In this, the fifth year of a prolonged downturn triggered by a financial crash, the prevailing view is that we all must pay for yesterday's excess. This case is made in both economic and moral terms. Nations and households ran up unsustainable debts; these obligation must be honored--to satisfy creditors, restore market confidence, deter future recklessness, and compel people and nations to live within their means.
A phrase often heard is moral hazard, a concept borrowed by economists from the insurance industry. In its original usage, the term referred to the risk that insuring against an adverse event would invite the event. For example, someone who insured a house for more than its worth would have an incentive to burn it down. Nowadays, economists use the term to mean any unintended reward for bad behavior. Presumably, if we give debt relief to struggling homeowners or beleaguered nations, we invite more profligacy in the future. Hence, belts need to be tightened not just to improve the fiscal balance but as punishment for past misdeeds and inducement for better self-discipline in the future.
- Robert Kuttner
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