The Moral Hazard of Politics

What guarantee do we have that newly elected governments will follow through on the promises that were made in the election campaign? Right now we have new governments in Newfoundland, Ontario and Saskatchewan. We have a new government every time there is an election even if we re-elect the same party. When political parties want our vote, they will promise outcomes that are popular even if they are hard to deliver. In the cold light of a post election winter morning, their behaviour may not match their promises. In that case, do voters run the risk of moral hazard?

Moral hazard refers to changes in behaviour by one party to a contract without the knowledge of the other party. Normally, moral hazard is written about from the perspective of the larger or more powerful group - for example, an insurance company or a government agency underwriting a farm income stabilization program. It is the company or the government agency that encounters the ‘hazard’ because of the immoral behaviour of the individual farmer who acts differently now that they are insured. However, it is also possible to look at it from the perspective of the smaller or weaker party. An individual farmer can enter into a contract with a seed company or government agency expecting one kind of behaviour and then experience a very different set of behaviours once the contract has been signed. This deliberate change in behaviour is an act of bad faith.

When you and I discuss this on coffee row, we remind ourselves to read the fine print and insist on full disclosure. That’s because we have been trained to accept “buyer beware” as the only moral principle that applies. Insurance companies talk about moral hazard because they rely on an additional and different moral principle. This is the principle of “utmost good faith”. Insurance companies have to trust their clients to behave the way they say they are going to because they can only afford to check a few contracts on a random or high risk basis.

In a similar way, voters accept the promises of political parties on the basis of “utmost good faith”. Voting them out in five years time is one kind of check on their behaviour but a rough and incomplete one.

Do political parties engage in immoral behaviour when they fail to keep their election promises? Sometimes yes and sometimes no. Promises are made on the basis of certain assumptions and often politicians do not control the realities on which they are based. The collapse of the stock market, or the beef export market cannot be anticipated and may radically alter assumptions about government revenue, expense or both. On the other hand, provincial governments may encourage expectations of growth or federal support when they know these outcomes are highly unlikely. They may promise to protect a community asset and then eviscerate it by another means. The capacity for deception is part of human nature. Theologians call it human sin. Economists call it moral hazard. It does exist. Everyone can experience it and everyone, farmers, insurance companies and politicians included, can engage in it.

First Published in November 2003