I’m John es I’ve had to share are my own they’re not the views of my employer a consulting firm called CEB or a First Bank and Trust in Brookings or Fischbach financial where I’m a board member and the research I’m about to share today is work that I did not that any of those organizations did now I happen to think that the work those organizations do and their views are pretty good but this is not those this is my views my talk is a serious sounding name it’s called what economists call a moral hazard and it comes as I said for some research I did in graduate school but the talks gonna use that research to try and tie in a few other things that aren’t like the research at all and then I’m gonna try and take that and turn it into a conversation about how we might reimagine our rural community let me show you a couple of things and this is a coffee shop and then this one is a building to live in it’s a rental in Massachusetts actually and this is Brookings high school here in town so this talk is gonna try and take that very serious sounding name with that odd term moral hazard in it and tie that together with all these things and then somehow tie that in to reinventing rural so wish me luck when I started thinking about moral hazard all I really knew about it was that when I heard that idea moral hazard mentioned it was always used as a rhetorical tool arguing that there was economic proof that a particular policy should and actually far more frequently should not be adopted all which was must leave you thinking well okay what does it mean already and if you’re like I was you suspect you already know what it means you think it means some sort of threat to character you think it means temptation and you’re not entirely wrong some people use moral hazard to mean a threat to character and way back in the terms history it actually did have something to do with character moral hazard comes to us from insurance old time insurers and I think Eve really old time like the thirteen and fourteen hundreds wanted to make sure that they weren’t going to provide some shady character with an insurance policy who would then do something wrong and stick them with the tab if you have seen with those episodes of The Simpsons where Moe talks about burning down the bar to collect the insurance that you know exactly what I mean here over time however the idea that moral hazard has anything to do with character has actually fallen aside in 1963 an economist imported the idea of moral hazard from insurance into economics and the way economists use the idea of moral hazard now dominates how the rest of us use it which means that the image that you should keep in mind when you hear the term moral hazard is not the serpent in the garden it’s a seatbelt sign moral hazard has come to mean that when you feel protected from a risk you are far more likely to take that risk so the idea here is that if someone forces you to wear a seatbelt in a car you’ll drive more recklessly because you feel protected from the consequences of an accident and that thinking has been applied to a lot of different subjects moral hazard applies to health care if you have health insurance and don’t have to pay the full cost of health coverage for expensive tests you’re far more likely to order those tests and others have taken the idea further suggesting that because America doesn’t have address and therefore it’s unlikely that the children of wealthy elite policymakers serve in the military that somehow they feel protected from the consequences of Wars and are more likely to start them and moral hazard has even been used to argue that because we provide a welfare system that people therefore choose to be poor or sick or old my research tried to track not just how often the phrase moral hazard has been used but how it has been spread I looked at the use of the term across a sample of a thousand different articles in academic policy journals and then Public Policy journals and white papers and then in the popular press moral hazard was introduced into the modern economic literature by a man named Kenneth arrow Kenneth arrow later on won the Nobel Prize from economics it spread into policy papers with figures like George Gilder remember George Gilder began beginning to say things like the moral hazard of current programs are clear unemployment programs cause unemployment and then the term exploded in the popular press where public opinion is formed the term the term was applied to debt forgiveness it was applied to aids policy to welfare to the draft what particularly caught my attention was driving from Washington DC where I’d lived for ten years to New York where I did this research at about 4:00 p.m. on the day I was driving the

levees around New Orleans broke and moral hazard was frequently used in the conversation around rebuilding New Orleans with some people arguing that if we did rebuild New Orleans not only would we likely see further human misery in New Orleans but somehow Californians would be encouraged to build homes on the San Andreas Fault because they would feel protected from the consequences of natural disaster and increasingly when people use the term over time they used the term moral hazard in a phrase and the phrase is what economists call a moral hazard the article would say and that creates what economists call a moral hazard more than 18% of all the articles using the term after 1985 included that exact phrase in rhetoric that’s called an appeal to Authority when someone uses the phrase when economists what am i must call the moral hazard what they want you to believe is that an economist has studied their idea and agrees with them so there’s two reasons to care about this the first is about who’s responsible for our choices and that really comes from how we started thinking about what moral hazard means when it was imported from economics I want to tell you that story because it’s a fascinating one the first time moral hazard appeared in the economic literature was as I said arrows 1963 American Economic Review article about rising medical care costs this is just a citation and I’m gonna map the articles that cited this article over time what’s interesting is that actually for several years nothing much happened but then in 1968 a French Lehman a freshly minted PhD named Mark Pauley responded to the letters section of that same journal that moral hazard isn’t about morality at all that demanding more of something when it doesn’t cost you anything is quote not a result of moral profanity but of rational economic behavior arrow also wrote a letter back to the same journal that appeared in the letters Theodore remember what was like before email they wrote letters back and forth to a journal and he wrote back quote paulie’s wording suggests that rational economic behavior and moral Profeta T are mutually exclusive categories no doubt judas iscariot turned a tidy profit from one of his transactions but the usual judgment of his behavior is not necessarily wrong the thing you need to know about this argument is that arrow lost that poly one and as a result moral hazard now refers not to the moral quality of individual action but to the economic incentives that a situation presents let me say that again arrow put responsibility for doing the right thing on the individual when he used the term moral hazard he meant a person and their individual actions Polly assigned responsibility to the situation the situation itself is the moral hazard Polly one articles published after 1968 cited both arrow and Pauli they refer to both articles but they used paulie’s definition of the term they refer to the moral hazard as the situation created when there is an incentive to do what might not be best or even when there’s just an ability to avoid consequences from doing the wrong thing arrow lost poly one and again that means that when you hear someone talk about moral hazard they’re talking about a set of circumstances a set of incentives and they are assuming that anyone put in that exact situation will behave exactly the same way no matter who they are they will react in the same way I want to leave that for a moment because that is what’s going to tie us back to our community the second reason to care about moral hazard actually goes to when we should and shouldn’t rely on economics to help us make decisions look I am a tie-wearing management consultant I spend my days advising clients to rely on what analysis of numbers tells us about their situations and I wear a tie while they do it I’m a big believer that understanding the economics of any choice of every choice is almost always the right move doing that work to understands decisions in that way is almost always worth it but you have to do the work so when

someone says or writes well that creates what economists call a moral hazard I am immediately suspicious I start listening to see whether they have actually done the work to prove their point or not and you should listen closely to because moral hazard and economic analysis in general actually can be used to support contradictory positions is there a moral hazard that policymakers will start Wars if their sons and daughters don’t serve in the military or is there a moral hazard in not starting a war with a nation that asserts its ability to build nuclear weapons is there a moral hazard in regulating hedge funds such that investors feel protected from the choice of a poor fund or is there a moral hazard from allowing hedge fund managers to operate without fear of censure if they abused their clients trust in my view it’s just too glib to assert that policymakers only concerned when they make a war is whether their children might die or that we should not require safety regulations like seatbelts that the monster believe reduce harm because of some theoretical incentive to recklessness 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 constrict economic thought into the service of their argument by using the thin gruel of what economists call a 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 decision because experts have evaluated possible outcomes even those experts have not so in short they’re using economic language to portray decisions as protected from risk and in doing so they’re encouraging bad behavior that should by now sound a little bit familiar okay so what does that mean for us as we imagine how our rural communities might develop you’ll recall a couple of minutes ago I got all fired up about mark Pauley and his understanding of moral hazard that it puts the responsibility on this situation rather than on the person again he almost suggests that our own ability to choose that what meat we might want is less important than the situation we find ourselves in that’s not going to make for good communities and here’s the thing it’s not true people choose to make choices that create the communities they want at the expense of their own economic incentives all the time this is a coffee-shop someone made this whoever opened this coffee shop which happens to be in Canada got great support because this company has worked really hard to make it really easy to open these coffee shops everywhere you go there’s one of these the coffee is always the same the pastries are always the same and not to my taste the music is always the same and sometimes that’s really comforting but most of the time it’s not you can go into any of these shops anywhere and not know whether you’re in Boise or Bedford Falls but when you go into Cottonwood coffee you know you’re in Brookings South Dakota Jacob didn’t rely on somebody else’s idea of what a coffee shop should be it would have been easier to get the help that a big chain would have given him it might have been easier to open a franchise certainly he could have gotten a loan more easily he could have gotten his supplies more cheaply from a central headquarters but he didn’t he made a choice to work harder in order to give his community to give us something that feels like ours this Massachusetts Randolph is the way it is because someone keeps it this way on the edge of falling down in need of paint to be fair they may do so I mean taking it cheaply because they’re short of funds the half deal or they might be maximizing their profit this is also a place to live it’s

also a rental when the owner of this house bought it she actually was just buying the land it sat on the house itself appraised as being worth nothing but she liked it she thought I had style and she’d been friends with a prior owner she spent a lot of time and effort putting it back on its feet as I said is also a rental three sets of tenants have lived there since she did the work to put it back together including now Amanda and will and I this great little house is where my family and I lived my mom is our landlord if she’d only cared about what the economics of the situation dictated this house wouldn’t be there but because she liked this house and wants to live in a community that cares for existing buildings uses them to their best impact and makes them look beautiful she did the work to put it back together and because she did we’ve gotten to celebrate two of my son’s birthdays in this is Brookings High School where the greatest debate coach in the history of South Dakota in possibly in American history taught her name is Judy Kroll she is in the national hall of fame for her field during her time at Brookings her teams did well they went to regional tournaments and they won them they went to national tournaments and very nearly won them several times people around town know that but what you might not know what everyone in town might not know unless you’re tied to the field of teaching debate is that there’s this room at every debate tournament I can’t look over where the scroll is there’s this room and every debate tournament that’s the command center it’s it’s where the tournament is run it’s where the matchups are said is where the ballots are counted called the tab room and the coaches that run the tab room are the most talented most trusted coaches that are available to the organizers of that tournament what you probably don’t know is that at the national tournament where every coach in the country is available to the organizers of the tournament mr. all will help to run the tab room for more than a decade and I’m telling you that because I want to invite you to speculate along with me I don’t know any of what I’m about to tell you but I think it’s true during her time at the top of the field all three of the big Sioux Falls schools replaced their debate coach so did all kinds of schools in Minnesota and Nebraska and to my point about her national prominence at the national tournament so did almost all of what are called the national circuit teams these are private schools around the country that fly business class to tournaments all the began all over the country every week for high school debate I don’t know this for certain but I would be shocked if Miss Crowell wasn’t offered every single one of those jobs from Sioux Falls down to st. Mark’s Academy down in Texas Texas and not having a good day here I would guess all of those jobs paid very very well it would have been economically rational for her to go coached her but she didn’t she chose to teach in Brookings instead 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 so here’s Brookings i centered the map on Nick’s hamburger shop I thought we could maybe agree that that was the physical if not spiritual center of town I’ve chosen three examples that are close to me clearly and that have shaped my experience but there are examples all over this great town of people choosing to try and build the kind of world they want to live in and I should point out about all the examples that I just gave that they weren’t necessarily economically or rational all of them hoped to be able to make a living after their choice my point here is not that we should all be leaving

money on the table all the time my point is this as the years go by they’re gonna be choices this community faces towards which either our policy makers on the council’s or advocates from one side or another will make arguments based on the community’s economic interest those are important arguments and we have to listen to them but we shouldn’t settle for arguments to fire off theory like it’ll raise the tax base because big box stores always do or well we can’t do that because it will create what economists call a moral hazard unless whoever makes those arguments is willing to show their work don’t accept the theory unless they have the numbers to back it up and we should also make our own choices no matter what mark Pauley 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 merged 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 thank you