Moral hazards and dependency that retard growth

The Finance Minister of a neighbouring country had announced a package of loan write-offs for farmers. It had cost the taxpayers billions of money. Students had learned that such hand-outs by the government promote moral hazard practices among people. They were puzzled and wanted to discuss the issue in the class.

I was present as an observer and also the guide of the discussion. “What do you really mean by the moral hazard problem?” one student raised the issue. “Well, everyone knows it,” another said. Then he explained it to his colleagues. “Suppose you write my assignment, because I have no time to do that. You do it with a good intention. You think that by doing that you help me and one day I would be able to do it on my own without being a burden to you. But, when I see that, without my labouring, I could get this help from you, I immediately get into the easy path. I do not even do the minimum of work I have to do to write the assignment. So, I don’t acquire the required knowledge to do it on my own. As a result, you will have to continue to write my assignments. So, I place an additional burden on you. It’s a moral hazard practice which I have forced upon you.”

“Your example is good. But, how does it apply to this loan write-off case?” one of his colleagues asked. “The answer is simple,” he said. “When the farmer knows that his loans are one day written off, he has no incentive to repay his loans. So, the loan default rate, as a whole, increases. When the ratio rises to a level at which the banks can no longer bear it, the pressure is exerted to litigate the defaulters. At that level, the government gets the pressure to write-off more loans. As a result, having tried to help the farmers, the government is now required to continue that help. It invariably raises the costs of the government. Since the government uses the taxpayers’ money, the burden on the taxpayers too rises. This is the moral hazard issue.”

“So, if we have moral hazards in an economy on a very wide basis, it retards the economic growth, because people have no incentives to work hard?” a girl commented.

“Precisely,” I answered. “People in an economy cannot become richer by passing a burden on themselves.”

“But, this moral hazard problem, is it a new issue?” one student asked and they did not have the answer. So, they looked at me.

“The moral hazard problem had been known even during the Buddha’s time, that is, 500 years before the Christ,” I said. “There’s a discourse by the Buddha in the Anguttara Nikaaya titled Chakkavatti Seehanaada Sutta. According to this discourse, long long time ago, the King of India found that there was an increase in the incidence of robberies and other felonies. When he asked his ministers, he was told that people resort to robbery and felony, because they do not have money to engage in their own trade or industry. So, the King opens his Treasury and gives money freely to enable them to start their own business. But, after sometime, people realize that they could get more money, if they commit more robberies. As a result, instead of robberies declining, they actually rise. This is due to moral hazard behaviour,” I explained.

“So, we have to put an end to the moral hazard problem?” another girl asked me.

“Not precisely,” I said. The problem is not the moral hazard, but immoral hazard.”

Students were now puzzled. “We know only about moral hazard. But, what is meant by immoral hazard?” one asked.

“Immoral hazard is the source and moral hazard is simply a symptom,” I explained. “It happens when the politicians or policy makers or bureaucrats decide to provide those benefits, because it serves their purposes. They don’t bear the costs of their decisions, but the taxpayers. But they use the taxpayers’ money to become popular and win the next elections.”

“So, immoral hazard is practiced by rulers who have discretionary power over tax payers’ money?”

“Yes,” I replied. “That’s why it is called immoral hazard. They waste taxpayers’ money to become popular and win elections. If they use their own money for that, then, that is ok. But, what they do is using someone else’s money to gain a private benefit. It continues to breed itself, because to win elections continuously, they have to give more and more free goods.

Eventually, they impose a greater and greater cost on the taxpayers who have no say for that”

“It’s a very pathetic situation. But, what can we do about it?” one of them asked.

“Take the example of Singapore,” I said. “They had a deliberate policy to prevent it. Right from the very beginning, they insisted that if politicians want to incur vote catching expenditure, they should bring money from their homes”

“So, when politicians practise immoral hazard, it breeds moral hazard by others,” a student concluded.