Did someone say "moral hazard"? Time for some brain TV!

"Tie-wearing management consultant" (his description) and really smart Brookings dude (mine) John Fishback presented the following talk at the first TEDx Brookings event in February. He talks about the term "moral hazard," its academic pedigree, its use in current discourse on public policy, and its relevance in the context of his hometown:

Among his key points, Fishback says we should not place theoretical incentives to recklessness above empirical evidence of practical benefits:

If the mere presence of moral hazard was actually an argument against action, no insurance policy could ever be written or sold, ever, and no government policy at all could ever be put into effect. So those who forcibly conscript economic thought into the service of their argument by using the thin gruel of "what economists call moral hazard" rather than doing the difficult work of economic analysis claim a level of support for their position that just doesn't exist. They are suggesting to decision-makers that the public is protected from the risk of a bad decisions because experts have evaluated possible outcomes, even though experts have not [John Fishback, "What Economists Call Moral Hazard," TEDx Brookings, 2014.02.21].

Fishback notes that the academic debate over moral hazard seems to have shifted responsibility for "bad" decisions from individuals to the situations and incentives created in the marketplace. Fishback turns to his hometown, to his neighbor Jacob Limmer, his mom, and his old debate coach Judy Kroll, and says (I perhaps oversimplify) nuts to that.

People choose to... create the communities they want at the expense of their own economic incentives all the time [Fishback, 2014.02.21].

Fishback says Limmer could have saved himself a lot of money and effort opening a Starbucks instead of Cottonwood Coffee. But Limmer chose to go his own way. The result:

When you go into Cottonwood Coffee, you know you're in Brookings, South Dakota [Fishback, 2014.02.21].

Fishback says his mom bought a plot of land in town with a house valued at zero and refurbished the house into a lovely little rental with character. Fishback says Judy Kroll passed up lots of more lucrative coaching opportunities to teach him and hundreds of other Brookings kids how to make a speech.

She taught me how to make a speech. And I don't know if her doing so made her community into what she wanted it to be. But her doing so has helped me make my life into what I want it to be [Fishback, 2014.02.21].

Fishback says his Brookings neighbors show the hazards in conventional moral-hazard theorizing. He does not reject the idea that economic incentives can incent. He simply rebuffs those who would assert moral hazard in theory without examining the real effects of real policies in real communities like Brookings, where people are not pinballs:

No matter what Mark Pauly says about the economics of a situation driving our choices, it is us and not our incentives that make our choices. If we want to live in a healthy rural community, then we need to make choices about how we want things to be rather than seeing ourselves as at the mercy of larger forces. We are not a product of the forces acting on us. Our community is, not nothing more than, but as much as the sum of all of our choices for it [Fishback, 2014.02.21].

Heavy thinking like Fishback's makes me want to see another TEDx Brookings really soon!