In a time of crisis, we expect societal leaders to make tough decisions to mitigate the adverse effects. In the last century, the world has arguably not faced a more significant crisis than the current pandemic. Many are understandably asking whether the decisions taken by medical, business and political leaders in these difficult times constitute a moral hazard.
The Economist defines moral hazard as “situations in which the costs of risky behaviour are not entirely borne by those responsible for that behaviour, so encouraging excessive risk-taking in the future”.
At the onset of the pandemic, the public health system in most countries was overwhelmed. The medical professional had to play God and decide which patients should get access to life-saving equipment when hospital capacity and facilities were overwhelmed. To what extent can one agree on the subjective criteria of undoubtedly well-meaning professionals who assumed the responsibility of deciding who should live and who should be left to die?
Political leaders had the arduous task of taking measures to save the economies from collapsing and rescuing many families from becoming destitute overnight after losing their jobs or their health due to the widespread impact of the pandemic. They assumed the right to limit our civil liberties to control the spread of COVID. Many would argue that in some cases, these restrictions were discriminatory even if they were imposed legally.
When the great financial crisis erupted in 2008, governments used taxpayers’ money to rescue banks that had long ignored good banking practices and risked becoming bankrupt when the crisis erupted. When governments face pressure to save struggling institutions for the sake of the economy as a whole, they might limit the short-term cost of a crisis but could lead to more risk-taking and worse crises in future.
To limit the spread of the pandemic, most governments and international institutions acted fast and generously to prevent lost sales and jobs from bringing about spikes in bankruptcies and poverty. Large amounts of taxpayers’ money were pumped into the economy to aid households and firms.
The IMF, a usually fiscally conservative institution, argued that governments across advanced economies could run fiscal deficits that exceed 10 per cent of GDP in 2020. The US incurred a deficit of about 15 per cent.
We still do not know how consumer behaviour, the fuel of economic growth, will change in the post-pandemic period
Central banks abandoned their usual caution and bought risky high-yield debt and bonds issued by struggling countries. Some government-owned banks went even further and bought corporate non-investment grade debt, issued guarantees for lending to distressed businesses and diluted the rigidity of the loan repayment programmes of struggling enterprises.
Some economists argue that decisions taken to save an economy from collapse never amount to moral hazard. These economists say that interventions designed to minimise moral hazard by directing help to the most deserving individuals and firms take time to define and implement – time not available in a crisis.
Other economists argue that questions of moral hazard cannot be put off forever. Generous support measures during the pandemic will be hard to dismantle as businesses and financial markets get caught up in a culture of dependence on state aid. If scarce financial resources support enterprises with poor survival prospects, healthier companies will struggle to find the support they need to grow.
Governments will argue that the generous packages offered during the pandemic were a one-off phenomenon to prevent an economic collapse. But there is no guarantee that other threats do not lie hidden around the corner waiting to pounce on our well-being.
The impact of climate change is no longer a subject for academic discussion. The long-term effects of COVID are still unknown and no one can guarantee that another pandemic would not impact the world economies in the coming few years.
Societal and economic behavioural changes challenge economic norms and historic economic relationships. We still do not know how consumer behaviour, the fuel of economic growth, will change in the post-pandemic period.
Confidence in the future remains fragile despite the happy talk of some political leaders. Financial markets sentiment changes with every piece of good or bad news. The fear of inflation, the momentum and confidence in economic growth and the risk of escalating geopolitical unrest persist.
This is the time when strong, confident leadership makes all the difference. Decisions taken during a crisis may contain an element of moral hazard that is justified to prevent the worst consequences of economic and social catastrophes. But in the coming years, societies will soon have to demand more personal and collective responsibilities to prosper.