Monday, April 30, 2012

War, Money, and Moral Hazard

War, Money, and Moral Hazard

By Thomas Magstadt

Moral hazard.  Economists define it as a problem arising from a tendency to take big risks where the potential rewards are great – hence the hazard.  The moral issue comes into play when the risk-taking individual or enterprise does not have to pay the consequences – when taxpayers, for example, are forced to bail out banks after they make colossal "casino" bets that fail.

Where there's no incentive to correct the offending behavior, there's every likelihood that it will happen again.  And here's the kicker:  the "it" isn't necessarily an economic crisis; it can be any crisis or catastrophe, including armed conflict. 

In the wake of the US bank-induced 2008 global financial crisis, policy makers, pundits, and economists suddenly rediscovered moral hazard in the under-regulated "free-market economy" both as a theoretical concept and as an existential danger.  Nobody was more ardent in pushing this idea than then Secretary of the Treasury Henry Paulson, who served in that position from 2006 to 2009.  His highest qualification for that high position was his former role as CEO of Goldman Sachs (1999-2006).  Goldman Sachs, of course, was one of the 20 or so massive commercial banks that were deemed too big to fail, one of the banks that private investors and the general public trusted to manage risks – and paid countless billions of dollars in transaction fees precisely for that purpose.

Moral hazards, however, exist outside the sphere of economics, too.  In fact, they arise in virtually all areas of our private and public life – including love and war where, despite the old bromide, all is definitely not fair.

Consider the case of Army Captain D.J. Skelton from my home state of South Dakota.  Severely wounded in an ambush attack in Fallujah, Iraq, in November 2004, Skelton survived massive injuries that might well have proven fatal. Skelton's story is one of amazing courage, valor, and devotion to duty.  His heroism is a matter of public record thanks to an article that appeared recently in Star and Stripes.*  After five months in the Walter Reed Medical Center and dozens of surgeries, he faced another fight – to stay in the Army – and won, despite having wounds that will never heal. To wit:

…A prosthetic left eye that never blinks…momentous hunk of shrapnel…ripped through his eye traveled with a terrible, beautiful precision, leaving the eyebrow, nose, and cheek more or less intact. An inch above or a trajectory angled just a few degrees higher and the metal would have pierced his brain. He would be dead. 

Scars rise up on his arms, legs, and torso. Shards of shrapnel ringed his heart but somehow missed it. Skelton’s right leg has so much metal holding it together and so few nerves that one of his party tricks is to stab a knife into his shin and walk around painlessly.

His left hand is nearly immobile, balled in a perpetual fist… [He] still has a golf-ball sized hole in his palate. Without a custom prosthetic, he cannot eat, drink, or, often, breathe.

Inspired largely by other patients, he fought to stay in the Army.

The army of today – the one in which Captain Skelton so valiantly serves – is fundamentally different from the army that fought in World Wars I and II, Korea, and Vietnam.  Next year, the United States will "celebrate" the 40th anniversary of the All-Volunteer Army – the professional military force brought into being in 1973 in the wake of the worst, costliest military debacle in US history.  It's clear now that one terrible mistake led to another:  the absence of a draft has created a wall of separation between the soldiers sent into battle and the society of the preternaturally insular country they bravely serve.  There could hardly be a more jarring contrast than between the violent cadence of combat operations in a modern-day war zone public and the peaceful rhythm of life in the leafy suburbs that ring our cities – bullets and bombs versus business-as-usual.

Every day in this country, we see lots of bumper stickers urging us to "Support Our Troops" on our highways and byways.  And flags.  Lots of flags.  We're so patriotic, but how many of us have a son or daughter in Afghanistan? How many of us knew a single soldier who like D.J. Skelton was severely wounded in Iraq?  But members of my generation, children of the Vietnam era, either served in Vietnam or certainly knew guys (women were not allowed to serve in combat roles at that time) who not only served but also paid the supreme price.  We all had friends who were killed in Vietnam; many of us had neighbors who came back alive but lost eyes, arms, legs.  One of my neighbors in Sioux Falls, for instance, had his legs blown off and nearly lost one arm when he stepped on a land mine only weeks into his deployment.  He was 18 years old at the time.

Because there was a draft, we were all deeply affected by that war and because it was not a war that made any sense – the very antithesis of World War II, for example – we opposed it as a nation of free and enfranchised citizens.  And we eventually won the war in the streets.  We did support our troops – not by forgetting about them and going on with our lives as we do now, but by forcing the politicians to bring them home from a losing war we could well afford not to win.  

So why did my generation behave so differently from the current one?  The short answer is the obvious one: there's no draft.

But the disconnect – the moral hazard – is compounded by another wall of separation between the generals and the warriors.  The generals in the Pentagon view the battlefield from a safe distance; they decide grand strategy and debate the merits of tactical adjustments and creative ideas for applying new weapons systems and technologies in ever-more destructive ways.  That's war – for the generals.  For the infantry combat is not about theoretical in the least, not about simulations or war games.  Not a game in any sense of the word. 

For the soldier on patrol in exquisitely dangerous places like Fallujah or Kandahar, war is existential in the purest sense.  To exist or not to exist.  That is the question grunts in such places have to ask with every step they take. But the generals, colonels, lieutenant colonels, and even majors, seldom see fit to put themselves in harm's way. It wasn't always so.  And, along with wide differentials in pay and benefits, it constitutes another moral hazard, one active-duty senior military officers rarely if ever acknowledge, much less address in any serious way.

Then, too, there is a total disconnect between the enlisted men, NCOs, and junior officers who do the fighting and the swaggering politicians who debate and posture and talk tough from a safe distance.  Precious few members of the US Congress have a son or daughter in the armed forces.  In the Iraq war, for example, it was only slightly above 1 percent.  In 2011, CNN's Jennifer Rizzo reported:**

Members of Congress are quick to say they support the troops and veterans, but the number of elected officials who have served has plummeted to its lowest point since World War II.

Only 20% of the 535 members of the new Congress have served in the military, 25 from the Senate and 90 from the House of Representatives.

Juxtapose that with 1975, when over 70% of those elected had served in the armed forces.

The latest trends in warfare are giving rise to yet another disconnect – between combatants and casualties of war. Drones operating in conjunction with GPS satellites are the new weapons of choice.  The new high-tech warriors pulling the trigger do not see the people they kill before or after they do it.  They do not have to be present in the country where the killing takes place.  In fact, one can now imagine warriors of future fighting battles without ever setting foot in the region where the war is being waged.

And, finally, back to economics.  We have brought into being the military-industrial complex President Dwight Eisenhower warned against in his farewell address a half century ago.  It's worth remembering that the man Americans called, as "Ike" was not only the Commander in Chief but also a five-star general in World War II – a military man who spurned militarism. 

Our war economy is self-perpetuating and mutually enriching for defense contractors, arms manufacturers, and the politicians who collude with the Pentagon to keep the war machine fully stoked.  There is virtually no congressional district in the United States that does not have key defense industries, military installations, and major suppliers of uniforms, food, fuel, and medicines, as well as a wide range of services to the armed forces.  Pull the plug on military spending and every state in the union would feel the economic impact – some more than others, of course, but none would be spared.  Incumbents in Congress would pay a heavy price.   

As it is, the people who pay the price for keeping the war economy going are the taxpayers and the troops – the former with money, the latter with lives and limbs.  Meanwhile, the individuals and enterprises that benefit from war while taking no risks and bearing no costs are incentivized to do it again and again, thus giving rise to the mother of all moral hazards.

This article was published at NationofChange at: All rights are reserved.

Donations can be sent to the Baltimore Nonviolence Center, 325 E. 25th St., Baltimore, MD 21218.  Ph: 410-366-1637; Email: mobuszewski [at] Go to


"The master class has always declared the wars; the subject class has always fought the battles. The master class has had all to gain and nothing to lose, while the subject class has had nothing to gain and everything to lose--especially their lives." Eugene Victor Debs


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