Tuesday, May 18, 2010

XXX Isn't Really About YYY: Some Suggested Compromises That Won't Fly

Robin Hanson famously argues that signaling drives much of behavior. Medicine isn't about health; it's about signaling to other people that we care, or that we're trying to be helpful--the real outcome isn't important (as suggested by evidence that health care expenditures don't contribute much to health).

Much (most?) policy discussion is driven by this signaling.  So, for example, the BP oil platform accident drives one side to suggest banning offshore drilling, and the other side to remain steadfast or even increase its support for drilling. Surely neither side can really mean this--stopping all offshore drilling would be too costly, and no one can really think that oils spills are a reason to be more willing to support drilling. These positions are just posturing to keep the other from getting some advantage.

If they were really interested in the public welfare, they would support some kind of compromise. This is a pretty easy one: Get rid of the limits on liability for oil spills, which causes injurers to take into account the full scope of the damage they could cause. This causes them to take greater precautions against accidents. It doesn't cause them to reduce the probability of an accident to zero; that's impossible, and the closer we get to zero probability of an accident, the more costly it becomes. Given that there's little the injured can do to influence the damage from an oil spill (aside, I suppose, from living on or near the coast), simply making the injurer liable for the full scope of damage caused should give the injurer the incentive to take the efficient level of precaution.

This might upset some conservatives, as it means that some oil platforms might shut down or fail to start up in the first place, due to increased safety or liability costs. It might upset some liberals because it only reduces the amount of drilling and the probability of accidents, rather than eliminating them. But if both sides were really interested in increasing safety and allowing drilling, it seems to me a reasonable compromise. Of course, the limit on liability will not be removed. The two sides are interested in signaling to their constituencies, not in making society better off. Drilling regulation isn't about safety; it's about showing you care about the environment or people driving cars. The same goes for mine safety: tort and civil law won't simply be allowed to sort out who should bear the liability for accidents, because it's not really about safety or business.

Another example is Cap and Trade. Liberals want to limit CO2 emissions with regulation, conservatives do not, due to opposition to the taxation implied by Cap and Trade or carbon taxes. Here's another simple compromise: Replace payroll taxes with CO2 taxes (or CO2 allowance auctions for Cap and Trade). Tax burdens shift but do not go up overall--in fact, a tax that creates a deadweight loss is replaced by a tax that eliminates a deadweight loss. Yet neither side will even propose such a bill, because they're interested in heat, not light (some people outside of government, including Al Gore, have proposed such an arrangement). CO2 regulation isn't about reducing CO2; it's about showing you care about the environment or taxpayers.

Such compromises are not always possible, but the fact that they sometimes are available but unexplored should create some doubts in the minds of anyone with faith in the efficiency of democracy.

ADDENDUM: Robin Hanson talks sensibly about regulation and infrequent accidents. Hat tip to Bryan Caplan at Econlog.

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