The Moral Hazards of Bailouts and Welfare

Consider two moral hazards:

#1 The Hazard of Wall Street Bailouts: When you rescue people from their own behavior, then they are more likely to engage in even riskier behavior.

#2 The Hazard of Welfare: When you rescue people from their own behavior, then they are more likely to engage in even more unproductive or foolish behavior.

Progressives will balk at #2.  People who are on welfare, they will say, are on welfare due to no fault of their own.  They are victims of circumstance.  Of course to anyone with common sense, this is right to a point.  Everyone to an extent is a "victim of circumstance."  Children raised by relatives because their parents have died are prime examples.  At the same time, if this line of thinking goes too far there is a denial of agency and with it personhood.

But then notice that something similar can be said about #1.  Individual investors face stiff social pressures from their bosses to engage in risky behavior.  They have a job on the line and a family to support.  Those bosses have pressure from stockholders.  The stockholders face pressure from wives or husbands.  And so forth.  And then there are the people who work for the investment firms who are not engaged in any risky behavior, who will suffer from their company's collapse if there are no bailouts.

I am offering neither a condemnation of welfare nor support for bailouts, just a caution that both practices should be engaged in with a heap of trepidation.