Normative Narratives


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Military Spending and “Moral Hazard”

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The ONE thing I have always agreed with President Trump about is that our NATO allies need to spend more on defense. But while Trump has certainly talked this talk, his actions have actually had the opposite effect by reinforcing a “moral hazard”.

You may be thinking, what is a moral hazard? It is “a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.”

In the case of the U.S. and our NATO allies, the “risky event” is NATO countries underinvesting in defense spending. Our allies are able to do this because they know they are protected by the U.S., who is the other party that will “incur the cost” through our massive defense budget.

I invoke this argument because the GOP often uses moral hazard as a justification when it proposes slashing spending on safety net programs (particularly healthcare programs). While I will not wade into that argument, hopefully framing my argument this way will resonate with some people who otherwise would not agree with my prescription for getting our allies to spend more on defense–by reducing (or at very least not increasing) our own defense spending. 

If anything, defense spending is better positioned for a moral hazard argument than safety net programs are. Moral hazard implies a choice is being made by a rational party based on cost, benefit, and risk. So what happens with the same choices when a person or country’s income rises? Wealthy people typically do not forgo health insurance, but wealthy nations sometimes do forgo adequate military spending, which is the crux of this whole issue. All this is not to say that a moral hazard does exist for military spending but not for safety net programs–I leave the reader to draw their own conclusions on that. The point of this little digression, rather, is to say that if you believe a moral hazard exists for safety net programs, it is hard to argue that one does not also exist for defense spending.

Regardless of your beliefs, this is not the first time that differentials in defense spending between the U.S. and our allies have been identified as a moral hazard. Former U.S. Defense Secretary Robert Gates made a similar claim, as highlighted in an Op-Ed written about his final speech to NATO in 2011:

“Gates’s frustration was no doubt sparked by the realization that his department has become the victim of moral hazard. The United States provides a free security guarantee to Europe. Europeans, meanwhile, have responded in an economically rational way by taking greater risk with their external defense. With the collapse of the Soviet Union removing the last plausible military threat, it was logical for European policymakers to avoid spending on expensive space, communications, and intelligence systems that the United States was largely providing for free. 

Gates concluded his speech by warning Europe’s leaders that the next generation of U.S. leaders lacks nostalgia for the Cold War struggle and could walk away from the NATO alliance. In the future, Europe will undoubtedly have to do more for its external defense. That doesn’t seem like a problem now [2011] since there is no apparent external threat. But should they have to more fully insure themselves, European defense planners should consider how they would rebuild their defenses. They should consider how much time it would take to mobilize political and budgetary authority to prepare for these threats and how long it would take to rebuild the required military forces.”

Since that speech [June 2011] many of the external threats to our NATO allies, which Gates noted were then not present, have since emerged. Absent adequate European military capabilities to deter and/or respond to a threat, the Syrian Civil War metastasized from a seemingly containable conflict to the worst humanitarian crisis since WWII. Refugees from the war and other regional conflicts have shaken the E.U. to its foundations, leading to Brexit and increasing Euroscepticism across the continent. More directly, a European (albeit non NATO) country, Ukraine, was invaded and had territory annexed by Russia.

It is, therefore, past time that European countries started taking greater ownership of their collective military capabilities. As Gates correctly noted, mobilizing sufficient public support–a necessary initial step for policy change in democracies–takes time and political ability. Recognizing this fact, it seems that European politicians are far behind where they should be in terms of reconciling their respective electorates with this reality.

Even that U.S. leader who “lacks nostalgia for the Cold War struggle and could walk away from the NATO alliance” is now in power in President Trump. While Presidents Obama and Bush also pressured NATO countries to spend more on defense, they did so more diplomatically. Perhaps surprisingly, I do not think that was necessarily the right approach when it comes to the issue at hand; sometimes difficult things just have to be said candidly, and proper incentives provided, to get a desired outcome (especially when large sums of money are involved, and speaking diplomatically has continuously failed to produce the desired outcome).

I’m sure Donny would tell you, in his usual egomaniacal hyperbole, that “no one has been tougher on NATO spending than me”. While Trump’s words have been the toughest, just like his predecessors his policies are reinforcing this longstanding moral hazard. To see how, just follow the money; the U.S. continues to increase its defense spending (over $100 billion increase since Trump took office, up to $716 billion dollars in fiscal year 2019), sending the message that we will keep making up for the rest of NATOs shortfall–after all, actions speak louder than words.

In order to end this moral hazard, Trump has to not put taxpayer money where his mouth is by not increasing defense spending. Of course the military-industrial complex (and his bases’ blind support for military spending) won’t allow him to do that, regardless of what moral hazard or–much more importantly–the other needs of our nation demand. 

If we continue on this course we will ultimately be left with more military spending both now and in the future, as we decrease pressure on our NATO allies to build up their military capabilities. 

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Economic Outlook: Making Banks Responsible for “Zombie Houses”

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Original article:

New York Attorney General Eric Schneiderman has launched a statewide effort to combat so-called zombie properties by encouraging the state legislature to pass the Abandoned Property Neighborhood Relief Act (APNRA) he proposed earlier this year.

Schneiderman announced that the city councils of Albany, Poughkeepsie, Elmira, Beacon, Jamestown and Hornell are scheduled to approve resolutions on Monday urging passage of the bill. The city councils of Newburgh, Binghamton and Schenectady have passed similar resolutions.

The Attorney General’s Abandoned Property Neighborhood Relief Act would provide support to neighborhoods plagued by vacant houses. Among other things, the legislation would make banks responsible for the abandoned properties.

See the full text of the legislation here

Some U.S. cities spent public funds on securing, cleaning and stabilizing the houses that generate no tax revenue. Others let the houses rot.

New York is among the states seeking to make banks take responsibility.

I (not surprisingly) like the idea of holding banks responsible for the maintenance of “zombie houses”. Municipal budgets should be spend on public goods and welfare programs, not on cleaning up messes left by irresponsible borrowers (homeowners who could not afford the homes they bought) and / or lenders (banks giving mortgages they never should have).

Not only does the Abandoned Property Neighborhood Relief Act free up municipal funds, there also seems to be a preventative benefit of holding banks responsible for maintaining abandoned homes. In Matt Taibbi’s best selling book “Griftopia”, he tells the story of bankers who sold people the biggest house at the highest interest rate (often pushing qualified buyers into “subprime” loans), in order to secure the biggest fee / commission for the sale. The banker received their fee immediately, regardless of the long term performance of the loan–the emphasis was on the quantity of mortgages sold, not the quality. The banks then bundled these mortgages into “mortgage backed securities”, had them rated at inflated values (by ratings agencies such as S & Ps), and sold them off to investment banks (which, when the time came, were “too big to fail” and got bailed out by the taxpayers).

When people inevitably defaulted on predatory loans, the bankers kept their fees and the municipality was left to pay to maintain the vacant home, lest it attract crime / erode real estate values; a classic example of excessive risk taking due to “moral hazard“. While there is no way to ensure that a mortgage will not go bad–there are too many variables to account for–holding banks responsible for the upkeep of abandoned homes will almost certainly lead to stricter due-diligence and a more long-term perspective on mortgages.

Taibbi does a much more comprehensive job of explaining the link between poor underwriting / predatory lending and the greater housing crisis in Griftopia. With less “bad” mortgages (ones people are likely to default on, including but not limited to “sub-prime”), the destructive potential of mortgage backed securities is limited.

Furthermore, people more people will be able to stay in their homes (even if they are slightly smaller), realizing all the associated socioeconomic benefits.