The Moral Hazard of Government; M. R. Duff

Less than two hours after arriving at work, I was completely incapacitated. A co-worker walked in to check on me and, after seeing me on the floor with a cold towel wrapped around my head, asked me how I was. I described the progression of this manifestly serious illness and the steps I had taken, without a hint of success, to combat it. "You idiot!" she said, ~~You aren't sick, or at least you aren't as sick as you think you are. You've overdosed on ibuprofen! Eight of those pills in less than two hours would be enough to put an elephant on the floor!" When I asked her what I should do next, she said, "STOP TAKING THE MEDICINE!" And she walked out. Every bottle of over-the-counter pain re liever carries instructions about appropriate dosage levels and schedules printed in plain Michael R. Duff resides in Bloomington, Indi ana. English on the label. Regrettably, some people just don't bother to read them.

For Safe Use, Read the Instructions Just· as some people risk damaging their health by diagnosing and (mis)treating their own illnesses, many in America today self prescribe more and more government as the answer to every social pain they feel and every competitive annoyance they are forced to endure. Like people who fail to read instructions on drug labels, they fail to read the instructions for their government: the Constitution of the United States. Those who crafted our representative government were like the family practitio ners of old. They outlined in writing what was necessary to live a healthy, productive life in a nation of free people. By the examples they set in their own lives, they placed the burden squarely on the citizen/ patient to employ the self-discipline and self-restraint required to follow their ad vised regimen in order to fully enjoy the benefits of a hard-won freedom.

In this century, however, our federal government has evolved into a kind of medicine-show quack pandering to a nation of self-indulgent hypochondriacs through the prescription of a succession of phoney, expensive "cure-aIls" that cure nothing, drain the lifeblood from the private econ307 308 THE FREEMAN • JUNE 1994 omy, and succeed only in making matters worse. The official recognition of a problem whether it be urban blight, drug abuse, or illiteracy-by a federal agency has histori cally served to institutionalize the problem itself. The moral hazard of government first comes to light as it rewards itself with additional funding in direct proportion to its failure to discharge any significant facet of its legal mandate. Public officialscharged with solving "cri ses" benefit directly from planning and executing programs that serve only to ex acerbate them. They are rewarded with power, tenure, and an escalating share of the budget to the precise degree that the "cri ses" over which they preside become so intractable that they eventually become trademarks of our national life to the rest of the world.

Stop Taking the Medicine! Programs designed to rebuild our inner cities and the family structures of those trapped there have, hundreds of billions of dollars later, managed to turn those areas into free-fire zones where tourists are hunted for sport and the only thing cheaper than life is the hollow ring of those who say the only answer is greater government in volvement. The moral hazard presented to poor peo ple by federal assistance programs has been well-documented. Rather than helping peo ple off the treadmill of poverty, it speeds up that treadmill, thus making it more hazard ous tojump offthan to stay on. The spinning wheel traps entire generations in a culture highlighted by federal dependency and vio lent crime;;'At some point, the admonition to just "STOPTAKINGTHE MEDICINE!" would seem to be appropriate. But this isn't about those examples of the initial stages of the moral hazard of govern ment that are easily recognizable. Most large organizations, even with the best of intentions, will eventually succumb to the pathology of bureaucracy. Once individuals within an organization can no longer perceive any direct evidence of their impact on the goal the organization is empowered to achieve, they will inevitably place their own advancement within the hierarchy ahead of the organization's own long-term best interests.

Soon, those who choose to make a career for themselves within the organization will tend to do so more and more as a means of gaining access to power while insulated from the vagaries of market forces, and less and less from an idealistic identification with the espoused common goal. This bloated, less virulent strain of the moral hazard of government is susceptible to the cyclical attempts to "reinvent" gov ernment by attacking the waste endemic to its operation. These efforts have generated more rhetoric than they have cut fat. En couraging politicians who embark on these routine exercises to attack the "how" of government without re-examining the "what" is like cheering an armed robber for trading in his old getaway car for one that gets better gas mileage. Trading Freedom for Oppression Throughout history-during the Civil War, westward expansion, the Great De pression, and World War II-Americans have been called upon to sacrifice part of their freedom for some national purpose. At such times the causes most often seemed just or, at least, historically fated. The issues were largely forced upon the American people, and the relatively small amounts of individual liberty that were sacrificed, while not always temporary, werejudged by many to be worth the cost.

However, the real moral hazard of gov ernment begins when it no longer reluctantly asks for these oblations in return for mount ing a concerted national effort to defeat a perceived common threat. It begins when the same process is used to justify limiting freedom to advance the interests of an emerging ruling class facing "issues" or "crises" for which no effective medicinal use of government can be documented or, THE MORAL HAZARD OF GOVERNMENT 309 worse yet, when the motivation is the clear expansion of government power for its own sake. New departments and agencies are rou tinely added as successive administrations are elected based on campaign pledges to deal with the "crisis" of the hour, as defined largely by the content of the latest media firestorm. For example, the "War on Drugs" provides the backdrop for the exis tence of special police powers which enable authorities to detain American citizens in American airports if they happen to fit a DEA "profile." Detainees are presumed guilty until they prove themselves innocent to their captors' satisfaction.

A philosopher once said that all vulgarity is the inability to resist a stimulus. While coined to describe the habits of the coarse, the maxim also brings to mind late twenti eth-century environmental policy in Amer ica. Anomalies are observed and reported, and before the dynamics of cause and effect can be clinically determined, blame is as signed and laws restricting the activities of those allegedly culpable are enacted and strictly enforced. All of this occurs in an atmosphere of hysteria created by a media whose sense of responsibility can be described by para phrasing the above maxim in this way: all debauchery is the inability to resist seeking a stimulus. What is the current state of our freedom after thirty years of en~ironmental delirium about uglobal warming," "acid rain," U ra don gas," and that storied uhole in the ozone layer"? An American can be sent to jail for digging a ditch on his own property if an alert neighbor suspects that it might, at some time in the past, have been a "wet land. " The EPA can also hold a person financially responsible for the environmen tal damage done to his land 75 years before, no matter how many people have held title to it in the interim.

The Tax Bite As a mechanism for raising revenue, the federal tax code is a complete fraud. As a system of rewards and punishments de signed to modify behavior in transparent annual exercises in social engineering by reallocating income between different eco nomic classes, all in the interest of "fair ness," it is a huge success. Small businesses that flourished as a re sult of the relatively enlightened tax code adjustments of the eighties are today the prime targets for the "enhanced" revenues with which the federal government seeks to fund its new ventures under the guise of reducing its debt. The moral hazard inherent in the federal tax code has become ever more obvious in the current admin istration's efforts to raise funds by target ing for' 'fairness" purposes those who can be singled out for punishment for· being rich. But there are not enough truly rich to matter. Confiscating I00 percent of the in come of those who make more than a million dollars a year would operate the federal establishment for a few hours. What is necessary is a creative redefinition of the term rich. The taxes that could be raised and the incomes of those from whom revenues would be taken are inversely proportional until one gets to the real source of most of the money in America, the middle class.

But taxing the middle class is no longer politically palatable, at least overtly. Some thing else is needed so that the federal government can tap into the vast pool of middle-class income while creating the illu sion of asking the rich to contribute their fair share. What is required is yet another pro file, one that successfully redefines the meaning and sources of income. So revenue enhancement experts now view income from a broader perspective. Hence they broaden the definition of income for the rich to include these considerations: (I) actual income: wages, salaries, tips, and cash bo nuses; (2) non-liquid compensation: the monetary value of fringe benefits; (3) de ferred income: capital gains not taken; (4) unrealized income: cash values in life insurance policies; (5) theoretical income: money a person could receive if the house he owns were rented out.

310 THE FREEMAN • JUNE 1994 One axiom concerning the moral hazard of government is that the hazard increases as the potential for satirizing it decreases. The rationale that drives a scheme to fabri cate rich people out of the whole cloth of a visibly struggling middle class is self parodying and would be humorous in and of itself if the consequences were not so severe. The Twin Tracks of Moral Hazard The moral hazard of government runs in two tracks. The first traces the pattern of crucial yet temporary sacrifices being asked in return for the resolution of truly national crises forming a pattern that has steadily degenerated into the habitual creation of federal departments to scratch the itch of the moment. By building constitutionally illicit public structures to resolve private issues, we commit ourselves to support gargantuan agencies with residual special powers each of which lingers long after the original "cri sis," never adequately addressed, has faded from memory.

Fresh dirt has been dug in this track by current proposals to bring a full seventh of the .nation's gross national product under federal management to deal with the "cri sis" in health care. If the departments of agriculture and education could grow to their current sizes based on their initial limited goals, the future size of the federal Department of National Health, or what ever it will be called, simply cannot, at this time, be imagined. But this is of little con sequence since, in our nation's capital, good intentions are not only presumed to be enough, but also assumed to be present in amounts equal to the task. The second track by which we can iden tify the moral hazard of government is the sheer hubris with which it is operated. Two examples from the recent budget agreement will illustrate. First is the government's conceit that it will do more productive things with the new money raised through in creased taxes than the people from whom it was confiscated. This new tax revenue will come directly from those most able and historically most willing to invest it in the private economy. This is the' 'trickle down"

theory as applied to government "invest ment." Second, there is the retroactivity of the tax increase itself. It is no longer enough that Americans are forced to conform their con duct to thousands of pages of tax codes and IRS regulations, strictures that are not only legendarily arcane but change almost every year. Now they must read their leaders' minds and adjust their daily activities in anticipation of future laws and regulations that will be retroactively applied. This naked display of government power compels us to continually assess and reas sess the character, motivations, back grounds, and personality quirks of those with the power to make and enforce such laws. In having to judge the mood of those in power, the hidden agenda of spouses, the potent influence of friends , family members, associates, and former classmates, Ameri cans are rapidly succumbing to a govern ment that has mutated into an old-fashioned ruling class and, at the same time, shown itself to be in rapid decline.

It is decidedly NOT in the best interests of those now exercising nearly unrestrained power to be judged by the American people by the evidence of their personal qualities. The Road to Feudalism Retroactivity, if sanctioned by the courts, is a large step in restoring the rights of feudal tenure. Those now in power should take a few minutes from their frantic efforts to micromanage every aspect of American life to read not only our own Constitution, but the Magna Carta as well. The hubris that is the inevitable by product of the moral hazard of government has intoxicated not only those at the top but also those charged with enforcing the law on a level much closer to our streets and our homes. In September, 1993,The Wall Street Jour nal reported the story of a drug raid in Malibu, California, that went terribly THE MORAL HAZARD OF GOVERNMENT 311 wrong. A 61-year-old man was suspected of having planted and cultivated a plot of marijuana on his large ranch there. A sher iff's department swat-team conducted a pre dawn, paramilitary raid on the man's house, and when he stumbled out of his bedroom with a gun he was shot dead.

There was no marijuana. There was no evidence that an elderly man could some how dispose of several acres of an illegal crop in the time it would have taken to serve a search warrant in the traditional manner. The man had no history of violent behavior. Was this simply the case of overzealous police officials acting irresponsibly with unintended tragic consequences in doing their part in a nationwide effort to eradicate the menace of drug abuse? Not when you read further that conver sations took place among the officers prior to the planning of the raid that centered on the value of the man's ranch upon its seizure and eventual liquidation. Does anything so illustrate the degree to which the moral hazard of government threatens us all as the fact that, prior to the decision to conduct the deadly raid against an unsuspecting 61-year-old American, the police had requested and paid for an ap praisal of the man's property? D Newfrom FEE!

THE VIRTUE OF LIBERTY by Tibor R. Machan T ibor Machan's The Virtueof Libertywill lead any serious reader to a better understanding of the principles of a free society. Professor Machan devotes the first part of his book to a brief history of the idea of freedom - from ancient to modern times-and a definition and defense of individual rights in the natural rights tradition. In The Virtueof Liberty,Professor Machan also explores: + the connection between liberty and moral virtue + the role of private property rights in a free society + how the free market economic order is conducive to moral community life + the moral arguments against the free market-and why they fail + why environmentalists try so hard to discredit the market, and why human beingsare really the most important part of nature, and + true individualism and its importance to how we live our lives. Professor Machan is Professor of Philosophy at Auburn University and a Contributing Editor of The Freeman. His other books include Individualsand Their Rights (Open Court, 1989), and Capitalismand Individualism(St. Martin's Press, 1990).

144 pages, $14.95 paperback, $19.95 cloth THEFREEMAN IDEASON LIBERTY WHAT'S WRONG WITH DEMOCRACY? by L. Hatzilambrou I n the twentieth century the United States has been transformed from a relatively low-tax, decentralized laissez-faire country into a hightax, centralized welfare state with ever-increasing numbers of laws , rules, regulations, and taxes that harass, bewilder, and regiment its citizens. Although this trend has developed to some extent gradu ally since the beginning of the republic, the crisis atmosphere of two world wars and the Depression of the 1930sprovided a welcome rationale for those who view government as the solution to most of society's problems. But for every problem seemingly solved by government, many more rise up to con front us. Today's problems seem insoluble, and the average person feels helpless in the face of them. We have a democratic system of govern ment that is supposed to produce the good society but instead results in one in which many are concerned about their safety, health, and old age, the deteriorating con ditions of the public sector, persisting pov erty, homelessness, and other indications of decay, the corruption of elected officials, the decline of morality, and a host of other worries. This is obviously not what people want. Something is amiss. What's wrong with democracy? Why doesn't it seem to work reasonably close to the popular per ception?