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The Price of Prudence The Economist, January 24, 2004 Highly visible threats to life and limb, such as terrorism, health scares and
calamities, are especially likely to provoke wild misjudgments about the odds
of a peril, and about its likely consequence. When that happens, people tend to
turn to their governments for reassurance. Over the past 20 years, the number
of government regulations aimed at improving safety in both Europe and America
has soared. Up to a point, that makes sense: the richer a country gets, the more
its citizens care about health and well-being, and the more anxious they become
to avoid putting them at risk.
Tastes in risk vary across countries. Europe is considered fairly risk-averse,
and has recently been fretting about greenhouse gases and genetically modified
food. But even within Europe, says Ragnar Lofstedt, of the King's Centre for Risk
Management in London, attitudes vary widely. Swedes are concerned about dangerous
chemicals, and Danes worry a lot about Sweden's nuclear power stations. Italians,
although addicted to their mobile phones, are bothered about radiation.
America, on the other hand, is often seen as having a strong risk-taking culture,
despite the draconian measures it has taken to snuff out smoking. Americans have
generally preferred to sue when faced with the effects of risk, rather than wait
for lawmakers to deal with their concerns. Their litigious society has turned
to product liability to shift the burden of failed products, such as car tyres
or silicone breast implants. The old rule of "buyer beware" has been sidelined.
That has led to some landmark court decisions in recent years. In 1994 McDonald's
was required to pay $3m (later reduced) to settle a lawsuit after a customer spilled
a cup of its scalding-hot coffee on her lap. The court said the company was responsible
for telling its customers about the damage its product might cause. McDonald's
had to issue a printed warning on its coffee cups, telling its customers that
the coffee they "are about to enjoy" is "extremely hot." And now the firm is being
sued for allegedly making people fat.
One American author, Philip Howard, has called this sort of thing "the death
of common sense". There are plenty of other examples. Playgrounds have to do without
seesaws for fear of lawsuits if someone gets hurt. A few years ago the American
government launched an investigation into "runaway car syndrome" after reports
of cars spontaneously launching themselves, yet later it turned out the drivers
were to blame. The risks in medicine are also high, so doctors order batteries
of tests to protect themselves, driving up health-care costs.
Macabre maths
But common sense gets you only so far when dealing with risks to safety, security
and health. How far, for instance, should a government go to save lives by reducing
everyday hazards? Life is priceless, of course, especially when it is yours or
a loved one's. Yet governments have budgets and must try to weigh costs and benefits.
If a life can be saved for a few thousand dollars, that sounds like money well
spent. But what if the cost is $100m?
According to Kip Viscusi of the Harvard Law School, the price that Americans
put on a life is around $7m. He has researched what people are willing to pay
to reduce the risk of death at their place of work and how much money they will
accept to compensate them for an increased risk of dying on the job. By cross-analysing
data from many surveys, he says, it is possible to discover the value people put
on avoiding the loss of a life. Different countries, it seems, have different
preferences (see chart 2). The Japanese, perhaps true to their reputation of being
risk-averse, put a price of almost $10m on each life, whereas the Taiwanese seem
to be satisfied with a modest $600,000. In general, as countries get richer the
price of a life goes up: by 5-6% for every 10% rise in income per head, according
to Mr Viscusi.
A country's rule book should reflect its people's preferences, but John Morrall,
an official at America's Office of Management and Budget, noted 20 years ago that
many regulations fail a basic cost-benefit test. He has just updated his analysis
by looking at 76 American regulations for the period from 1960-2001, and has found
that government is still doing a poor job. Only just over half the regulations
he studied were "cost-effective" as defined by saving a life at the cost of less
than $7m, and some were vastly more expensive. In itself, that may not be a bad
thing: people may well decide to spend a lot more to protect themselves from particularly
nasty deaths, and less to prevent deaths that result from voluntary risk-taking.
The problem comes when inefficient regulation is promoted at the expense of the
thriftier sort.
According to Mr Morrall, environmental regulations, such as restrictions on hazardous
waste and other kinds of pollution, generally cost over $1 billion for every life
saved, often much more (see table 3). The cost of such regulations, many of them
designed to reduce the use of substances that cause cancer, is far higher than
the results seem to justify.
On the other hand, fairly cheap measures can produce big benefits. In America,
simple precautions, such as requiring cigarette lighters to be child-proof or
reflectors to be installed on heavy lorries, have proved especially cost-effective.
Disappointingly, many measures that could save lives at low cost are still waiting
to be introduced. These include reducing some types of fats, such as trans fatty
acids, in foods (each life saved would cost only $3,000), or installing defibrillators
in workplaces to treat cardiac arrests.
Other countries are not necessarily any better than America at balancing costs
and benefits. The British government, faced with public outrage after a string
of fatal train crashes, decided to put a lot of money into improving rail safety,
but seems to have overreacted. By one measure, it will spend over £2 billion for
each life saved.
Governments often spend huge amounts of money on some risks and ignore others
that cause far more lives to be lost, usually in response to popular pressure
to deal with things such as nasty chemicals. But according to Paul Slovic of the
University of Oregon, voters do not necessarily take a rational view. Instead,
they are influenced by dread and uncertainty. The more dreadful or unexpected
a death, say in a hijack or from a rare disease such as BSE, the more people seem
prepared to pay to avert it.
That leads to a problem: most people consistently worry too much about things
such as perishing in a nuclear accident or being infected with anthrax after a
terrorist attack, which have a low probability of occurring but would result in
particularly horrible deaths, and neglect hazards closer to home, such as car
accidents, mishaps in the home or health problems arising from eating the wrong
things.
Protect or sue?
A transatlantic divide now seems to be opening up in the way that governments
guard against such dangers. American regulators have recently been taking more
of a cost-benefit approach to risk, whereas Europeans are putting more emphasis
on precautions, whatever the cost. John Graham, appointed as America's top regulator
at the Office of Management and Budget in 2001, had previously been an academic
who used cost-benefit methodologies to analyse risks. He recently caused a stir
by calling the inefficiencies of regulation "statistical murder", arguing that
bad regulation absorbs money that could be better spent to save lives another
way.
Europe seems to be going the other way. The approach now favoured is called the
"precautionary principle", which can be summed up as "better safe than sorry."
This was conceived in Germany in the late 1960s as part of the country's new environmental-protection
laws, and the idea was that reasonable precautions should be taken when releasing
substances into the environment. But it has grown into something far more powerful.
Som> e see it as reversing the burden of proof on businesses that want to launch
a product, use a chemical or adopt a new practice. They will have to show that
their product is safe in all circumstances, even if the science to prove it is
not yet available.
The European Commission has now adopted the same approach. For example, it has
recently proposed increased regulation for the European chemical industry, through
a programme called REACH, which would require thousands of chemicals to be tested
to ensure that they do not cause cancer and other ailments. The proposal has caused
a rift between advocates of greenery, such as Sweden, and countries with large
chemical industries, such as France, Germany and Britain, which think that the
cost of such regulation may far exceed the benefits.
Environmental risks are not the only sort that that cause rationality to be put
to one side. Arguably, America's war on terrorism falls into the same category.
The terrorist attacks of September 11th 2001 killed 3,000 people. As Mr Viscusi
points out, more Americans are killed in car accidents every month, and more than
300,000 die from the effects of cigarette smoking every year; yet Americans are
willing to incur huge costs to prevent similar attacks.
Some of the costs of prevention are non-financial, such as having to put up with
longer security queues at airports, or accepting more scrutiny from the state.
Americans seem prepared to live with these: when Mr Viscusi, with Richard Zeckhauser,
studied people's response to the attacks, he found them willing to give up some
civil liberties to improve security. But some of the costs can be measured in
money: this year the Department of Homeland Security's budget for preventing terrorism
is nearly $30 billion. No one knows how many lives that might save.
Terrorism is precisely the sort of uncertainty that is likely to lead to too
many precautions: better to be seen to be taking action straight away than to
weigh up the costs and benefits first. American airports do seem more secure than
they were before the September 11th attacks, but that may not mean Americans are
any safer: it may simply persuade the terrorists to look for easier targets.
The biggest question governments face in managing risk is how far they should
go. Politicians like to think that they can make life for citizens pretty well
risk-free. There are indeed cost-effective - as well as expensive - ways of significantly
reducing many risks. But bringing them down close to zero, in government or in
any other sphere, will remain a fool's errand. | |
