The Price of Prudence

[Gordon B]

The economist website is subscription only, so I will reprint the entire article. I'm sure some people here will enjoy it.



THE PRICE OF PRUDENCE
-1ST

Governments must protect their citizens, but not at any cost

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 GBP2 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. Some 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.

[Pete C]

Originally posted by Gordon B
The economist website is subscription only, so I will reprint the entire article.

Isn't that called stealing?

[Chris D]

Dear Prudence, won't you come out to play?

[Douglas]

Last week two papers crossed my desk; first that these monetary estimates of how much an individual values his life peak around the age of 40, second that estimates of personal happiness tend to reach their nadir around the same age. I'm sure they're not related at all.

The estimates cited seem on the high side. I think the EPA has or will come out soon with estimates below $4 million soon for the US. These estimates are also only for prime age males, with a whole can of very ugly worms waiting to be spilled if you want to evaluate policies along other dimensions. For example, if old people are more susceptible to air pollution and they don’t value their lives as highly should you pursue abatement as vigorously?

The article notes the greater use of the precautionary principle in (continental) Europe. True, but not as bad as it would be trying to make out. There is some movement from a position where some policies were being based solely on blind ideology to at least some attempt to take into account costs and benefits.

[Rob C]

As I understand it, it was exactly this kind of cold cost/benefit analysis, undertaken by McDonald's on PRIOR lawsuits, that led to the jury's infamous award in the case of the coffee burn.

McDonald's had apparently made a determination that it would cost them less to continue to settle claims from burned consumers than to lose sales on coffee by lowering the temperature--since studies had shown that hotter coffee tasted better.

Jurors apparently don't like it when big corporations explicitly value profits over their customers' safety. How irrational of them!

[walto]

The chart title is about "workers," but the article is about environmental hazards. As relative workers' compensation benefits aren't even discussed in the article--which focuses on tort litigation (prohibited for most workers), I really don't have much of an idea what the hell the article is actually about. It's not about worker aversion to risk though.

[Rob C]

Originally posted by walto
The chart title is about "workers," but the article is about environmental hazards. As relative workers' compensation benefits aren't even discussed in the article--which focuses on tort litigation (prohibited for most workers), I really don't have much of an idea what the hell the article is actually about. It's not about worker aversion to risk though.

The article is about Economist subscribers' aversion to other peoples' risk.

[Salvador Dali Lama]

Originally posted by Rob C
The article is about Economist subscribers' aversion to other peoples' risk.

touche.

the article was kind of interesting... in a book report kind of way. maybe it was written for an 8th grade english class? if it was, it's pretty good.

if not, i want the last minute and a half of my life back.

[Douglas]

Walto, I'd assume that the article would not lead of with the chart and its place is misleading - I agree that the article is blah.

As you no doubt know, in many cases policymakers are mandated to compare costs and benefits of proposals (they don't necessarily decide the proposals’ fates). When they fill in the box of the value of avoided deaths, they have always used this estimate of how much a prime age male worker values his own life. In a sense this is the highest figure they can use and so is a variant of the precautionary principle. The centrality of these estimates in the policy process is the reason the table is included (the willingness to accept risk is measured by wage differentials in relation to likelihood of being killed in a given occupation).

[Gordon B]

The article did not lead off with the chart. I do not know how I could have pasted the chart in and preserved the format. The chart in the article was at the side about a quarter down.

The article was not about workers per se but about risk aversion and how people will pay more to insure against passive death than against active death, e.g. restrictions on hazardous waste versus aggressive highway driving. However, the article, contrary to what Walt said, is not about environmental hazards per se.

Rob C and SDL, you guys evidently have an aversion to economic thinking. I was hoping to have an intelligent discussion but instead there's been a jump to conclusion that the article must be bad because it implies that some environmental actions are costly in terms of the lives they save.


Douglas, if either paper is available on the web please PM the url(s) to me. I'd like to read the full papers.

[Gary Sisco]

Too abstract a question to arrive at anything remotely scientific. Put a pistol to a worker's head and ask again, for example. Or ask a soldier mixing up a batch of Agent Orange (assuming he knows the consequences) how much his life is worth. You'll get a much different chart.

It's amazing how much Marxists and bourgeois economists resemble each other in their economic reductionism.

[Douglas]

I agree, Gary - that's why that question is not asked.

[Gary Sisco]

They also think this way in DC, unfortunately. For example, the idea of capping lawsuits for physical damage to one's body. How much is being ablebodied worth to anyone here? If you were to be quadriplegic tomorrow from an auto accident (it can happen to anyone, anytime, in myriad ways), how much would your ablebodiedness be worth to you, in round figures?

I think that if you're really honest, you'll say that your life doesn't have a dollar value, to you.

The Bushists like to use $250,000 as a cap figure. That would have almost paid for Bronwyn's time in rehab, excluding her time in the intensive care ward before that, and then she'd have gone directly from rehab to a nursing home without passing go or collecting $200, at age 29. Those of you who've met her can imagine what life would be like for her in a nursing home, but there would have been no alternative whatsoever if that cap had been in place at the time of her successful suit. Hell, it took 50g's just to add an accessible addition to her mom's house, so that she had somewhere to live, and even then she had to live on the locked, nut ward at the hospital for six months, while the construction went on. And that of course has a cost as well. And etc.

What really gripes my ass is that, to the people who talk this way (those in power, I mean), $250 k is lunch money. They wouldn't even take a job with that as an annual salary, and yet they think that's all anyone else in the world is entitled to, no matter how badly hurt, even when it's clearly someone else's fault. What an amazing arrogance. Makes me want to go clean my pistol, actually.

[Tom Storer]

Originally posted by Douglas
the willingness to accept risk is measured by wage differentials in relation to likelihood of being killed in a given occupation.

Now that's an interesting assumption. It assumes that people always have a good amount of choice of occupation and that they are aware of the relative likelihood of being killed per occupation.

[Monte Smith]

Originally posted by Douglas
...(the willingness to accept risk is measured by wage differentials in relation to likelihood of being killed in a given occupation).

When the German conglomerate Bertelsmann bought the large publishing company I was working for in New York, the CEO of Bertelsmann, Dr. Thomas Middlehoff, brought the many thousands of employees to a get-psyched rally at Radio City Music Hall. Up on stage, Dr. Middlehoff pumped his fist and announced his love and allegiance to Bertelsmann. “I would die for Bertelsmann! Would you die for Bertelsmann?” he asked the crowd. There wasn’t a very enthusiastic reply. For the life of me, I couldn’t figure out exactly how I could die for Bertelsmann. I mean short of a massive papercut.

[Douglas]

Thanks for the image, Monte; some things are just better left unsaid.

Tom, I'd accept your point if people had no choice in occupation. Otherwise it should be reasonably robust in allowing wage-risk relationships to be identified.

[Rob C]

That's exactly the thing. No one is at risk of dying by writing articles for the Economist, either. As Tom implies, the choice may be certain death from starvation versus a mere possibility of death from dangerous employment.

And I would take issue with the chart saying it measures "workers' willingness to accept risk". Rather, it measures how little employers can get away with paying someone to risk his or her life. This chart doesn't measure how dear the worker holds his life, but how cheap the employer measures his employee's life. Which is what I was trying to get at with my earlier, glibber response.

I don't see the point of the article, either--as an academic exercise, it's a little interesting, but the "point" of the article seems to me primarily to be an ideological argument against environmental and workplace regulations.

[Douglas]

Rob, in a sense if people have no alternative you are right and that was what I admitted in my previous post.

But the way they look at these risk-wage relationships is not to compare the wage of someone working for the economist with someone forced by circumstance to work in a coal mine. They take into account the other determinants of wages/salaries and then controlling for these differences look at relationship between the remaining wage differentials and the risks of dying because of the job. For a purely illustrative example to show you what I mean, you could look at the differential in wages between two foreign correspondents working for the economist in Columbia and Peru. If we can assume that the people are pretty similar the cost of living is pretty similar etc, but one has a higher probability of being killed the wage differential would give you an indication of how much that journalist values their own life.

It is a huge number of cases like this that make up the national estimates. And it is because it is looking across a very wide cross section of occupations that you can say in some way it does reflect workers' willingness to accept risk.

The reason it is done is to feed into briefing documents on costs and benefits to help policy makers determine what the target of the policy should be and prioritise between policies. It doesn't dictate policy, but does inform the policy makers' decision making.

When it isn't done you can get wildly expensive policies being put in place. You can use that money to far greater effect - you can save more lives by limiting policy here to improve it there. That is the point of the article.

[Salvador Dali Lama]

Quite to the contrary, Gordon. I'm very interested in economics.

it's just a really shitty article, thats all. it doesn't go anywhere, doesn't tell me (or anyone else that reads the economist i hope) anything I don't already know. Plus it's very poorly written. and on top of all that, this particular exercise in futility espouses a philosophy I don't really care for.

an intelligent article might be better suited if you want to spark an intelligent discussion.

fuck this encyclopedia brittanica bullshit.

[walto]

I wrote a fairly substantial post on this today (probably what made the site crash) and I'm too lazy recreate it. My point was, though, that you have to discuss workcomp benefits and injury frequencies for any sort of analysis of worker risk because most workers in Western countries are barred from bringing tort suits and because neither of these workplace stats correlate particularly well with wages or general morbidity/mortality or anything else even mentioned in passing in this article.

This being the case, Gordon, it doesn't really matter whether the chart comes first or is buried somewhere in the middle. The "intellectual discussion" you were pining for needs something a bit more sensible to launch it, I think.

[GoodSpeak]

Did someone say "Prudence"?

Hit it Boys [my apologies to PeteC]:

Dear Prudence
Lennon/McCartney

Dear Prudence won't you come out to play
Dear Prudence greet the brand new day
The sun is up the sky is blue
It's beautiful and so are you
Dear Prudence won't you come out to play

Dear Prudence open up your eyes
Dear Prudence see the sunny skies
The wind is low the birds will sing
That you are part of everything
Dear Prudence, won't you open up your eyes

Look around round
Look around round round
Look around

Dear Prudence let me see your smile
Dear Prudence like a little child
The clouds will be a daisy chain
So let me see your smile again
Dear Prudence won't you let me see you smile

Dear Prudence won't you come out to play
Dear Prudence greet the brand new day
The sun is up the sky is blue
It's beautiful and so are you
Dear Prudence won't you come out to play

[moneyp]

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.

I stopped right there. As Rob C touches on, the case against McDonald's was entirely justified. The woman had freaking third degree burns from that coffee spill, and she tried to settle with them for a reasonable amount. That this writer couldn't be bothered to check his facts, chalking it up as another frivolous lawsuit, doesn't say much for the rest of his research abilities.