Moral Hazard and the Palestinians

Many of you are probably familiar with the term moral hazard—the economic concept that explains how misguided policy encourages behavior that is detrimental to the broader society. While it may lend aid to a targeted population in the short term—in the long term, once the cost of the policy has been fully implemented, it often leads to calamitous results.

That is to say—a beneficiary group engages in adverse behavior to obtain an advantage with the expectation that the risk will be assumed by non-beneficiaries that did not agree to assume that risk.

Some recent examples from the progressive domestic U.S. policy include forgiving student loans—thereby encouraging people to borrow with the expectation that others will assume the debt, non-punishment of students that attack teachers and otherwise disrupt classrooms, and eliminating cash bail, thus reducing the cost of criminal behavior.

But moral hazard can also be applied to the case of the Palestinians, in the current Middle East conflict.

The people of Gaza chose to elect Hamas in 2007 when they could have elected the less barbaric Palestinian Authority. Since that time, Hamas has continuously engaged in a low level war with Israel. But it has periodically increased the intensity of that war, inevitably leading to significant destruction of Palestinian lives and property.

In each instance, the international community, usually led by the U.S., the EU, Saudi Arabia, and other countries have paid for the reconstruction of the property that was destroyed in Gaza.

Reconstruction does not bring the dead back to life but it does restore some degree of normalcy to the area.

Here is the key point.

The Hamas leaders know in advance of their attacks on Israel that following Israel’s counterattacks, the territory under their control will be rebuilt by others—giving them zero incentive to stop carrying out heinous acts of violence against the Jewish state.

Those who die carrying out these attacks are deemed to be martyrs which as per Islamist belief means that they are bound for glory and therefore rewarded for their sacrifice. Each time Hamas attacks Israel it knows that it will not be held responsible by Gazans for reconstruction and the dead will be hailed as heroes.

This reduces the cost of war to Hamas and Gazans generally. The Gazan people have less incentive to rebel and to seek a change in government. International aid that keeps flowing in, regardless of their barbaric behavior increases the likelihood that Hamas will remain in power and continue to attack Israel.

The cost is then transferred to the international community while Hamas benefits because it creates martyrs and is viewed as a righteous tormentor of the Israeli enemy. The Hamas leaders also likely benefit personally as they siphon off the “humanitarian aid” for their personal gratification.

But the Gazans are the ones who ultimately suffer, because they do not change their attitude toward their government—nor do they actively seek to change it.

Following Hamas’ latest atrocious attack on Israel, the Biden administration is seeking to provide humanitarian and reconstruction aid to the Palestinians while the war continues. By contrast, during previous wars, the U.S. did not provide humanitarian assistance to the Germans, the Japanese, or the North Vietnamese while war continued—because it was necessary for the citizens of those countries to understand the ramifications and suffer the consequences that their governments created for them.

Providing aid to the Palestinians now will likely only prolong the conflict and will certainly reduce the incentive for Gazans to prevent a resurgence of Hamas—or its equally destructive replacement following Israel’s likely destruction of the current incarnation of that group.

Sending aid while Hamas continues to hold about 200 hostages is the height of stupidity—because it removes powerful leverage that we have to free the hostages.

Arguably the U.S. could reasonably commit to providing some aid following the safe release of all hostages, such as removal of the wounded to hospitals outside of Gaza.

Note that I wrote “some aid.” Under no circumstances should any of it go towards reconstruction or any commitment to reconstruct. Similarly—although I have little faith in them—the broader international community should also commit that they will not provide reconstruction aid in any form, if following Israel’s victory, Gaza is again controlled by a Hamas-like entity.

Following the victories in WWII, the Allies ensured that neither the Japanese nor the Germans would reinstate brutal non-democratic regimes by proving to the defeated populations that their governments were evil. They also occupied these countries militarily and ran their governments.

It is unlikely that the same can be done in Gaza given the centuries long influence of Islamist beliefs. The replacement regimes are unlikely to be democratic or liberal-leaning and will almost certainly not be successful if imposed from the outside. But even if the next regime is non-democratic and not liberal, the next government can still be non-aggressive towards Israel.

The Gazans must be given the opportunity to learn that if they want to live in peace and perhaps even prosper, they need to create a government that will not attack its neighbor; a government that is primarily responsible for caring for those that it governs.

This is more likely to happen if they are forced to bear the consequences of their support for this evil regime.

Jeffrey Keltz is a retired Information Technology professional and now spends his time cycling and studying politics, history and economics.

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Photo: A picture taken from the southern Israeli city of Sderot on October 26, 2023 shows smoke rising from the Gaza Strip during an Israeli strike, amid ongoing battles between Israel and the Palestinian Hamas movement. Israel said on October 26 that a column of tanks and infantry had launched an overnight raid into Hamas-controlled Gaza, striking "numerous" targets before retreating to home soil. (Photo by Jack Guez / AFP) (Photo by JACK GUEZ/AFP via Getty Images)