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Moral Hazard in Flint, Michigan

Updated March 8, 2016.

The city of Flint, Michigan is, in short, a mess. The city is broke, and because of corrosive water from the Flint River, the water supply has become tainted with lead and other toxins. In response to the crisis, Democrats in the Senate are proposing a $220 million plan that would provide aid to Flint and other cities in cleaning up their water supplies.

Let’s be honest, this is a hard thing for a lawmaker to vote against. The optics of voting against cleaning up polluted water can be deadly, especially in an election year. But good optics and good policy are often different, and what the Democrats are proposing is terrible policy for a number of reasons.

There’s a term economists use called “moral hazard.” It describes a situation in which failure is made less costly, with the result that people are more willing to fail. By signaling that the federal government is willing to intervene in local crises to the tune of hundreds of millions of dollars, mayors, governors, and state legislators have less incentive to make sure their policies are good ones. If something goes wrong, the federal net will be there to catch them. The result of this will be a lot more cities like Flint in the future.

Such a move in Flint would set a poor precedent. If the Senate bails out a single ailing city, they will soon have to beat back an army of cities insisting that their own situations merit a similar bailout. There will be no end to the flood of money that will have to flow from Congress to the states, because failure to comply will be seen as uncompassionate, or worse in the case of cities with high minority populations, racist.

As the national debt continues to soar past $19 trillion with no end in sight, the last thing we need is to start shelling out for every mismanaged city in the country. Problems like the ones experienced in Flint were created at local level, and they ultimately have to be solved at the local level or state level. Otherwise, we might as well abandon all pretense of federalism.

Sen. Mike Lee (R-UT) has put a hold on a bill providing aid to Flint in the Senate, keeping it from coming to the Senate floor for a vote. The political pressure he’s facing to remove his hold on the bill is tremendous. The bad policy of the Flint proposal should make this effort a non-starter with fiscal conservatives, and Sen. Lee should be applauded for his willingness to do the right thing on not cave into the politics of optics.