The first sign of corruption in a society is that the end justifies the means. ~ Georges Bernanos (1888-1949)
Between a rock and a hard place
The term "moral hazard" has been around for a long time. It popped into consciousness most recently when Mervyn King, governor of the Bank of England, invoked it to explain why it is not always a good idea for the government to bail out a bank – specifically Northern Rock.
It's like this. People are grown-ups who navigate through the world by taking risks, some of which work out and some of which don't. This is especially true of the banking business. If the risks taken don't work out and the bank finds itself up s*** creek without a paddle, there will be a nasty fall out. Ordinary people with money in the bank will get hurt. If the government bails out the bank using tax payers' money, then the next bank will be less careful, believing that – if the worst comes to the worst – the government will pile in to save it. Risky business practice will become the norm and we shall all go to hell in a hand-basket.
But a big problem remains. We, the poor bank customers, do not have the resources or the understanding to know whether a bank is acting prudently or not. And we would not be given the information on which to base a decision even if we asked for it. So we have to rely on government regulatory systems to check things out for us. Hence the dilemma when government watchfulness fails.
Law of unintended consequences plus
There are many other moral hazards we need to worry about, most of them relating to government activity. It's a bit like the law of unintended consequences but, in the case of moral hazard, the dangers created are evident at the start. The hazard is created by the wilful folly of decision makers.
Loans for honours
Let's start with a topical one. Donations to political parties. For the benefit of readers outside the UK, the Labour government has twice been caught flouting the rules on accepting political donations. The first time, they broke the spirit but not the letter by accepting loans instead of gifts and offered to repay the lenders with honours. The second time, the jury is still out. The claims and counter claims about who did what and who knew what when are the typical spats that go on between politicians when they have broken the rules and been caught out. "I didn't know and didn't mean it" is a feeble response which would not be accepted as a defence in court. Yet that is exactly what we are getting from the politicians who frame our laws.
Why should politicians get away with breaking the law while expecting the rest of us to obey it? Perhaps it's because they have power and the rest of us don't. And it's probably why David Blunkett (former Home Secretary) seemed so indignant when he was caught using public money to pay for his girlfriend's train tickets. The moral hazard here is that respect for law is eroded when the powerful show a blatant disregard for it (if, that is, they think they can get away with it).
And then there is legislation against drugs. Celebrities do not even try to hide the fact that they break the law – and those same celebrities are feted by the political clique and even by royalty. The moral hazard here is obvious. On the one hand, ordinary oiks caught with drugs receive, at the very least, a criminal record and a good chance of going to prison. Their life chances are often ruined, while the rich and famous continue to smoke and snort with impunity.
Politicians bemoan the decline in respect for law and order; they berate an ill-disciplined youth for its failure to behave responsibly. But how can you persuade disadvantaged young people to respect the law when, at the same time, the politicians who frame the laws (and their celebrity friends) fail to do so? You see what I mean by moral hazard.
Which brings me to laws that are unenforceable. The war on drugs is costly both in financial resources and in wasted lives. The demand for drugs cannot be stemmed. Organized crime finds it has a lucrative business and a good percentage of the population is happy to ignore the law. What is it about governments around the world that they cannot break the habit of banging their heads against this particular brick wall? They know they are not going to win (just as the US failed to stop alcohol consumption in the 1920s). Instead they have created a moral hazard. Lakes of illegal money are used to corrupt politicians and officials and, in some states of the world, to subvert entire governments.
Criminal records for all
Moral hazard also comes from the efficient enforcement of regulations that are routinely ignored. Such a high proportion of drivers have been convicted of speeding that many of them accept the status of convicted criminals as normal, not something of which they should feel ashamed. This situation should not be accepted with equanimity and at least the government minister who was caught driving while using a mobile phone was convicted and fined. But he still attempted to mitigate his crime by claiming that he was dealing with important affairs of state at the time.
The hazard here also undermines respect for the law. Unless criminals represent only a small minority of the population, then criminality becomes normal, fear of punishment loses its sting, and punishments become harsher to enforce the law. We end up in a situation where you might as well be hung for a sheep as for a lamb. If I am fined for putting my bins out on the wrong day, why should I leave it at that? I might as well do some fly tipping as well. Not a big deal in comparison with the other examples, but corrosive all the same.
Less is more
According to the Liberal Democrats, "Since 1997 this government has passed 365 acts of Parliament and more than 32,000 statutory instruments." This has introduced well over 3000 new criminal offences. When the government was caught out in the loans-for-honours fiasco, it responded by introducing yet more legislation and has now tangled itself up in that.
The most horrific part of the unfolding saga is not the facts of the case, but a statement by Wendy Alexander (leader of the Scottish Labour Party) in which she rejects any suggestion of "intentional wrongdoing". Her statement clearly shows that an important politician no longer feels bound to obey the law. "I did not mean to do it" may be a mitigating factor – but it is definitely not a defence.
So the government itself has fallen victim to the barrage of moral hazards which it created.
Mervyn King thought long and hard before the rescue of Northern Rock was put in place. One assumes that an assessment was made and he accepted that the failure of the bank would pose a greater danger than the moral hazard created by the rescue package. Would that the government made more decisions in this way. If only it would think harder before creating so many new laws.
And there is little evidence that society is improving as a result of all this legislation. Prisons are overcrowded and convicted criminals are released early to make room for new ones. Middle-class criminals discuss the hazards of life with 9 points on their driving licences (next strike and the licence is gone), petty thugs wear ASBOs* as a badge of honour, and government ministers wriggle when they are caught on hooks of their own making. The investigation of a major corruption case is abandoned when a dodgy ally threatens to take its business elsewhere. A self-confessed drug user sings at the funeral of the Princess Diana in front of a congregation that included past, present and future prime ministers, the assembled royal family and a world-wide television audience.
The legal structure has started to creak. Respect for the law is flying out of the window at all levels of society – including the political classes. There is ever-present danger of the endemic corruption which dominates so much of the world. In the map below, the darker the red, the more corrupt the nation. Frightening isn't it?
- An ASBO is an Anti-social Behavior Order. It can be requested by the police, or a local authority and is imposed by a judge without a trial. The person on whom it is imposed is restricted from acting in certain ways or being in certain places. Violation of the ASBO can result in a prison sentence. So it acts as a method of punishing an individual without needing to prove that they have committed any crime other than violating the ASBO.