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The moral hazard of geographic inequality

The data don’t lie – Americans increasingly live in communities that differ on the basis of class and wealth. Physical separation may be minimal, but differences in quality-of-life and quality of institutions mean that residents may as well be living in different worlds or at least different countries. Such an arrangement has serious negative consequences for our nation. Among the most dangerous is a form of sociological moral hazard.

In the world of economics, moral hazard results when market forces prevent natural business consequences from impacting actors in the market. Because of interventions, these actors disregard the risk of certain actions – usually negative – even when the risk is sizeable and the natural result of reckless behaviors.

The greatest contemporary example of moral hazard is the result of government action following the 2008 financial crisis. Large banks were saved from the bankruptcy court by trillion-dollar bailouts, and never experienced the severely negative but expected consequences of their reckless lending and shameful profiteering. Today, the world is left with a group of Too Big To Fail financial institutions, emboldened by the government response to continue reckless behaviors that threaten future financial crises. Applied to the national fabric of the US – especially in its increasingly unequal state – we face similar catastrophy.

The widening chasm of wealth and economic opportunity in the US can be seen in the patchwork of municipalities and cities that dot the US. The most recent Census data show increasing class-based separation of Americans in their towns and neighborhoods. Wealthier Americans and the middle and lower classes rarely call the same town “home.” In the suburbs of Philadelphia, the wealthy and middle class concentrate in outer suburbs while the poor crowd into neighborhoods in the decaying inner city or dilapidated inner-ring suburbs.
Gentrified neighborhoods and Center City census tracts may boast significant populations of the wealthy and upwardly mobile, but these enclaves pale in comparison to the sheer size Philly’s ghettos and poor suburbs that developed just outside city limits in the post-war period.

To be sure, processes like white flight and suburbanization have devastated cities for decades. If these processes are longstanding, then why should anyone care today? Besides the magnitude of today’s separation, this situation threatens the very fate of institutions that ensure the continued validity of ideals related to equality and economic opportunity.

Concentrated wealth and poverty mean concentrated educational excellence and complete decrepitude. They create areas of great services and infrastructure and areas with poor or nonexistent services (often the very locales where they are needed most).

This is disastrous, given our already desperate need for effective public policymaking. Wealthy persons with the most resources and capacity to influence public policy often in perfect communities where the importance of funding schools, social services, and public infrastructure is lost. With little evidence of the importance of these institutions in their surroundings, the wealthy become less likely to support tax expenditure on public education, social services, and mass transit. The importance of these institutions to the lives of the vast majority of Americans is largely lost.

Like the result of reckless lending, the consequences of inadequately funding these institutions has numerous negative impacts: an uneducated populace, rampant social problems like crime and disease, and further declines in economic opportunity. In this way, a sort of sociological moral hazard is the result when the geographic and class-based separation of Americans shields the most powerful, gifted, and wealthy among us from seeing the importance of public policy that funds education and supports community services. Like the banks, society is likely to continue the blunders of the past because actors with the capacity to make a difference feel no need to do so…and often commit considerable resources to defeating change agents seeking good public policy and adequate funding of public institutions.

We see that inequality threatens much more fire consequences than initial discrepancies in economic opportunity and quality-of-life. It has the capacity to snowball, preventing meaningful public policy decisions and actions that could reverse the quickly unfolding economic disaster.

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