The New Republic

When Congress was constructing its economic
stimulus bill in February, Democrats attempted to insert a provision
that would have extended unemployment benefits by 13 weeks. Republicans
would have none of it: Doing so would create an "incentive for people
who could otherwise be employed not to be employed," sniffed South
Dakota Senator John Thune. That's the way moral hazard works: If
government helps those in need, it just creates an incentive to act
irresponsibly.

If Republicans had followed this line of
logic when investment bank Bear Stearns threatened to collapse last
week, they should have quickly rejected the idea of a federal bailout.
After all, Bear had acted irresponsibly, aggressively embracing the
preposterous notion underlying the current financial crisis: that real
estate prices would keep going up, making otherwise indefensible
subprime mortgages a good investment. Surely it would be a mistake for
the feds to sweep to the rescue and thereby encourage such recklessness.

Well, maybe not. The Bush administration
agreed to step in, and Treasury Secretary Henry Paulson brushed off the
moral-hazard argument; the firm had already suffered enough. "If you
would ask Bear Stearns shareholders in terms of what had happened to
their value, I don't think any of them would think this was good for
them."

He has a point. But the episode serves to
illustrate the fallacy of Thune's argument. No one who loses his or her
job is very happy about it, either, even if unemployment benefits are
available--so, during a recession, such benefits have a minimal adverse
impact on employment levels. It's more than a little troubling that the
Bush administration finds it so much easier to sympathize with the
plight of Wall Street titans than with that of ordinary Americans.

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