Moral Hazard

The outcomes of the various bailout and stimulus packages already passed or currently being contemplated, and the lessons to be drawn from them, won’t be known in their entirety for quite some time, if ever. There is, however, one quite basic premise that is once again being revealed by the federal government’s current attempts to step in and bolster the economy.

Government spending creates moral hazard.

Check out the lead story in this morning’s USA Today – States continue spending sprees. Why is that? As the national daily reports, though a few states have attempted to curb spending:

Most have taken a wait-and-see attitude because spending cuts may not be needed if Congress approves a large federal aid package, and big spending hikes are a possibility.

Further, as South Carolina Governor Mark Sanford, who, it should be pointed out, opposes the expected stimulus package, is quoted in the piece:

If Washington will wave a magic wand and bail you out, the obvious answer in politics is to avoid decisions you don’t want to make.

I am agnostic about the President-elect’s proposed stimulus package. I would like to know more detail regarding what the trillion or so dollars will be spent on, what the funding mechanisms will be and what oversight Congress and the administration will have over what the money is spent on. I’m also not smart enough to foresee what the consequences might be if Congress fails to pass a stimulus package. However, I do know that states and, in turn, cities and towns should not use federal stimulus as an excuse to just keep spending money they clearly don’t have.