Flint, Congress and Moral Hazard

            Dan Kildee is the Democratic Congressman whose district includes Flint, Michigan.  Last week he proposed comprehensive legislation focused on providing help to the city whose population had been poisoned by the carelessness of Michigan’s Department of Environmental Quality and the “emergency financial managers” appointed by Governor Rick Snyder.

            The measure would provide federal matching funds to repair Flint’s water distribution system and provide health monitoring and remedial services for residents poisoned by the lead leached from pipes by the caustic waters of the Flint River.  Michigan Senators Debbie Stabenow (D-MI) and Gary Peters (D-MI) have introduced a counterpart measure in the Senate.

            The liberal/progressive in me wants to stand up and cheer for my fellow Democrats.  Those people in Flint need help and they need it now.  And they apparently don’t have the political muscle to wring anything but mea culpas and contrite apologies out of Lansing. We’re all Americans, and if that means anything, it should be that when our fellow Americans are in trouble we help them out through our national government.

            But the political scientist in me is less enthusiastic.  The Flint catastrophe has queued up a difficult problem that pervades the Tragic Commons: “moral hazard.”

            Moral hazard exists when people are protected from the adverse consequences of their actions by some third party.  Because of that protection, people lose the incentive to behave properly.  There’s a great example of moral hazard in a scene from the 1991 flick Fried Green Tomatoes.  In it, a frustrated older driver loses a parking space for which she had been patiently waiting to a pair of young women driving a VW convertible.  The older driver’s enraged and gleefully rams the VW multiple times with her four door Ford sedan. “Face it, girls” the older driver says, “I’m older and I have more insurance.”             

            Like a number of states captured by Republicans in the wave elections of 2010 and 2014, Michigan adopted substantial tax cuts.  Among other things those cuts blew a hole in Flint’s budget, enabling the Snyder to appoint a series of emergency financial managers more interested in cutting costs than in protecting the public.

            There isn’t any question that the State of Michigan is responsible for the mess in Flint.  Everyone here in the Tragic Commons thinks that it should be up to Michigan’s taxpayers to clean it up.

            Moral hazard results if the national government steps up to help.  Michigan would get to keep its taxes low while national taxpayers bear the expense of the cleanup.   The fact that Kildee’s bill provides funding only on a matching basis goes some part of the distance in reducing the moral hazard, but still, from the standpoint of principle, it doesn’t explain why the State of Michigan and its taxpayers shouldn’t pick up the entire check.

            In fact, if Congress adopts Kildee’s bill or anything like it, Congress would be telling the States (and the Republican politicians that run them) not to worry about being fiscally responsible with their tax rates.  Moral hazard would encourages states to cut their tax rates and take comfort in the assurance that if things get really bad in the state, benevolent taxpayers from the rest of the country will step in and bail the state out.  Moral hazard would stand the straight-laced Republican insistence on fiscal prudence on its head.

            On the other hand, there are some in the Tragic Commons who argue that fiscal prudence requires state and local governments to try to pass their costs off to suckers not smart enough (or too sentimental) to object.  That is, after all, what the Tragic Commons is all about.

            Looking at Rep. Kildee’s bill through the lens of moral hazard raises another question: Is federal assistance for Flint any different from federal assistance for places like the Jersey Shore, devastated by hurricane Sandy? Should we be more willing to help people who have been hurt by force majeure than by human agency?

            At first blush, Hurricane Sandy can be seen as a “one-off” event for which nobody on the local level had any responsibility.  The damage done to the Jersey Shore occurred because of Mother Nature’s wrath, not because state and local authorities were asleep at the switch as they were in Flint.

            Yet, the need for federal assistance depended on available state resources.  New Jersey is a coastal state, and its officials should be able to anticipate that the sea will rise up against it from time to time.  Why shouldn’t we expect New Jersey to insure itself against such disasters by using its taxing powers to create a large reserve fund to be used in such cases?  Or, to put it another way, how much should the rest of us be willing to help a state that hasn’t tried to anticipate disaster by using its tax power to protect itself?

            These are difficult questions, and they go straight to the heart of our federal system.  If we’re going to have a system in which states are sovereign and have financial control over their territories, shouldn’t they also have to absorb some substantial portion of a loss before turning to Washington for additional assistance?  Shouldn’t state voters be forced to suffer the consequences of electing politicians who want to reduce the level of safety for its residents in order to cut its taxes?

            Or, must we instead recognize that we live in the Tragic Commons, and accept that the cost of doing the right things for our fellow citizens when their own states won’t has the potential for turning the rest of us into suckers.