Question

Is it ethical for a government to act in ways that “socialize” financial risks or losses? Is it ethical to do so while privatizing gains/profits? Or to do so in ways that favor wealthier citizens while imposing risks on less wealthy taxpayers (or vice versa)? Or that create moral hazards? Why or why not? Are there social goals that are so important that they would lead you to change your answer?

Answer 1

Privatizing earnings and socializing risks is a practice of treating the earnings of a company strictly the property of its shareholders while when it makes losses, the society is expected to shoulder the losses and recovery plan. The shareholders have right over the benefits but it comes to fall out and losses, the society as a whole has to come forward for the bailout.

In no sense, this practice of socializing losses seems ethical especially when the benefits are strictly kept for the benefits of the owners. The civilians pay their hard-earned money as taxes for the upliftment and development of the country while the government keeps using it to correct the mistakes of wealth driven corporates which take high risks in order to earn higher profits.

Why should innocent citizens pay for the greed of corporates? The act does not seem sensible at all. When the company makes a profit, it goes exclusively to the shareholders but when the company makes losses, those wealthy shareholders are not made accountable for it and they have no role in making the company come back to its feet.

Due to their importance in the economy, companies know that they have the backing of the government and govt. would not let them vanish. This assurance motivates them to take excessive risks in pursuance of higher earnings and creates a moral hazard which eventually has to be borne by the general public.

But still, there are reasons which make these government interventions important for the health of the economy. The people who defend such bailouts stress on the fact that some organizations are too big to fail and the rationale of not letting the corporates fail is based on the assumption that allowing them to collapse would cause economic downturns and have much more dire effects on the working and middle-class population than rescues do. These rescues are in the form of Taxpayer-funded subsidies and Government bailout plans that the government comes out with to save those wealthy conglomerates. It is no option to let these "too big to fail" corporates collapse because the failure of one will have contagious effects on other companies and banks which would be great trouble for the govt to clean up the mess. If left untackled, these companies can make the economy hit the rock bottom.