Katrina 17 Years Later: Moral Hazard
August 29 marked the 17th anniversary of a hurricane which, as I said at the time in this blog, more or less severed my life in half. Back then the remark was predictive, but now I can say it is true: Almost all my life was spent in either Louisiana or Virginia prior to Katrina; since then I have lived entirely in Mississippi. Before Katrina, I devoted myself to outpatient internal medicine and pediatrics, and since then I have been primarily a hospitalist — and, for the last 12 years, exclusively one. There was before Katrina, and after.
My memories of the storm have faded in the passing years. I can’t say I feel the pain of it as acutely as I did fifteen years ago, although very little is completely forgotten. This I am grateful for. A short memory is not always a bad thing. Life lessons, wisdom, the love of friends and family are worth locking into memory. Pain, not so much. I am a Christian and believe in the spiritual redemption of pain, but not PTSD pain, the kind of pain that lingers, hiding in dark corners, waiting for a weak moment to return. In this case, I give thanks for my aging brain.
But one thought that continues to trigger me from the Katrina days is the phrase moral hazard. I had not heard the term before Katrina, but economists like to use it to describe the risks people take when they feel they can count on non-market forces (i.e, government handouts) to bail them out if a disaster occurs. Put generally, moral hazard refers to the behavior of people who will take economic risks, like building and rebuilding in a hurricane zone, because they know if they suffer harm the government will make up for their loss at little cost to them. In these cases, the story goes, the government is rewarding bad behavior. Thus, moral hazard.
The term surfaces in politics every once in awhile, and usually in the mouth of a conservative. It has most recently been applied to college loan forgiveness. The idea in that case is that people will continue to take out college loans with abandon as long as they think the federal government will bail them out. In both cases, with Katrina and college borrowers, the point is that people are using government support to insure against bad judgment, and without the corrective value of failure and just punishment, will repeat the mistake in the future.
The problem with this kind of criticism, especially in the case of Katrina, is that it bizarrely assumes that Gulf Coast residents say, “I’m going to build a house here and when a hurricane takes me out, the Feds will fix everything, so no worries.” But this is nowhere near the truth: No one wants to face ruin in a hurricane, much less die in one. As any survivor of Katrina can can tell you — as I can tell you personally — no amount of assistance makes up for that kind of loss. In the same way, no one who took out college loans in 2005, the year of Katrina, expected the stock market to crash in 2009, well-paying jobs to dry up, and real estate prices to go through the ceiling, pricing them out of the housing market.
No one plans for the worst. People plan for reasonable risks, and hope the worst never comes. Because that’s all most people are able to do.
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There are other kinds of moral hazards that economists and politicians seem to conveniently overlook. When the U.S. government bailed out the stock market in 2009, that was an example of moral hazard in the financial industry. Banks took excessive risks with investors’ money, knowing that if somehow things fell apart, the U.S. Treasury and the Federal Reserve would step in to save the day.
Rich people always have good reason to expect to be bailed out. The wealthy have too many power connections for it to be otherwise. And when the government gave the banks $1 trillion to keep the financial system from crashing, and then pumped trillions more into the economy through artificially low interest rates that hovered near zero for a decade, that belief proved to be true. Don’t be deceived by financial people who say the public also benefitted from low interest rates. They may have, but this benefit pales beside the killing Wall Street made when very low borrowing terms allowed big businesses to amass enormous sums of cash and drive up stocks with share buybacks for virtually no risk.
Remember the term “too big to fail”? Banks are too big to fail. Cities like New Orleans, middle class people, and the poor, according to proponents of moral hazard, should not be. Who enjoys the real moral hazard?
Another problem with the term moral hazard is that it tends to be applied retrospectively. New Orleans gets hit by a hurricane and suddenly it is a moral hazard. That’s only because the disaster happened. There are millions of people in California sitting on fault lines waiting for their moral hazard from earthquake or wildfire. Or consider the real estate boom in South Florida, which almost certainly will go under water in the next 50 to 80 years as the sea level rises from climate change. Those expensive condos on South Beach are one of the many costly moral hazards this country faces. Then there are the millions who continue to relocate to Colorado, Nevada, New Mexico, West Texas, and Arizona, places that do not have enough water to support the growing population. When Lake Meade and the Colorado River run out of water, as they very well may, there could be 20 million people or more living in a moral hazard zone that those of us who live in areas that continue to get over 60 inches of rain a year will be asked to pay for.
But future moral hazards are ignored. Seduced by the recency bias that plagues the media, pundits and “economic experts” prefer to identify college graduates in low-paying careers or people living on the Gulf Coast as the scofflaws. As with Louisiana and hurricanes, the time to reduce moral hazard is before the damage is done. Raise levees, regulate the water supply and excessive building in the desert, address climate change. But the people who carp about moral hazard are not interested in prevention. They are interested in allowing the people harmed by natural disasters to suffer, so they will learn their lesson.
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All governments and economic systems should exist to support human flourishing. The government and the economy exist for us, not the other way around. This is where economists and conservatives get it wrong with moral hazard. Society exists to give people choices, even if sometimes those choices are the wrong ones. The exercise of free will is essential to human happiness, and governments and societies should support this, within reason, even if it costs more than the accountants say it should.
People make mistakes and always will. People choose love over money, joy over frugality, and in the case of New Orleans, a unique city’s culture over the security of Anywhere Else America. This may or may not be a mistake, but these are the kinds of mistakes people make all the time, and should be allowed to make. The purpose of economies and governments is not to punish people who make get into trouble. We are human beings of value and dignity, and sometimes we go too far and yes, when we do — and if we haven’t broken the law — we deserve help to get back on track. To repurpose an old pro-life saying, you should be thankful your Momma believed in bailouts.*
Everyone needs a bailout every once in awhile. Rich, poor — everyone. We have all screwed up at one time or another and been let off the hook for it. Small things, big things. I don’t think the size of the mistake matters all that much, as long as it was an honest one. I don’t subscribe to a moral system that says the size of the sin depends on the cost in dollars. Wrong is wrong, right is right. Stealing a dollar from a beggar is not more moral than depriving a billionaire of a hundred million. And we are not even talking about sin with Katrina. We are talking about errors in judgment, or not even that — acts of personal preference.
People who get cancer will take far more out of the medical system than they could ever pay back, and we accept that. We let people drink and smoke. I’m a medical doctor and even I would be against prohibiting people from smoking. What we would gain in medical savings isn’t worth the dignity we would take away from people when we force them to do what we, in our great wisdom and without their permission, have decided is best for them. But when things go wrong, we need to be willing to help anyway. Because they are people who make mistakes, just like us.
Many people made bad decisions before Hurricane Katrina. They built in low-lying areas without insisting their politicians protect them from storms, and without standing ready to pay taxes to make sure it happened. They built on the ground instead of elevating their homes. They chose to stay behind when the storm hit when they should have evacuated, creating problems for the emergency responders who had to rescue them.
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I still remember the moment I decided I was definitely evacuating for Katrina. It was Saturday morning and the St. Bernard Parish government was issuing warnings on a channel reserved for emergencies only. A channel that I had never seen used before. One of the members of the sheriff’s department said he and another politician had driven around the parish to check on the condition of the levee system. He said that the levee was built to fifteen feet across much of the parish but in some places it had “sunk down to 12 feet or even less.” At that time, Katrina was predicted to bring a 25-foot storm surge. Not only was this man admitting the levees were nowhere close to adequate, he was implying that they weren’t being kept up. Why would anyone responsible for a levee system allow a levee to sink without fixing it? And yet when I bought my house in Meraux, Louisiana in 2001, I was told I didn’t need flood insurance because the street had never flooded since the road was laid down. Thank heavens I realized how silly that advice was and got flood insurance anyway.
But this is what happens when government and society fail you. You don’t buy a new TV expecting it to catch on fire in your living room. You don’t buy oranges expecting them to be coated with salmonella. And you don’t buy a house expecting it to flood or be destroyed in an earthquake. You assume that the builders who constructed it chose a safe place and elevation. That the city has flood protection in place. You expect competence from people who ought to know better than you do what is safe and what is not. We depend on one another. You depend on my competence as a doctor, and I depend on your competence to maintain a levee. That’s what living in a society is supposed to mean. People who live in society have a right to expect competence — something in short supply after Katrina — and not to be punished for having done so.
And that is the final problem with moral hazard. It assumes the market knows best, and that safety protections are in place. It assumes that if you can buy it, it is safe — because efficient markets will price risk into it and eliminate bad options (like the exploding TV).
But that isn’t true. The free market does not identify moral hazards. People who have something to sell will never give you a fair assessment of risk. When was the last time a car salesmen told you what your death risk was if you had an accident? Ask a power tool salesman what your risk is of losing a finger using their product and see what kind of answer you get. Not the unvarnished truth, that’s certain.
No, moral risk is just another sophisticated way to blame the victim. It is caveat emptor, and screw you if you didn’t get the email. If moral risk were a concept designed for the public good, economists and politicians would be devising ways to help markets protect people. There would be fair information about everything from the enviromental risks of coal burning power plants to what will happen if you bring a gun into your home. And these costs would be built into the price of the product, or there would be restrictions about who can buy them. This doesn’t happen. We buy things off the shelf all the time without knowing the risks.
People who are affected by natural disasters need to be helped, not lectured to. Moral hazard is a much more complicated problem than the experts are willing to admit. People choose where to live based on cost, on the location of family, and in the case of New Orleans, for the love of the regional culture, which is unlike that of any other American city. These things matter more than to them than money or hurricane risk. The major weakness of economics, which most pundits and politicians are slow to acknowledge but ethical philosophers know well, is that the free market can only measure things that have a price tag. And that excludes many things of real value.
Moral hazard is nothing but the old-fashioned blame game. The world is full to the gills with people who want to blame. What we are short of is people of character who love their neighbors and want to build good things and create relationships that are productive and beautiful.
You know, like the people who went back and rebuilt New Orleans after Katrina.
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* The original saying is, “You should be thankful your momma was pro-life.”
