In the past few months, many professionals have had to make tough moral decisions. Doctors in some countries had to decide which patients should get access to scarce life-saving equipment. Politicians had to impose liberty-restricting measures to limit the spread of the pandemic. As a result, some have suffered mental and physical distress for the sake of the common good.
Less critical decisions relate to the moral hazard of using public funds to rescue businesses and their employees. An intense debate on the importance of good governance started after the financial crisis of 2008. Taxpayers had to save some banks who had been poorly managed. Today the moral hazard debate is very subdued.
Business lobbies, trade unions, church leaders, opposition politicians, and ordinary people seem to have strong views on what their governments should be doing to ensure that the economic impact of the pandemic does not destroy their future. The most common belief is that governments should continue to pump money in the economy.
Saving the economy from collapse is undoubtedly a morally justifiable objective. But tough questions about risk and responsibility cannot be put off forever.
At the end of this pandemic, many countries will end up with vast amounts of debt that have to be repaid by future generations. Today’s youth already face a bleak future as a result of the economic mismanagement of many of today’s political leaders. Burdening young people with debt in the coming decades is equivalent to promoting moral hazard.
The Economist describes moral hazard as ‘situations in which the costs of risky behaviour are not entirely borne by those responsible for their behaviour, so encouraging excessive risk-taking in the future’. Moral hazard concerns mostly arise at times of crises.
Governments face enormous pressure to ensure that normality in people’s lives returns as soon as possible. In the present context, this means ensuring that businesses survive the economic slowdown caused by the lockdown and that the vast majority of workers do not lose their jobs.
We have seen governments pump enormous sums of money to achieve this aim. Yet, speaking to both businesses and individuals negatively affected by the pandemic, it seems that they expect even more support to ease their pain.
Saving people’s jobs comes at a high cost
Economic statistics are beginning to emerge to show the impact of the pandemic on economic growth. GDP reductions in double figures are the order of the day. We may see even more dramatic drops in wealth creation in the coming months.
Usually conservative central banks have thrown monetary orthodoxy to the wind. They are prepared to print as much money as needed to buy the debt of distressed governments. They also want to buy corporate junk bonds to ensure stability in capital markets.
Some outspoken central bankers expressed their worries about this extraordinary strategy. They believe governments and businesses that had borrowed recklessly before the pandemic have been given a new lease of life that they do not deserve. Eventually, ordinary citizens, especially young people, will have to pay the bill for rescuing zombie organisations.
The objective of saving people’s jobs comes at a high cost. But this objective is worth pursuing. The last thing the world needs is another depression that will mostly hit the weakest in society.
Laser-focused initiatives to prevent abuse in state aid are not easy to define. This is mainly because government action has to be quick to avoid economic devastation and market panic.
For instance, in Italy, some businesses have furloughed their employees to get the government subsidies but at the same time insisted that these same employees should still report for work.
Countries like Greece and Italy are refusing to borrow from the European Stability Mechanism because such borrowing will be conditional to structural economic reforms.
The pandemic will be controlled at some time, even if today we are no more certain when that time will come than we were six months ago. The bills for the public support will start being mailed to taxpayers in the next few years.
The big challenge for regulatory institutions and governments is to ensure that the worst consequences of moral hazard do not fall on the weakest in society.
Other crises, possibly linked to the consequences of climate change and geopolitical tensions, may not be that far away. In the meantime, politicians refuse to talk about the inevitability of increasing taxes in future.
We can only hope that our leaders will opt to tax wealth rather than work to accelerate the recovery.