James Pethokoukis

Politics and policy from inside Washington

Volcanoes, healthcare reform and global warming

Apr 27, 2010 17:49 UTC

Over at Edge, a variety of scientists give their take on the Iceland volcano eruption and its impact on air travel. Two really stood out to me. The first also highlights the problem of defensive medicine; the second shows the downside to action dealing with global warming:

DANIEL KAHNEMAN

Psychologist, Princeton; Recipient, 2002 Nobel Prize in Economic Sciences

Imagine a public official who considers an action that involves a small and ambiguous risk of disaster. Imagine further that the best expert judgment available is that the expected social benefit of the action is large and that the risks are real but tolerably small. Such situations inevitably create a conflict between the interests of society and those of the officials who are charged to decide on its behalf.

Hindsight and personal accountability are the problem. Decision makers can be certain that if the worst happens their decision to act — however justified it was ex ante — will be perceived ex post as a horrendous mistake. They face the possibility of devastating blame and guilt, as well as career-destroying consequences. The risks are asymmetric because the costs of playing it safe are likely to be negligible.

Even if future analyses of the ash cloud incident conclude that flights could have resumed safely much sooner, it is unlikely that any of the officials involved in delaying the flights will lose their jobs. In this situation and in many others — defensive medicine is an example — the valid anticipation of hindsight combines with social norms of personal accountability to produce overly cautious behavior.

The solution?

Where the social good requires taking risks, we need procedures that will reduce personal accountability and diffuse responsibility, perhaps by assigning some categories of decisions to designated groups of experts rather than to individual functionaries.

MATT RIDLEY
Science Writer; Founding chairman of the International Centre for Life; Author, The Rational Optimist: How Prosperity Evolves

The ash cloud reminds us of the risks of risk aversion. Shutting down Europe’s airspace removed the risk of an ash-caused crash, but it also increased all sorts of other risks: the risk of death to a patient because an urgent medical operation might have to be postponed for lack of supplies, the risk of poverty to a Kenyan farm worker because roses could not be flown to European markets, the risk of a collision between ferries on extra night-time sailings in the English Channel. And so on. Risk decisions cannot be taken in isolation. The precautionary principle makes too little allowance for the risks that are run by avoiding risks — the innovations not made, the existing suffering not alleviated. The ash cloud, by reminding us of the risks of not being able to fly planes, is a timely reminder that the risks of global warming must be weighed against the risks of high energy costs — the risks of poverty (cheap energy creates jobs), of hunger (fertiliser costs depend on energy costs), of rainforest destruction and indoor air pollution (expensive electricity makes firewood seem cheaper), of orangutan extinction in subsidised biofuel palm oil plantations.

Oh, and remember the lessons of public choice theory: if you set up a body called the Volcanic Ash Advisory Centre, don’t be surprised if it over-reacts the first time it gets a chance the demonstrate that it considers itself — as all public bodies always do — underfunded.

COMMENT

Excellent points all.

Posted by zotdoc | Report as abusive

Government and venture capital

Apr 27, 2010 17:05 UTC

Stumbled across some interesting research on government support of startup businesses. First, this new piece on the Vox site:

We are all for policy support for entrepreneurs. But, we believe it must be channelled correctly. An approach that seeks to pick winners ex ante is likely to fail. We base this assessment in part on the very poor performance of policy interventions of this type (Lerner 2009). Our view is also based on the underlying firm dynamics that are observed in the data and discussed above. We instead believe policymakers should focus more consistently on the many small businesses and entrepreneurs that make large and small improvements to the economy. The best support policymakers can provide is to encourage competition among local banks and financiers. Governments should forget about picking winners and focus on picking the right system.

Me: Right, capital access is important. But then I took a look at that Lerner report (Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It) by Josh Lerner at Harvard. Here is an interesting bit of a Q&A he did with the NYTimes Freakonomics blog (anything in bold is mine):

Q. Are government interventions to boost entrepreneurship always successful? Why do these programs fail?

A. Sadly, for every successful effort such as those in Israel and Singapore, there are numerous unsuccessful ones.

First, they can simply get it wrong: allocating funds and support in an inept or, even worse, a counterproductive manner. Decisions that seem plausible within the halls of a legislative body or a government bureaucracy can be wildly at odds with what entrepreneurs and their backers really need. When Australia legalized the venture capital limited partnership structure earlier this decade, for instance, legislators worried that foreign funds or firms might exploit the favorable tax treatment these entities enjoyed. So they required that each company backed by a venture partnership have at least half its assets in Australia. The venture funds found that this restriction handicapped the companies in their portfolio. The entrepreneurs could not expand their software development activities in India or their manufacturing operations in China without putting the venture funds’ tax status in danger, even as they competed against American ventures that made heavy use of “off-shoring.”

Q. You write about “The Neglected Art of Setting the Table” i.e. establishing a favorable environment for entrepreneurs. Tell us about the ideal place setting.

A. Often, in their eagerness to get to the “fun stuff” of handing out money, public leaders neglect the importance of setting the table, or creating a favorable environment. Such efforts to create the right climate for entrepreneurship are likely to have several dimensions. Ensuring that creative ideas can move easily from universities and government laboratories is critically important. However, many entrepreneurs come not from academia, but rather from corporate positions, and studies have documented that, for these individuals, the attractiveness of entrepreneurial activity is very sensitive to tax policy (particularly low capital gains tax rates). Also important is ensuring that the law allows firms to enter into the needed contracts — for instance, with a potential financier or a source of technology — and that these contracts can be enforced.

COMMENT

Another phase on the global Marxofascist war on Americans, for the sake of their globally controlled society.

One may wish to Web search: “greatest scandal in modern history – treason in process”

Posted by ArlenWilliams | Report as abusive

Obama’s deficit commission and the politics of crisis

Apr 27, 2010 16:30 UTC

Good luck to the Obama deficit commission. In my heart, I do not believe Congress will pass huge entitlement cuts (preferable)  or tax increases without a  crisis.  (There needs to be a focus on boosting economic growth.) To quote Milton Friedman in Capitalism and Freedom:

Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

Here is one crisis scenario, as outlined by the Committee for a Responsible Federal Budget:

If low interest rates lead to continued debt accumulation and then suddenly, creditor preferences shift, we could experience a “catastrophic budget failure” as set out in a recent paper by Len Burman of the Maxwell School at Syracuse University and his colleagues at the Tax Policy Center.

Under this scenario, at some point financial markets or foreign lenders decide we are no longer a good credit risk, possibly due to debt affordability concerns. They conclude the United States cannot escape basic economic and financial “laws of gravity” forever. They stop buying our debt securities or demand dramatically higher interest rates due to increased perceived risk. With the sudden shift and large rise in interest rates, the economy goes into a severe recession. (“The longer it takes for the crisis to occur, the worse it will be.”) Unlike the past two years, we cannot, however, borrow to stimulate the economy because the crisis was caused by excessive debt and lost confidence. “In the extreme case, the U.S. may not be able to borrow at any interest rate.” Creditors concerned with hyperinflation or even default will not buy U.S. debt.

COMMENT

wait!
What happens after that? The Road Warrior – Hilly Have Eyes scenario?

Seriously. What would the landscape look like after the “unthinkable” happens? I’m curious.

Posted by bryanX | Report as abusive
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