Moral Hazard at the local level

A few weeks ago it was reported in the Morgan County Citizen that the Morgan County Board of Commissioners agreed to fund a $15,000 study in order to determine the economic viability of creating a regional “food hub” in Morgan County. It would seem government backed subsidies of private businesses is not just a federal or state issue but a local one as well. In an of itself there is nothing wrong with the idea of the food hub, the problem is why is any government in any way assisting in funding a possible private enterprise? If the backers of this idea feel it may be a good idea then they need to invest their own funds for this study. If the study finds it is viable and this new enterprise comes into existence will they refund the county the $15,000 fee? Perhaps, but if it indicates it is not viable will they still refund the fee? I’m guessing not, otherwise what would be the point in having the county pay for it, why don’t they just pay for it to begin with? This is a case of “heads I win, tails you lose.”

The wider issue here is this is a miniature version of why we had the recent housing bubble, and that issue is known as “moral hazard.” Moral hazard is when someone else takes on the responsibility for any bad decisions you might make. This tends to increase the number of bad decisions. For example if I told you to go into a casino and gamble as much as you wanted and that if you lost I would reimburse all your losses, how much constraint would you feel about gambling as much as you could vs if it was your own money and it would not be reimbursed? No constraint at all. This is a similar situation. If a group of private investors have an idea for a new venture but they are unsure of the viability of it, why not get the government to pay for the background information? If it is a winner they will start the business, and if a loser than none of them are out any money, only the government (the people) are.

Now I am not accusing anyone of any malfeasance or sinister motives here, my point is that our system is set up in a way where this is simply the normal mode of operation, so why not take advantage of it? But when you codify moral hazard into your governmental system you will only increase the odds for a lot of waste. The counter argument here may be that “this will lead to jobs possibly.” Yes, maybe it will, and maybe it won’t, but why should the people (the government) gamble their money on ideas that may or may not pan out. If the investors think it is a good idea then they need to spend their money and put their money on the table. Diffuse costs and concentrated benefits inevitably lead to problems of economic distortions and cronyism.