Tuesday, April 17, 2007

The (un)Wisdom of Taking Precautions Against Highly Unlikely Events

Sometimes when I encounter people from colder climates (Yankees, as my mother would call them) who have moved south, they make a remark about the incredible lack of prepararations by southerners for snow and ice. No one has snow tires, few cars are all-wheel-drive, and people lack some relevant driving skills. Schools shut down at the slightest hint of snow. I respond that this is, in fact, a rational response. The costs of doing things to prepare for snow are high, while snow is infrequent and not usually severe. It's less expensive to just stay inside for a day or two than to incur the massive fixed costs of getting everything ready for harsh blizzards, which mostly do not occur. Occasionally this policy doesn't work so well--I remember being stranded on campus as an undergraduate for several days during the 1993 blizzard, without power, heat, and, for the most part, warm food. Overall, however, it pays to just ignore these infrequent and unpredictable events, unpleasant as they may be.

While reading about the horrifying attacks at Virginia Tech, it occurred to me that I was expecting to hear about what ought to be done about this. I'm sure it won't be long before someone is suggesting more security in schools, more gun control laws, censorship of video games, movies, and television, and other policy changes. It's tempting to give in to the urge to just do something. Yet as horrible as the deaths of at least 32 people might be, taking action is costly. Getting closer to a police state might help, but it has its own costs in lost liberty and possibly economic growth. And even then, if a madman is really determined to wreak havoc, it is difficult to stop him. Is there really anything simple and inexpensive that could be done to stop future maniacs from going on killing sprees?

I realize that this is an unpalatable argument to make. I expect many people that hear this sort of argument think "So you just want to do nothing and let people die?" Obviously I don't want people to die. Yet it's important not to overreact to highly unlikely events. Resources that we devote to protecting ourselves from events like the VT shootings, the Columbine Massacre (eight years ago), and the UT tower sniper (forty one years ago) are unavailable for other uses. Resources that colleges reallocate to protecting themselves from an event that happens to only one campus out of thousands every (say) five years are unavailable for improving campus life and educating students. I know that if my current employer faced a choice between spending $1 million on additional security or more faculty, better classrooms, better dormatories, and better technology, I would choose any of the latter over the former. Sometimes the best response is to do nothing at all. People who refuse to at least consider this option are not being intellectually honest.

A related question is why people over-respond to these low-probability threats. Why do people insist on air travel being so much safer than automobile travel after plane crashes? Why do people think that the construction of a nuclear power plant is something to be stopped at all costs? I think the answer lies in evolutionary psychology. In the early evolutionary environment, people lived in small groups and faced frequent danger, from predatory animals and other humans. If a leopard ate one of your fellows, this leopard represented a significant risk, and it paid to react strongly to it, either by taking precautions or hunting down the leopard. There were lots of serious risks, all of them worth doing something about, and we are descended from those people who were paranoid enough to take those necessary and costly actions. Today we have mostly the same brains as our ancestors 30,000 years ago, yet we live in a much safer world. We didn't evolve to deal appropriately with small and remote risks; we treat them the same way we did the big, significant, immediate risks we dealt with in the distant past. So we see a plane crash and think "That could happen to me! Someone should do something about that." Politicians, ever eager to please, regardless of the costs and benefits, happily respond with tighter regulation. On the other hand, when we get accustomed some risks--such as auto accidents--we deal with them much better. We insure against them, and buy safer cars if we are especially risk averse, because car crashes are more common and less catastrophic.

Given that this may be an immutable (for the time being, anyway) aspect of human nature, I don't think there's anything to be done about it. Asking people to stop overreacting to very low risk events is like asking women to stop being attracted to men with higher testosterone levels, or expecting adolescent males to be more risk averse. Unfortunately, that means we're probably doomed to more bad public policy when these unlikely and unfortunate events occur.

Monday, April 09, 2007

Let's Destroy Some Jobs

No, seriously, let's destroy some jobs. I found this autoblog story interesting. The big 3 auto manufacturers are getting rid of unnecessary dealerships. This is probably a good idea, as their existence meant that the big 3 were to some extent competing with themselves. But there is a better solution.

Current law prohibits automotive manufacturers from owning their own car dealerships in the U.S. That is, no car company--not GM, not Honda, not Volvo-- can sell a car directly to you. Not online, not through a company-owned dealership, never. Not in the U.S., anyway. If you're wealthy enough, you can go to Germany and buy a BMW directly, but that doesn't help the poor much. Instead, you must go to an independent dealership.

This study suggests that savings of six to ten percent might be achieved by "cutting out the middle man" (if I'm reading it correctly--the section on cost savings is a bit poorly worded). Not only would we get cheaper cars, however--we'd also free up those resources for producing other things. To put it another way, we should destroy these jobs. For those of you who don't like that idea, consider this: We could create more jobs by legally mandating a new market: a car dealership dealership. That is, you cannot buy directly from a car dealership. Instead, you must go to a dealership dealership, where you will shop around for dealerships, and pay this new middleman a fee. Want to create more jobs? How about a dealership dealership dealership?

The problem with this argument is that jobs are not, in and of themselves, a good thing. Production of valuable goods and services is a good thing, and jobs that produce nothing of value should be destroyed, so that workers can produce something else. Jobs are valuable if and only if they produce things of value. If we all decided to quit our current jobs and take up the production of horse-drawn carriages and buggy whips, we'd all be employed, but we'd be wasting resources. If you really love that sort of thing, then have fun producing carriages, but don't expect anyone else to pay to indulge your production preferences, and don't ask the government to require people to buy your output.

This restriction on automobile manufacturers was imposed for antitrust reasons. The government feared that allowing manufacturers to run both production and distribution of their cars would be anticompetitive, and result in higher prices. There are two problems with this argument. The first is that there are many competing automobile manufacturers now. The real competition is between manufacturers, not dealers. The second problem is that this policy does nothing to reduce car prices. If the automobile manufacturers want to raise the retail price of cars, they can do so by simply raising the price at which they sell to dealers. To take an extreme case, a monopoly can extract monopoly profits at any point in the process between production and consumption. Microsoft doesn't need to own CompUSA and Bestbuy to make a lot of money off of Windows; it merely charges these retailers a high price.

So let's recap. Eliminating the restriction on direct retail distribution of automobiles by manufacturers would eliminate jobs, which would be good in the long run, as new jobs will be created in other industries, producing more valuable goods. Eliminating the restriction will result in lower car prices for everyone; rich and poor alike will be able to buy directly from the manufacturer.

Incidentally, that study I cited above also suggests that automotive dealerships have been taking their own anticompetitive action, lobbying for state laws that limit the entry of new dealerships. So there's a third potential benefit: new dealerships where they are valuable, and the elimination of old dealerships where they are not.