Moral Hazard Creep

“You shall not muzzle an ox when it is treading out the grain.” – Deuteronomy 25:4

“You shall not oppress your neighbor or rob him. The wages of a hired servant shall not remain with you all night until the morning.” – Leviticus 19:13

On Sunday, 60 Minutes aired a piece on the mounting debt crisis of quite a few of the United States. It’s a good piece; the video can be found here: State Budgets: the Day of Reckoning. The story had a number of interviews, including NJ governor Chris Christie (who I think is fantastic – because of his spending reduction), the Illinois state comptroller, and an investment analyst assessing the risk in municipal bonds. It’s worth a look if you haven’t seen it.

The long and the short of it is that states have spent way more than they can afford. During the good years (or, rather, the bubble years) state legislators made massive promises to lots of different funding initiatives, including pensions for state and local employees. Now the states are finding that they cannot pay the bill, and will not be able to fund the massive benefits packages promised to the state workers. This is a problem that needs a solution.

At issue is who will feel the pain from this. State employees, most of them unionized, are entrenched on the issue. They move a lot of votes and have a great deal of clout in political arenas. Will they have to give away their benefits? The public also wants to avoid the pain – which would mean massive spending cuts and welshing on pension promises.

Obviously there is interest in “a third way” whereby the federal government bails out the states and allows them to continue on as they have been. This has a number of problems. First, it does not address the core issue – insolvency of over-promised benefits packages. A bailout would just require another bailout in a year or two.

More disconcerting though are the moral implications of a bailout. States (and individuals) that did make difficult political decisions to cut spending (and benefits) will be forced to pay out of their savings and fiscal stability to rescue those who have not been prudent. The Keynsians will argue that we’re all better off if nobody goes belly up. I disagree – I think state failures are exactly what needs to happen to get the message across that free spending is not OK.

The bailout tacitly amounts to theft. The Bible verses given at the beginning indicate that a laborer (whether an ox or a person) is deserving of the fruits of his labor. When you work hard, save money, make difficult political choices, etc … you ought to be able to reap the rewards of your hard work. You ought not be told that you have to take the proceeds of your efforts and pay off the debts of other people (you can do it if you want to – but it must be your choice). Yet this is the moral hazard we are facing.

States have been utterly ridiculous in their promises and have refused to step away from the spending programs. In the next year or two (maybe less for California and Illinois), we will see states that are forced to make a decision. Let us hope that there will be no immoral bailout coming. Better for the irresponsible states to feel the pain now while they can still do something about it – instead of continually running the entire system of the country into the ground trying to rescue some “deadbeat states” (those are the words of the Illinois comptroller, not me).

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2 Responses to Moral Hazard Creep

  1. Michelle says:

    I saw that segment on 60 Minutes, too. It was all pretty unnerving to say the least. Being a NC state employee, I knew it was bad. In our county alone, we’ll have $37.2 million LESS in funding next school year–which could equal about 330 Guilford County Schools positions. It’s not good!

  2. nomasir says:

    It is a pickle alright. Not sure how states will respond to all of this. They won’t be able to borrow more (unless the feds guarantee the bonds – which has its own difficulties). They can’t possibly raise taxes to cover the shortfalls, that would only drive businesses out. Likely, benefits, pay, and social services will have to take a hit.

    It could be a scary time for lots of people.

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