Sunday, November 1, 2015

Ip, Foolproof

Greg Ip, the chief economics commentator for the Wall Street Journal and author of The Little Book of Economics, has written an intriguing new book: Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe (Little, Brown, 2015). Drawing primarily from finance and secondarily from such diverse fields as forest management, sports, medicine, and transportation, he explores the tradeoff between innovation and crisis. Or, alternatively, though obviously not equivalently, between stability and disaster, between safety and danger, between fear and adventure.

The tension between these opposing forces “bedevils the people whose job it is to steer our economy and manage our surroundings. Philosophically, they fall into two schools of thought. One, which I call the engineers, seeks to use the maximum of our knowledge and ability to solve problems and make the world safer and more stable; the other, which I call the ecologists, regards such efforts with suspicion, because given the complexity and adaptability of people and the environment, they will always have unintended consequences that may be worse than the problem we are trying to solve.” (pp. 18-19)

In the first half of the book Ip demonstrates how “the pursuit of safety leads to behavior that makes disaster more likely.” (p. 125) Football helmets, designed to reduce injuries, became weapons for spearing opponents. Antilock brakes became an excuse to drive faster and brake harder. The global saving glut, a form of insurance, contributed to the financial crisis of 2008 as, of course, did portfolio insurance to the crash of 1987.

The second half of this book offers prescriptions for how to strike the right balance between safety and disaster.

One of Ip’s theses is that it doesn’t make sense to pay any price to avoid a disaster or crisis. “Not only is the price too high, but the nature of complex systems is such that if risk taking is repressed in one arena, it may migrate to another, and even more costs and damage may occur through other means.” (p. 130) For instance, shutting down nuclear power plants because there is a very small chance of a catastrophe (and, even then, the maximum number of deaths is probably in the hundreds) may not be justifiable. Each year deaths attributed mainly to pollution from the burning of wood and fossil fuels total more than 7,000 in the U.S. alone.

Sometimes seemingly excessive risk taking turns out to be good for society. In the course of the dot-com bubble this was manifest not only in the overly indebted Amazon’s ability “to pull another financing rabbit out of its rather magical hat” and stay afloat. It was also manifest in the host of telecom companies that borrowed billions to lay fiber-optic networks between cities and continents –and that subsequently sank. Of the networks we now take for granted, 63% of transatlantic, 35% of trans-Pacific, and 39% of the capacity between the U.S. and Latin America were built by now-bankrupt companies.

We will never eliminate disasters and crises. “Nor,” Ip contends, “should we want to. Periodic crisis is the price we pay for an economic system that encourages, and rewards, risk. Periodic disasters are the price we pay for situating our cities in desirable, productive places.” And so, the book concludes, “Our goal should be to eliminate big disasters, not small ones, to accept a bit more risk and instability today in return for more reward and stability in the long run.” (p. 219)

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