Moral Hazard & Legal (?) Corruption

Photo by Christopher Bill on Unsplash

Like me, you may have known Frank Hester only as the Tory donor who reportedly said Diane Abbot made him “want to hate all black women” (Link) and the equally embarrassing and unsurprising refusal of the PM to a) call these comments racists and b) return the £15.3m (!) of donations. Now we have a better idea about the context of these donations and the reason for the refusal to return them.

The Guardian reports that “Companies linked to Tory donors [were] given £8.4bn in public contracts since 2016“. So it certainly looks to me like Hester’s donations to the Conservatives were a form of “thank-you” (Could I get into legal trouble calling this a quid pro quo? – Not that anyone will read this, mind you). So the Tories’ refusal to return the donations are not (just) a sign of their moral bankrupcy, but also good economics.

In economics, moral hazard is situation where two parties agree to an exchange where one party pays the other to take a certain action. Then, after having received the payment, the second party may renege on the agreement if the first party cannot enforce it.

Let’s assume, hypothetically (lol!), that a political party agrees with a businessperson to funnel public money their way in return for donations. If there is a way that the party can later be pressured by public shaming into returning the donations after it becomes known that the donor is morally bankrupt, we have a moral hazard situation. For example, a donor may decide to intentionally leak a morally reprehensible statement they made earlier in order to have their cake and eat it, too (i.e. get the public money and get their donations returned), without technically reneging on their promise to donate. By stubbornly keeping the donations even though this was almost certainly damaging electorally, the Tories discouraged future bribers donors from going down that route.

So this was a case of terrible moral behaviour, but good economics.

Sunak, the Economist?

In his latest blog post, Chris Grey points to the comments of Rafael Behr made on Nick Cohen’s The Lowdown podcast, “that Sunak almost inexplicably flunked standing up to the populists in his party after he had easily defeated their attempts to derail the Windsor Framework and defied their desire to scrap the entirety of Retained EU Law” and then remarks that “In fact, Sunak proceeded to pander to the populists, especially with the Rwanda policy. Or, perhaps, he was not pandering to them so much as showing his own beliefs.

I was thinking about this apparent contradiction. If I had to wildy speculate (which is what this blog is largely for), I would say that Sunak actually believes in Rwanda policy, but not, unlike many on the far right, because he is racist, but because he has received an education in economics (According to Wikipedia, Sunak read philosophy, politics and economics at Lincoln College, Oxford and later got an MBA from Stanford).

Given his political programme (or rather lack therefore) while PM, it is clear that Sunak is not guided by any kind of political vision. He is a MBA technocrat and the Windsor Framework is a MBA case study achievement. So why did he not continue in this vain? Because all the other major problems in the country cannot be solved only by negotiations – at least not with an austerity mindset or without upsetting the business interests of Tory clientele. You would think that if you pledge to reduce NHS waiting lists, stopping doctors and nurses from striking would be high on your priority list, but that requires doling out some money and when was the last time a nurse made a sizable donation to the Conservative party? If you want me to scratch your back …

Anyway, Sunak was looking for problems to solve with the economist’s toolbox: You want more of something, make it cheaper. You want less of something, make it more expensive. One thing the Conservatives and their voters want less of is immigration. Unfortunately, despite all the rhetoric, you can’t reduce legal migration because the economy need it like an addict needs their shot, so the focus had be on those who come here in small boats. Ironically, the fact that so many people decide to sit in an overcrowded dinghy at night to be shipped across the channel shows how successful the Tories have already been in making it extremely costly for refugees to come here by closing pretty much all legal routes to claim asylum in the UK. So what else can they do? Since penning migrants in camps is not palatable even for the Tories (yet), you have to come up with something worse than putting them in hotels (and barges), e.g. sending them to a dictatorship in central Africa. Am I too cynical in saying that despite all the efforts to declare the country safe by law, the fact that Rwanda would most likely not be an entirely safe haven for the people sent there is an important feature, not a bug, of the whole programme? Anyway, it seems to me that Sunak’s MBA trained mind could appreciate the economics behind the plan, which is why he not only stuck with it and its right wing proponents, it was basically his flagship policy. He had nothing else, really.

As a side note, the notion that the people in the dinghies made a proper cost-benefit analysis before embarking on their journey is absurd. I’m not saying that making it even more costly for migrants to come here in small boats would have no effect, but it would most certainly not have the effect size the right believes. These people are desperate, otherwise they would not pay huge sums to trafficers and risk their lives at sea. Also, if you want to reach into the economist’s toolbox, why not try to make it more costly for people to leave their home by helping to improve living standards there. Or at least stop the local conditions from getting any worse because of the changing climate, which is something that could be done in parts right here at home. But somehow, Sunak did not go for that. I wonder why? Donations, maybe?