Immoral Hazards: New Orleans Style

“Moral hazard” is a term deployed by many economists and politicians to criticize and dismantle public programs. Missing from their vocabularies is the parallel term “immoral hazard.” New Orleans’ hurricane and aftermath reveal that immoral hazards have been ignored.

The moral hazard concept developed in the insurance field. If an insurance company reimbursed home owners or auto drivers for all the costs of a fire or auto accident, they might be encouraged to be inattentive to fire threats or dangerous driving. Full coverage of home or auto losses would therefore produce a hazard, a moral hazard in that it induced antisocial behavior. Enter, therefore, “deductibles,” so that the insured could not count on full reimbursement from the insurance company and would have an incentive to pay attention to fire and driving hazards.

With relish, economists applied the moral hazard way of thinking to many fields, particularly public assistance, unemployment insurance, and other efforts to alleviate unemployment, low income, and poverty. Providing substantial financial aid might discourage the unemployed from pursuing jobs and accepting employment at wages below their previous experience or current need, the appropriate moral behavior by the standards of many economists. A New Yorker cartoon by B. Smaller captures the spirit of the moral hazard concept: a small boy explains to his mother that he is not giving any of his cookies to his friend because he might create “a cycle of dependency.”

The New Orleans situation demands a companion concept—immoral hazard. Harming people through governmental or corporate neglect or bad policy is an immoral hazard. Reducing spending on improving the levees that protected the city produced an immoral hazard that endangered the lives and livelihoods of residents. Neglecting to be prepared to deal with a Level 4 hurricane was another. Jurisdictional and other disputes among city, state, and federal agencies should have been anticipated and adjudicated before a major storm occurred. In situations of potential but great threat, inattention, inadequate preparation, and inaction are immoral hazards.

An immoral hazard occurs by not providing needed help when no or little danger exists of inducing a moral hazard. A key example is limited or no prenatal and later health care for poor and low-income women and children. More broadly, inadequate housing, nutrition, and schooling are immoral hazards inflicted on children who run no risk of indulging in a moral hazard if they are helped. Letting children suffer (an undesirable outcome that can be anticipated) in order to prevent their parents from possibly participating in a moral hazard constitutes an immoral hazard. It damages children who are not responsible for how some parents might respond to a public program.

Drug and other corporations that do not reveal risks in the use of their products produce immoral hazards....