home politics, property rights, Republicans, Virginia Some Virginia Republicans Have a Moral Hazard Problem

Some Virginia Republicans Have a Moral Hazard Problem

This post has nothing to do with religious morals. Sorry to disappoint. It is about a much more exciting issue, law and economics.

I studied law at one of the few law schools in the country, and the only one in the metropolitan Washington, DC area, that places a heavy emphasis on the study of law and economics. If you factor in conservative as well, George Mason, no matter what the ranking says, is one of the best in country.

Many law schools these days offer law and economics courses. At Mason, at least when I went, that was the program. Economic concepts are explained to budding lawyers with little, if any, formal economic theory background. Rather than focus on what is “right,” there is an emphasis efficient outcomes dictated by the free market.

Many students were frustrated by the economics. Pareto superior moves? Waste?  Moral hazard? Externalities? Diminishing marginal … what? Hold on a minute. I signed up for an J.D., not an MBA! Some understood it. Others were not buying. But most students, me included, appreciated learning another tool for resolving legal and policy problems. We signed up for it.

We had at least a full year of economics and professors that actually lived the material in other course.  Things seem to have changed, a little, but the core thinking remains the same. If you’re interested in learning more about law and economics, there is a great history of the movement at Mason Law’s website.

In real life, law and economics helps to make some sense of our legal and public policy systems. Inefficient outcomes abound in our lives. Daily.  It is the nature of the life. Your always making choices. There will always be winners and, forbid, losers. Approaching legal and public policy issues with some grounding in free market economics though is a good thing. The legal community and public policy world needs a lot more of it.

This brings me my home state of Virginia and the Republican Party. Some Virginia Republican party leaders could use a refresher, and in some cases an introduction, to Law & Econ 101. The recent tax two-step — cutting one tax but raising others — reminds me of a term we talked about a lot in law school, the moral hazard. For example, our federal government is a living, breathing moral hazard. A dragon that no party has really tamed the past forty years.

A moral hazard can occur in just about every sector of the economy. In government, local, state, and federal, moral hazards occur when the government creates a bad incentive by intervening in the market (or our lives) (e.g., our tax code, most welfare programs and other “feel good” federal regulations, etc.) that ultimately result in bad outcomes (e.g., tax cheats or higher taxes, more government programs that we do not need, multiple generations on welfare, the recent housing crisis, etc.).

Seinfeld fans, here is a good example of a moral hazard, courtesy of the Economics of Seinfeld blog. And here is a more technical but easy to follow explanation, with political examples, from the folks over at the Center for Freedom and Prosperity Foundation:

Rather than simply cut the gas tax and leaving money in our pockets to spend however we want to, certain members of the Virginia GOP, including our Governor, are telling us we’re too dumb to know what to do with our money. They would rather intervene in the market and shift the tax raising power to local governments to fund government programs that are living and breathing moral hazards.

The gas tax should have been eliminated. And nothing more. What we did makes us no better than certain Democrats in the Commonwealth who are passionate defenders of redistribution, rob Peter to pay Paul politics.

Defenders of the gas tax two-step argue it is about roads, economic development and, of course, our AAA Bond Rating. I’ve been hearing this for as long as I’ve been living in this area (since 1992). And folks who have lived here longer tell me it has always been this way. All we are doing is advancing a culture full of moral hazard problems.

Back to George Mason. Housed in the law school, there a great think tank that holds conferences every now and then about the power of free markets. The Mercatus Center has trained judges, Members of Congress, Congressional staffers and many others on the basics of how markets, not governments, improve quality of life. Maybe its time for some of our folks received a refresher course in law and economics.

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