowing full well that the consequences, the punishment, will land elsewhere.
Take a closer look at moral hazard ex ante from ex post and you will find that blame is widely attributed to the wrong immoralists. Governments and families are being asked to accept austerity for the common good. Yet the prime movers of the crisis were bankers who incurred massive debts in order to pursue speculative activities. The weak reforms to date have not changed the incentives for excessively risky banker behaviors, which persist.
The best cure for moral hazard is the proverbial ounce of prevention. Moral hazard was rampant in the run-up to the crash because the financial industry was allowed to make wildly speculative bets and to pass along risks to the rest of the society. Yet in its aftermath, this financial crisis is being treated more as an object lesson in personal improvidence than as a case for drastic financial reform.
Aside from laying bare the true moral questions at stake, Kuttner critiques the way the national discourse talks about public debt. Of course, “Exaggerated worries about public debt are a staple of conservative rhetoric in good times and bad” and the current historical moment is no exception.