The Moral Hazard Hazard

The voice in your head that orders you to do bad things is not necessarily a demon or a black dog. In many cases it turns out to be some theoretical conclusion you learned in school. Economists, for example, have internalized a notion of how markets are supposed to function that is far more attractive than mere empirical information. “Who you gonna believe? Conclusions that follow validly from convenient axioms or your lying eyes?” Back before the California energy crunch, proponents of deregulation made calculations from reasonable assumptions that putting up with occasional blackouts was worth it if it made the system more efficient overall. In the event, however, people just would not put up with unreliable service; and it turned out that the “reasonable assumptions” had only been reasonable on somebody’s blackboard. Politically, they were simply impossible. What’s going on with New Orleans is similar. The social Darwinists of the administration have been brought up short by the sudden revelation that the nation as a whole thinks of itself as a nation and doesn’t think that even poor blacks are disposable at 3/5ths a head. As a result, we’ve learned how fast even an incompetent government can act when confronted with a catastrophic public relation’s disaster.

Certain ideas mesmerize their thinkers. They are like drugs. For example, discussions of the state of America’s health system almost always get caught up on the issue of moral hazard, the terrifying prospect that adequate health care insurance would encourage people to go to the doctor too often. Such an eventuality is certainly possible since making anything cheaper is liable to increase demand, but the issue has got to be the reddest red herring of them all in a country where, on the evidence, the current incentives often discourage people from going to the doctor when they should and the largest single reason we pay more for health care is the expense of maintaining an enormous bureaucracy dedicated to keeping people from getting care. Whatever the notional cost of moral hazard, the real—and staggering—costs arise from the levees and dykes erected to hold it off. Meanwhile, the nations that have capitulated to universal care and succumbed to a terminal case of moral hazard have been penalized with better medicine at a much lower cost, a fact that, unfortunately, is no match for a fascinating idea.