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14.04.2003, 20:38

Terrorism and the Moral Hazard / Artikel mises.org

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Terrorism and the Moral Hazard
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By Christopher
Westley

<o:p>
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[Posted April
14, 2003]

 

[img][/img] Many
supported the war in Iraq due to the supposed increase in security we
will experience at home once Saddam is out of the picture. But who really
feels safer in its aftermath? Why do government's warnings of impending doom
seem to be increasing rather than decreasing? Why has the government even
put up a new website (www.ready.gov) that
makes the most paranoid survivalist literature seem moderate and sane by
comparison? 

 

Last November,
even as the government was preparing its war on Iraq, President Bush
signed legislation signed into law by President Bush last November,
insurance companies are required to offer terrorism insurance for possible
9/11-like terrorist acts in the future.

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That's
interesting. A reduced threat of terrorism would suggest less need for
precaution. If the government actually believed that the homeland would be
safer due to its actions overseas, then why does it impose (under the threat
of violence) the insurance requirement? <o:p>
 </o:p>

Others seem to
see the war in Iraq itself as a form of insurance. They justify it as a
necessary response to the shocking events of September 11, 2001, as though the
Iraqi regime organized and executed those attacks (no connection has ever been
demonstrated). By not responding forcefully, the U.S. would be sending a
message of weakness to that and similar governments. The billions of dollars
spent on this military venture and those that follow represent insurance
payments to reclaim the level of safety many took for granted before 9/11.

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The country
singer Darryl Worley, cashing in on this public mood, has recorded a
popular song entitled"Have
You Forgotten?" that explicitly makes this
point. This sentiment is epitomized by the comments of a college student
quoted in the New York Times:  "It's the security of the United
States that's at issue. They're saying that the only way we can ensure the
security of our citizens is to go in there."  

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This reasoning
behind the hysteria follows the theory of blowback, the idea that angering and
alienating millions of people must result in some organized-and-yet-unknown
future retaliation. Government officials know that their policies will lessen
security, not increase it, and that a world with terrorism insurance will make
life more tolerable than a world without it. The electorate will more likely
accept these policies if their costs, in terms of blowback, are softened by
terrorism insurance already in place.

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This raises
the problem of moral hazard to a different and dangerous level. Moral hazard
problems result in any insurance program when the insured parties engage in
risky behavior because of the existence of the insurance. It is well known,
for instance, that people drive more recklessly when they receive high levels
of automobile insurance at a low cost.

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To minimize
these problems, insurance companies charge higher premiums to individuals who
engage in high risk activities to force the cost of their activities onto them
and to force them to assume responsibility for their actions. Therefore, the
policyholder with multiple accidents must pay higher premiums, and the smoker
who refuses to shun tobacco is forced to pay more for his health benefits.

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Such is the
economic logic of the link between consumption and payment. If you choose to
continue smoking, or if you choose to continue to engage in reckless driving,
you will pay more for insurance. If you don't, then you will be forcing the
costs of your actions on to others in the form of higher insurance costs,
socializing the benefits you get from owning insurance onto remaining
policyholders.     

<o:p>
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The same
relationship between consumption and payment does not apply to terrorism
insurance, because those who are forced to purchase it are not the same people
who increase the likelihood of increased costs in the future from their
actions. The situation would be analogous to a smoker who uses the state to
force others to pay for his insurance coverage to compensate for health
problems that result from his plans to continue to smoke in the future. In the
same way, by forcing insurance companies to offer terrorism insurance, the
government enables itself to engage in activity that increases the likelihood
of terrorist strikes at home.

<o:p>
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Real terrorism
insurance would imply systems that reward those insured for moderating their
behavior. When running for president, Candidate Bush argued for a"more
humble foreign policy," and until one is implemented it is not likely
that there will be reduced terrorism at home. This can only be achieved by
increasing the scope of voluntary cooperation between individuals, or by
favoring the scope of voluntary market transactions over state power. In other
words, to insure for a world characterized by peaceful international
relations, you must give trade a chance.

<o:p>
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Free trade
draws men and women together by making them interdependent and thus creates
the conditions necessary for civilization. On the other hand,"government
interference with business and socialism," writes Ludwig von Mises in Human
Action[/i] (The Scholars Edition, pp. 819-20)"create conflicts for
which no peaceful solution can be found. …  What has transformed
the limited war between royal armies into total war, the clash between peoples,
is not technicalities of military art, but the substitution of the welfare
state for the laissez-faire state."

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Many such
substitutions will result from the war in Iraq and those that follow it,
enabled by government interventions encouraged by terrorism insurance. This
explains, to a large extent, the opposition to the war from the Right.
Nondefensive wars never expand freedom in the world. The health of the state
and the health of civilization are mutually exclusive concepts.

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Too bad such
thinking can't be written into a country song.

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Christopher
Westley, Ph.D., is an assistant professor of economics at Jacksonville State
University. See his Mises.org Daily
Articles Archive. Send him MAIL.