Earlier, I wrote about the argument that many who are now facing foreclosure are in trouble "through no fault of their own" and argued that that was irrelevant. Even earlier, I wrote about federal flood insurance, and about increasing damage caused by natural disasters. While these may seem to be unrelated topics, they all have one thing in common, that is the high price tag caused by indemnifying people against either bad judgment or bad luck.

Many conservatives, while arguing against welfare, have a problem with denying assistance to "hard working people" who "fall on hard times". They seem to think the argument against welfare is that the recipients are "welfare cheats" or "slackers", and that there is no problem with providing a "safety net" for those who suffer a misfortune. But that approach is wrong. Whether we give aid to all and sundry, or apply some sort of "work ethic" morality check, or even adopt some sort of social security pseudo-insurance scheme where we only pay out to those who pay in (as unemployment insurance does), indemnifying against loss is still a problem.

And, oddly, it is a problem conservatives should see, but rarely do.

Conservatives are the first to declare "when you subsidize something, you get more of it". And, applying this to welfare they come to the conclusion that, if you pay people not to work, you get more people who refuse to work. Some even have the consistency to apply this to unemployment insurance, and argue that the longer unemployment benefits are continued, or the greater the benefits paid tot he unemployed, the more unemployed individuals we will have.

But here we see the problem I am describing. While some rightly understand subsidizing unemployment will cause more unemployment, others are blinded by the fact that those collecting unemployment insurance were "hard workers" who lost their jobs "through no fault of their own". Seeing them as "good people" they can't believe they would choose not to work. Somehow they believe these "good people" are immune to economic forces, and so getting money from unemployment insurance will not allow them to be more selective about the jobs they will take, thus prolonging unemployment. In short, once they fail to see a reason to disapprove of the recipients, they lose sight of the economic realities.

And the same is true of programs which indemnify those who are in trouble "through no fault of their own". Whether it be bailouts for those who are behind on mortgages or flood insurance, so long as the beneficiaries cannot be smeared as "slackers" or "leeches", many conservatives forget their own rule that you get more of what you subsidize. So long as the recipients are "good people", many lose sight of the fact that moral value does not invalidate economic laws. Just as a good person is just as subject to gravity as a bad person, he is also subject to the laws of economics as well.

And that is the problem with the programs which indemnify people against "bad luck". By subsidizing either risk taking, or lack of planning for bad times, they encourage an increase in risk taking and discourage prudence. After all, why avoid risks when the state will pick up the tab? And why plan for a rainy day when the state will bail you out?

Let us look at flood insurance for an example. In the past, no insurer would insure a home built in a flood plain, or a house along a coast prone to flood damage, or if they would, the cost was prohibitive for most. So, what did people do? Most chose not to live on coasts or in flood plains, a prudent move. However, the federal government, deciding this was unfair, stepped in and provided "insurance". However, as the cost is wholly unrelated to the risk, this "insurance" is really nothing but a subsidy for those taking a risk.

And what was the outcome?

We see it all around us. Each hurricane, every flood, is a record setter. Damage from floods grows year after year. Now, some of that is due to inflation, but even in constant dollars, flood damage rises every year. No, this is not the result of "global warming" or some unprecedented series of storms. Part is because we are wealthier every year and have more valuable things to destroy, but the biggest cause, by far, is the fact that the government indemnifies people against flood damage. Let's face it, the coast is beautiful, most people would love to live along the water. But many were discouraged by the risk of flooding. Until the feds stepped in and removed the costs associated with that risk. With the costs of flood damage being carried by someone else, there is no disincentive to building in risky locations, and so we see a continual increase in the damage caused by storms.

Or let us turn tot he mortgage bailouts, and the many proposals to help only those who are "deserving".

Even if one could distinguish between the deserving and undeserving, or even agree on what those terms mean, would it be a good idea to help the "deserving" to pay off their mortgages? While most would agree those who bought houses they could not afford are "undeserving" and those who are in trouble through the loss of a job are "deserving", what about the great majority who fall in between? What about those who took ARMs, expecting rates to remain low? Or took interest only loans, expecting to refinance when the house appreciated? How about those who took out second mortgages before losing their jobs? In the end it doesn't really matter, because, looking at it objectively, if we exclude those who did things like taking mortgages they could not afford, the people in trouble fall into two categories. There are those who took risks, such as financing through ARMs, expecting appreciation, and so on, and those who did not take risks but failed to prepare for misfortune sufficiently.

Let us look at the first group, as it is similar to the flood insurance example. Those who took ARMs, who used interest only financing, and similar schemes, expecting either rates would remain low or the appreciation of their property would allow them to get into a fixed rate loan should rates rise, were gambling. It may not have been obvious, but they were. The reason ARMs, interest only, and similar schemes appealed to borrowers was that they required less money, but the reason for that was risk. They were cheap because they could become, without warning, incredibly expensive. As with everything in the market, the better the return, the greater the risk. And loans are no different.

Which brings me to my point. Just as with the flood insurance, if we subsidize risk taking, then we encourage even greater risks. And the outcome of that is total bankruptcy for everyone. If you doubt that, think of it this way. If you were to tell every blackjack player in Vegas that he would keep all his winnings, but you would cover his losses, or even half his losses, what would happen? He would take incredible risks. He would be, effectively, playing with someone else's money. With no incentive to be responsible (or in the case of partial subsidy, with reduced incentive to be responsible), he would take greater risks than usual, incurring greater losses, for which we would be responsible. And the same is true of loans. If we pick up the tab for those who took risky loans, in the future there will be a greater demand for such loans, in expectation that they will also be bailed out should the worst happen. As conservatives should recognize, subsidizing risk taking will buy us more risk taking.

But what of those who did not take risks, yet still ended up in trouble?

Again, though it sounds harsh to say so, they too made a mistake, though one all of us have made at some time. They failed to provide enough for misfortune. Of course, no one can provide for all misfortunes, but that does not change the fact that in this case, they failed to set aside enough money for this particular disaster. I do not say this to impugn them, but to point out the consequence. If we subsidize failure to plan, the we buy ourselves more imprudence.

Think about it. Right now we all try to set aside some money in case of disaster. As we know that if misfortune befalls us we will be forced to live on those savings. However, if the state says they will pay for us should disaster come, why would we save? If there is no reason to be prepared for misfortune, then it is not rational to save for such an eventuality. Rather than keep money on hand for such an event, it makes more sense to spend it, put it in long term investments, or otherwise use it. In other words, once we know that the government will save us from disaster, it makes no sense to plan for disaster.

And that is it, the whole reason that the moral worth of the victims is irrelevant. Whether or not they are good people, whether or not they behaved responsibly, once we get in the business of saving people form misfortune, we end up increasing the number of misfortunes we will encounter.

POSTSCRIPT

None of this is meant to argue that we should not personally help those who need it, either individually or through charity. As charity is not a legal right, or a certainty, it does not have the same impact as government welfare does. As charity is not an entitlement, it is unlikely the knowledge that charity exists will encourage people to stop planning or make them take more risks.