Jun.
27
2018

The moral hazard of lazy thinking

When a local or national government proposes a solution in the form of new taxes or subsidies, it is time to get suspicious. Money is a grand economic invention. By implementing money as a unit of account, we can obtain an efficient economic metric system, which is simple enough to be suitable for everyday usage. To put it in another way, money is for the economy what is a global coordinate system for geography. By applying it, we can answer any otherwise difficult problems or relative questions such as the determination of any global location. Likewise, the coordinate system of currency provides answers for complex and/or subjective questions, such as the market valuation of certain goods or investor sentiment regarding a future business model. However, using this metric system can lead to lazy and uncreative  economic decision making due to its practical simplicity. If the government sees market valuations unfit, it is often tempted to simply manipulate those values through redistribution. The catch of the game is that artificial forces – such as government manipulation – will be insufficient to change people’s perception, leaving the society with inefficient outcomes.

Axiomatically, certain public goods – such as public order or legal infrastructure – require a centralized agent on the market. Moreover, a certain degree of redistribution can also be desirable if it can tackle the risk of random shocks or prevent agents from dominating the market. However, if the state goes beyond these basic functions, moral hazard arises.

Generally speaking, moral hazard is the risk of hidden action. If I let the control over to a certain agent, who later fails to represent my best interest, then we are facing a moral hazard problem. It undoubtedly creates an interesting context if the state enjoys monopoly over legislation while it also controls a fraction of the people’s income. Given that officials can be voted out of office and the powers are sufficiently separated, the system becomes more resilient by creating a negative payoff for potential abuses. Unfortunately, it is still quite common for government agents to exploit their positions. Even though the list of potential misuses of power goes on from corruption through cronyism to buying votes, let us focus on our current topic: state redistribution and market intervention.

As mentioned above, the application of money as a metric system makes it convenient to observe subjective market perceptions and valuations. On the other hand, it restricts the imagination of policymakers and obstructs market reforms. For instance, what should we do if the fertility rates are too low? The government may choose to pay out more subsidies to families. The only problem with such incentive systems is that they can only offer a solution to a one-dimensional money issue. If the source of the issue lies elsewhere, fiscal policy is ineffective and insufficient to produce a long-term solution. Yet, there are ways to resolve the issue without re-allocating a single penny. Labour market reforms consisting of paternal leaves and policies that decreases career opportunity costs for parents’ can improve long term fertility trends.

The primary objective of the state is to create a fair level playing field by creating an efficient and transparent system of rules and regulations. It should not aim to create an environment of outcomes that it sees fit by abusing its legislative monopoly. Implementing the appropriate incentive systems and eliminating overregulation leads to a more efficient outcome than any  direct coordinate system manipulation would ever do.

Money doesn’t only make you lazy… it also makes you dumb

The commercial hub of Washington state has seen its property prices soar well above their pre-crisis level. At the same time the city of Seattle is also experiencing a homeless crisis, where the number of camps in public places have increased exponentially. Local policymakers came up with a quite unusual explanation for the phenomenon: big corporations have created too many jobs.

One of the main events in the contemporary history of Seattle is the construction of a new downtown Amazon headquarter. It is hard to believe that Amazon faces an unwelcoming environment while it invests millions of dollars to build its second HQ. Local policymakers proposed a so called Amazon-tax, which would be a levied over hours-worked for local big companies. Any firm with local operations and more than 20 million dollar revenue must pay a lump sum of 26 cents over each hour worked by its employees. It complicated our plain vanilla understanding further if we would factor in that these companies have created half the post-crisis jobs, and helped the Seattle labour market to recover in just a couple of years.

According to the official narrative, the investment projects of corporate giants with deep pockets are driving property prices higher, which trend squeezes out ordinary buyers from the real estate market. The proposed tax aims to serve as a counterbalance by discouraging companies to move jobs to the city, while the collected tax can be used to fund the city’s homeless social-programmes.

Contrary to the rhetoric of some leftist council members, the source of the problem is not the greediness of real-estate developers or multinational companies. The local government conveniently glosses over the fact that while new jobs create demand for residential properties, the disastrous regulatory environment makes it impossible for supply to meet the increased demand.

In case someone would contemplate to become a real estate developer in Washington state, she must be prepared to comply with seven hundred pages of regulations. Furthermore, new residential properties must meet the requirements of another seven hundred pages of building codes. The lack of enthusiasm to build new houses suddenly becomes less surprising. According to the official rhetoric, the purchasing power of companies squeezes out ordinary buyers. Whereas in fact, it is the overregulation what creates the housing crisis in Seattle. While an Amazon or Boeing sized company can easily afford to employ a team of lawyers to deal with regulations, a household could hardly afford such ‘luxury’. The one who actually oppresses the people is the state regulation itself. The proposed solution is to levy higher taxes and drive out businesses.

As the above example has shown, thinking in monetary terms can distort our perception about real problems. The best policymakers can do is to only deploy fiscal tools as a last resort. Instead they should focus on their original purpose: creating an optimal regulatory environment.

Source of featured image: geekwire.com