Sunday, August 23, 2009

What Ever Happened to Moral Hazard?


The term "moral hazard" has a long history, but it was brought into prominence by economist Kenneth Arrow to describe situations in which governments step in to rescue private financial institutions from the consequences of their own risky or imprudent behavior. The term itself has an interesting etymology; hazard was originally a dice game, like craps, in which bettors would often wager (and lose) their fortunes, which, come to think of it, is really not that different than banks making disastrous bets on subprime mortgages, credit default swaps, toxic assets and the other forms of financial chicanery that caused the financial meltdown in September 2008 and let to a global recession that is still not over.

The word "moral" also did not necessarily have to do with ethical evaluation and accountability as it does today. According to Martha C. White, "moral hazard was an assessment of risk based on the situation. For instance, a log cabin was more susceptible to fire damage than a stone cottage. Over the years, though, “moral hazard” also came to mean a situation in which the insured became cavalier about due diligence on their end—leaving a cooking fire unattended in that log cabin, for instance—banking on restitution in the event of a disaster" [Martha C. White (2008) . What is a Moral Hazard? From Slate - The Big Money].

The basic idea of moral hazard as we use the term today is that people and institutions will be encouraged to take greater risks than they should or otherwise would if they believe that someone else will take responsibility for rescuing them if things turn out really badly. For instance, the government, an insurance company, or bleeding heart liberal do-gooders will step in to save people from the worst consequences of their own irresponsible behavior. If the government has a track record of stepping in to rescue banks that are "too big to fail" from the consequences of their own greed and poor judgment, this creates a moral hazard that encourages future risky behavior on the parts of bankers.

This outcome is particularly likely, many people believe, if those who were rescued in the past are not forced to accept any of the costs of their own bad behavior and, moreover, are rescued without agreeing to accept any new regulations that would prevent them from making similarly poor choices in the future. This sort of governmental response to a financial crisis rewards irresponsible behavior by privatizing the profits while socializing the costs. It is a perverse incentive that encourages irresponsibility.

This is just what the US government did last fall in response to Wall Street's bad bets and the collapse of credit markets. Many people, including myself, accepted the argument at the time that, although a massive government bailout could indeed create moral hazards, this risk was insignificant compared to the very real and immediate risk of a panic that would trigger an economic depression. In doing so I had assumed that eventually we would start addressing the risk of moral hazard and do something to re-regulate the financial industry in order to prevent the banks and insurance companies that were rescued from engaging in the very kinds of risky investments that got them, and all the rest of us, into this mess. Whatever happened to that?

What happened is that financial re-regulation got put on Obama's back burner and no one is talking about it any more. Now people are talking about a "government take-over" of health care insurance. The language of "take overs" is important, because the idea resonates with something a lot of people object to about the way the government has handled the financial crisis, the recession, the failures of GM and Chrysler, and yes, even the "Cash for Clunkers" program that is due to expire tomorrow.

In each of these cases it appears that government intervention undermines the value of personal responsibility. Steeped in the Protestant Ethic of self-reliance and independence, there are many American's whose sense of morality is offended when they think that the government, or indeed anyone else, is planning to "take over" matters that should properly be one's own business. Adults are supposed to take care of themselves and it is an affront to one's dignity to have the government involvement in what should be a matter of personal responsibility. The term "take over" also connotes loss of control, so the term delivers a double-whammy to people who fear that the government is trying to run their lives.

Obama and his advisors would do well to recognize this and to start re-framing the national debate over health insurance reform to highlight the need for greater personal responsibility in matters of health. They should hammer on this theme whenever they talk about the way health insurance works in this country. What we really have is "sick care" rather than health care. People with health insurance are not necessarily encouraged to stay healthy by, for instance, joining a gym, stopping smoking, losing weight, getting regular physicals, engaging in wellness programs, eating healthier foods, and so forth. Rather, they are paying for the assurance that that when they get sick or are injured someone will help them pay their medical bills.

The so-called "public option" (a terrible name) needs to be described as a low-cost form of health insurance that will create incentives for people to get primary medical care, engage in personal behaviors that encourage wellness and disease prevention, pay doctors and hospitals for keeping people healthy rather than treating them when they get sick, and employing the best evidence-based treatments available in a coordinated and efficient manner. It should be called something like "WellCare" or "Amerihealth" to give it the right vibes. Above all the pitch should emphasize that it is not a substitute for individuals taking personal responsibility for their own health. Rather it will operate so as to make it easier for folks to do so by creating positive incentives that will lead to better health outcomes and lower costs for everyone.

The outstanding success of the "Cash for Clunkers" program demonstrates that even proud and independent-minded Americans are not averse to accepting government help in doing what they should be doing for themselves anyway. "Sure," they will say, "I probably made a mistake when I bought that Ford Expedition ten years ago, never expecting that the price of gasoline would go over $4.00 a gallon." "But, I am damn happy to accept a government check for $4500 to trade it in for a Toyota Corolla. If the banks can get billions why can't I get a few thousand?" The moral hazard here, that people will continue to make stupid consumer decisions expecting that the government will bail them out, is not so serious, and most of us will just shrug our shoulders and accept the risk.

But what about the people who never bought an SUV in the first place, or who never smoked, who exercise regularly, eat fresh healthy food, invested their money prudently and cautiously, and generally accepted personal responsibility for taking good care of themselves? What are we getting? We are getting screwed. We did the right thing, after all, and accepted our personal responsibility and also some share of our social responsibilities.
We could at least get a little credit, you know.

There is, in fact, no contradiction between accepting personal responsibility for caring for oneself, and also accepting a share of social responsibility for caring for others. Generally speaking, living a life of personal responsibility is an achievement for which individuals can be justly proud. Living such a life is also, generally speaking, a precondition for accepting one's social responsibilities, particularly those that involve caring for others. Accepting the burdens of parenthood and raising children is the primary way in which most adults express their social responsibility, their willingness to make sacrifices for the good of others. This is fine and good, and responsible parents should get a lot of credit.

Some individuals extend their social responsibility beyond the confines of their own family, and accept some responsibility for fixing some of the "big problems of society". Such people manifest a higher virtue by voluntarily "taking responsibility" for helping to "repair the world", but those who stop at personal responsibility and familial responsibility are not to be faulted on that account. These folks understand that by taking care of themselves and their loved ones, they are doing a good service to society by not having to ask anyone else for help in what should properly be their own responsibility.

These folks don't get enough credit; we should let them know that by caring well for themselves and their families they are fulfilling their primary social responsibilities. But, they might also need to be reminded that their are lots of folks who are not so fortunate, who for one reason or another, mostly not because of their own choices and actions, are unable to fully take care of themselves and for minor children who depend on them, and could use some help getting to a position of self-reliance. Framed in this way, most people will respond with compassion rather than with scorn or indifference. Particularly if one invokes the principle of reciprocity (popularly known as the Golden Rule) and proposes that they themselves should be entitled to similar help if ever they falter and cannot fully take care of themselves. We humans are wired for reciprocal altruism; we just have to figure out how to activate these responses when mutual aid is mediated by large governmental institutions.

If people take personal responsibility for themselves, and accept a fair share of their social responsibilities, they should be lauded and indeed rewarded for doing so. The problem, once again, is one of perverse incentives. We are embracing policies that discourage people from taking personal responsibility when we should be doing the opposite. The idea that our major institutions should be incentivizing and rewarding both personal and social responsibility is a winner both politically and morally.

So why don't more politicians get it?

Addendum 9/12/09: This New York Times story explains what happened to the idea of moral hazard in the financial industry. It morphed into I.B.G.

Friday, August 21, 2009

Death Squads, American Style


The term 'death squad' entered the lexicon back in the 1980s when it was used to refer to gangs of off-duty military personnel who were hired by right-wing military dictatorships in countries such as Guatemala and El Salvador to kidnap and murder people they suspected of sympathizing with the Marxist guerrillas who were fighting the army in the mountains.

In a story published in the New York Times this week it has been revealed that in 2004 the CIA hired the private military contractor Blackwater to organize a program to locate and assassinate suspected Al Qaeda operatives. The program was top secret and Vice President Cheney allegedly specifically ordered that Congressional oversight committees not be informed of its existence.

It seems like there might still be more surprises in store for those of us who have been paying attention to Bush and Cheney's little shop of horrors. The list of human rights violations and abuses that can be laid at the feet of the Bush administration is long and includes: the “disappearance” of suspected terrorists into CIA-run secret prisons, the denial of the right of habeas corpus of detainees, the use of ‘enhanced’ interrogation methods, a.k.a. torture, such as water-boarding, sleep deprivation, and auditory stimulus overload by military interrogators and the CIA, the indefinite detention without charges or trials of suspected terrorists at Guantánamo, the construction of the concept of “unlawful enemy combatants”, the use of Predator drones to assassinate suspected terrorists, the detention of an American citizen, Jose Padilla, without charges or trial for more than three years, the irregular renditions of persons such as Maher Arar to countries such as Syria, Egypt and Yemen where they have been tortured, the torture of persons such as Khalid Al Masri in secret CIA prisons, ill-treatment and deaths of detainees held at Baghram airbase in Afghanistan, and the secret and illegal eavesdropping on American citizens by the National Security Agency in violation of the Foreign Intelligence Surveillance Act, among others.

A number of these human rights abuses have been the subject of several high-level special reports on U.S. human rights violations prepared by the charter-based bodies of the United Nations. In the report dealing with respect for civil and political rights while conducting counter-terrorism, the Special Rapporteur for the Mission to the United States of America, Martin Scheinin, identified, "serious situations of incompatibility between international human rights obligations and the counter-terrorism law and practice of the United States. Such situations include the prohibition against torture, or cruel, inhuman or degrading treatment; the right to life; and the right to a fair trial” (Scheinin 2007). He has also identified deficiencies in United States law and practice pertaining to "the principle of non-refoulement; the rendition of persons to places of secret detention; the definition of terrorism; non-discrimination; checks in the application of immigration laws; and the obtaining of private records of persons and the unlawful surveillance of persons, including a lack of sufficient balances in that context"(23).

It is now clear that senior officials of the government of the United States conspired to break the law, and that the Department of Justice was complicit in these crimes and their cover-up. The New York Times stated unequivocally that "some of the very highest officials of the land not only approved the abuse of prisoners, but participated in the detailed planning of harsh interrogations and helped create a legal structure to shield from justice those who followed orders," and this was done "with President Bush's clear knowledge and support"(20 April 2008). The President’s top national security advisors, Vice President Dick Cheney; Secretary of Defense Donald Rumsfeld, National Security Advisor Condoleeza Rice, Secretary of State Colin Powell, and Director of Central Intelligence, George Tenet, held dozens of meetings in the White House Situation Room to organize and give legal cover to enhanced interrogation methods, including brutal methods of abuse that all civilized nations consider to be torture.

A report issued by the Senate Armed Services Committee on December 11, 2008, the day after the sixtieth anniversary of the passage of the Universal Declaration of human rights, concluded that, “the authorization of aggressive interrogation techniques by senior officials was both a direct cause of detainee abuse and conveyed the message that it was okay to mistreat and degrade detainees in U.S. custody,” saying also that, “The abuse of detainees in U.S. custody cannot simply be attributed to the actions of ‘a few bad apples’ acting on their own. The fact is that senior officials in the United States government solicited information on how to use aggressive techniques, redefined the law to create the appearance of their legality, and authorized their use against detainees”.

These reports, and many others dealing with the human rights record of the Bush administration, demonstrate that there is ample reason to believe that senior officials of the George W. Bush administration, conspired to systematically violate human rights, broke U.S. laws, and authorized the commission of war crimes.

Yet calls for accountability for these crimes, even for the appointment of a special prosecutor to investigate them, have been pushed aside by the Obama administration again and again using the specious argument that it is better to look forward than back. But the only way we can hope for a American future in which these kinds of abuses will not be repeated is by fully investigating what happened during the Bush-Cheney administration and holding the architects of these policies accountable.

Rather than misinformed people screaming at their Congressmen about "death panels" that were never even contemplated, progressives should be screaming about the government-sponsored "death squads" that were authorized by the former administration. Where is the sense of moral outrage on the left? Why are progressives allowing themselves to be "slow-walked" into accepting the fact that the Obama adminstration is allowing political considerations to interfere with the investigation of these crimes and the administration of justice?

Addendum: August 31, 2009

We now learn that Blackwater was supposed to provide foreigners for surveillance and support for death squads so as to make sure there were no "American fingerprints" on these secret operations. Fortunately, the program never became operational and was downgraded and finally ended before anyone was assassinated.
See this report in the Huffington Post for details.

Thursday, August 13, 2009

Big Lies


If different months of the year reflect different personality types, then August must be the month for idiots and liars. All of the reasonable and responsible people are away on vacation so the field of play is left to the nutcases. This is particularly evident this August in the so-called debate (really what has become a shouting match) between the proponents and opponents of health care reform. The pity of it is that with all of the lies and disinformation that are being spread by opponents of health care reform, and the need by the supporters to constantly rebut them, ordinary people are being prevented from learning the facts and hearing about the real issues.

President Obama, who is an admirer of Abraham Lincoln, should recall that he once said that you can "Fool all of the people some of the time, and some of the people all of the time. But you can't fool all of the people all of the time". Lincoln, however, failed to note that in a democratically-governed society all you need to do is to fool most of the people most of the time, and you can get what you want.

That is the strategy that the Republican Party (the GOP -- Guardians of Profit) and their allies in the health insurance industry seem to be counting on to derail Obama's health financing reform agenda. Their preferred tactic is known in the public opinion and propaganda industry as the "Big Lie". It is really very simple to use and usually works quite well.

All one needs to do is to invent a lie so preposterous that most people will think that no one would ever say such a thing if it wasn't true. It is important that the lie be something that induces fear in people and that it be made to seem that the supposed fearful thing is being kept secret. Then one gets a lot of important people to repeat the lie over and over again at every opportunity.

This is why one is hearing about "death panels" and FEMA concentration camps as elements of Obama's health care proposal, and why loyal Republican operatives can be relied upon to repeat these canards on every cable channel new show that will give them a pulpit from which to broadcast their propaganda talking points. When one "big lie" gets debunked they just invent another one and the beat goes on. But all the while the real issues are never discussed as the electorate is being whip-sawed between the conflicting emotions of fear and hope.

The biggest lie the opponents of reform are using these days is the claim that America has "the best health care system in the world." If this is true, then of course there is no reason to reform it and doing so is only likely to make it worse. But this is a outright lie as any objective assessment of the facts would reveal. The three basic criteria for judging national health care delivery systems are access, quality, and cost.

The U.S. health care system does not provide universal access, as for instance, does France or Britain; the health outcomes for the American people are worse that those of many countries, for instance, Canada or Denmark, and the cost per patient to deliver poor care to only a portion of the population is the highest in the developed world. By any objective assessment the U.S. health care system is one of the worst systems found in any rich country, but many people continue to solemnly repeat the claim that it is the best. They do so because the statement has a positive emotional valence to patriotic people, because believing it undermines the argument for reform, and because they know that if it they repeat it often enough with enough sincere feeling, a lot of people will believe it is true.

The political game this month is to see which side can nudge the poll numbers a few percentage points in one direction or another. Recent polls have shown opponents of reform slightly ahead. After the Congress returns from its August recess, there will be a final "scrum" in which compromises will be accepted and deals will be made, and some kind of health care bill will be cobbled together. For members of Congress who are on the fence, or just being cagey, a shift in public opinion about health care reform could sway their votes and mean the difference between legislative victory or defeat for Obama's initiative.

Some commentators have compared the angry demonstrations and shouting at recent town hall meetings to the tactics used by fascist brown shirts in the 1930s. At the same time, Republican propagandists have suggested that Obama and the Democrats are Nazis; Rush Limbaugh has described
Obama's healthcare logo as "right out of Adolf Hitler's playbook". Last week someone painted a swastika on the door of democratic congressman David Scott, and a woman at a town brawl demonstration held up a sign with a picture of Obama's face superimposed on a picture of a Nazi stormtrooper.

The opponents of health care reform, having unleashed the dogs "Fear" and "Anger" in order to prevent proponents of reform from actually answering questions from their constituents, are innoculating themselves against the charge that they are behaving like fascists by leveling this same accusation preemptively at their targets. Also, of course, everyone hates Hitler and the Nazis so getting that label to stick to Obama will carry a lot of emotional weight.

All of these tactics and techniques are well known. An earlier politician wrote the following about the use of big lies:


All this was inspired by the principle--which is quite true in itself--that in the big lie there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily; and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie, since they themselves often tell small lies in little matters but would be ashamed to resort to large-scale falsehoods. It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and will continue to think that there may be some other explanation. For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact which is known to all expert liars in this world and to all who conspire together in the art of lying.

The author of his quote is Adolf Hitler (Mein Kampf, vol. I, ch. X).

Addendum: For the story about who exactly were the expert liars who conspired together to create the myth of death panels see this story in the New York Times.