Fran O’Sullivan joins us in asking why the Government was so quick to completely bailout the South Canterbury Finance investors and is being so miserly with earthquake victims:
“Just imagine the uproar if the sequence had been reversed [if the earthquake came before the SCF].
Consider: Key goes down to the earthquake zone. Tells Cantabrians the Government will get behind them. But it will not be able to stand fully behind those who don’t have earthquake insurance. As he told TVNZ’s Q&A programme on Sunday: “It’s the 5 or 10 per cent of people that don’t have insurance that have said, ‘Look, I’ll risk it’ … and that’s the moral hazard for the Government because, on the one hand, if we pay everybody out, why would people take insurance. On the other hand, you’re gonna have people with real hardship and deprivation, and it’s getting that balancing act right. It’s not going to be easy.”
His Government has since indicated it will come to the party with a range of social services. But nobody is pretending a bailout is on the way for those who failed to take out insurance.
Consider again: if having already made crystal clear his Government’s view that it was too concerned about moral hazard risks, and the signal that would be sent if the Crown restored the losses of uninsured earthquake victims, Key then turned around a day or so later and said the Government was prepared to overlook moral hazard concerns when it came to South Canterbury’s bond investors and creditors and fully pay them out so it could get full control of the situation.
I suspect the uproar of hatred that has been pouring out against South Canterbury founder Allan Hubbard on far too many uncontrolled websites over the past week would have instead been directed against a Government arguably looking after well-heeled opportunists to whom it did not owe a red cent as they were not covered by the guarantee scheme.
As Maier said on Tuesday last week: “A lot of bets in the casino paid off big time today.”
What we have ended up with is very untidy: the Government has paid out “in the know” bond investors and foreign preferential shareholders who did not qualify for the guarantee.
Forget about moral hazard – the smart money now knows that the Key Government can be “gamed”.
I want to make a point about this moral hazard argument that the government is so concerned about with the earthquake, which it wasn’t concerned about with SCF.
The moral hazard argument is that if the government cover someone’s losses now, it will encourage them to take uninsured risks in the future in the expectation of a government bailout if things go wrong, imposing even more costs on the government in the future and unhinging capitalism by allowing return without risk. Both the SCF bailout and covering the costs of uninsured homeowners and workers could create a moral hazard.
But, in the case of the earthquake victims at least, there’s the social justice argument that you can’t allow families, especially children, to suffer because of the poverty or mistakes of the parents or their parents’ employers. Do people deserve to have their lives ruined because they couldn’t afford insurance? We have a moral duty to help.
It seems to me that there’s a simple solution: help people now, prevent people taking uninsured risks in the future.
How does it work?
Damage insurance: Government extends EQC coverage to all homes and contents affected by this quake, regardless of whether the people had home insurance or not (side question: if you’re a renter, your landlord presumably has the house insurance so gets EQC cover but do you get EQC cover for your contents?)
In future, EQC is funded not out of a levy on home insurance policies but by a levy on residential rates. Every property owner pays rates, so there’s no moral hazard problem of people not bothering to get home insurance – instead, everyone is covered and everyone pays. Bear in mind that you can’t get earthquake coverage from private insurers in Christchurch any more but there are still major earthquakes occurring.
Wages: Government covers the wages of all employers who can’t work due to the quake on top of any private insurance that businesses have. No-one is left out of pocket.
To avoid moral hazard, in the future wage insurance for disasters will be covered by a compulsory public insurance scheme like ACC, funded by a tiny payroll levy. And I do mean tiny – a $100 million pool expected to be paid out once a decade could be funded with a levy of just 1 cent per hundred dollars of wages. Again, everyone gets covered now and there’s no moral hazard for the future because a compulsory and universal insurance scheme has been introduced.
The government can help the people who need help now while avoiding creating an undesirable moral hazard for the future. The question is: will it choose to?
PS. Since my piece the other day, respected business journo Patrick Smellie has written an article dismissing the suggestion that the earthquake could be an economic boon, and Treasury has put damage at $4 billion and the initial output loss at 0.5% of GDP.