The problem of reverse moral hazard from government inaction
Comments to a recent article brought to mind an underlying conflict among many about how to view a recession or depression. One view is to argue that an unrestrained down turn, performs a useful, necessary and inevitable function because it (1) cuts back on excesses, (2) prunes the “dead wood,” out of the economy, putting lesser companies and people out of work, and (3) corrects imbalances in and between markets. [Seeking Alpha] calls this the “let’s have the worst recession at all costs” viewpoint, or for short, the moral retribution approach. Others, while agreeing that a down turn can do these things, argue (1) the costs are too high from that approach and (2) too many companies are destroyed and people, thrown out of work, who essentially did nothing wrong, except get caught up in the national economic tail spin. The analogy is a good, well-valued stock that goes down with the rest of the market. [Seeking Alpha] calls the second problem here for those injured the one of reverse moral hazard. Companies and employment are lost in great quantities by people who did nothing seriously wrong and injured no one. That is the core problem with the retribution approach and the reason governments should act and intervene. Fortunately, good public policy, while certainly not perfect, seeks to avoid reverse moral hazard problem and is more neutral, not seeking to injure and being less imbued with a sense of retribution. It provides general stimulus programs for interim help -- to provided time for hopefully successful readjustment by companies and employees in less precarious economic positions, recognizing that the worst companies and employees are going to be – what is the word – “pruned” away by the down turn. Obviously, this is a more effective and less costly approach to do what often panicked markets are trying to do with an indiscriminate sledge hammer.