Managing Collateral Negative Consequences
Arden Rowell asks about how the economic dynamic approach would take into account tradeoffs as it manages change over time. The book eschews the term “tradeoff” in favor of a more limited concept, “collateral negative consequences.” (p. 70). This shift was intentional, meant to emphasize that society’s commitment to avoiding systemic risk should be just that, a commitment. Therefore, the primary question governments should ask in seeking to avoid systemic risk is which measures will do so effectively. (pp. 69-70). Democracies often make a concrete normative commitment to avoiding systemic risk, just as we make a commitment to free speech. The very idea of commitment means that we must take the steps needed to meet the commitment, even if they are costly to us. Therefore, I reject the concept of tradeoffs as a signal for some kind of optimization exercise that ignores normative commitments in favor of a more subtle concept of addressing collateral negative consequences that seeks to take certain qualitative detriments of actions addressing systemic risk into account without weakening our commitment to this goal.
The idea of commitment implies that the question of how much investment should we make to avoid systemic risk is not the right question to ask. It’s a little like asking how much investment should we make in our marriage. It’s not unbounded, but basically we try to do what is necessary to make the marriage work.
Having said that, the book, as Arden notes, does not eschew consideration of collateral negative consequences. Here are some of the principles stated in the book:
- If one has two efficacious means of avoiding a systemic risk, choose one avoiding negative collateral consequences if possible. (p. 70)
- Use narrow exceptions to legal rules where possible to avoid collateral negative consequences when implementing an efficacious means of avoiding systemic risk. (p. 71)
- If all efficacious means have serious negative collateral consequences, make value choices about which collateral consequences we most wish to avoid in choosing a set of efficacious means. (p. 70)
- If necessary to avoid a systemic risk, one must forego an economic opportunity, that’s ok. If we avoid systemic risks, new opportunities will arise. (p. 72).
- Avoid measures that would not leave open a reasonably robust set of economic opportunities. (p. 72).
- If the only measure avoiding systemic risk creates a systemic risk, avoid the systemic risk most likely to arise. (p. 72).
These principles demand that we do all we can to effectively avoid systemic risk, unless doing so creates some sort of catastrophe of its own, which is a rare case in the real world. But they reject reduction of efforts to avoid systemic risk to a supposedly valueless optimization exercise based on monetized costs and benefits.
That said, I agree that economic dynamic analysis (EDA) does not tell us anything about the value of cost-benefit analysis (CBA). Indeed, as Michael Livermore points out, EDA can improve CBA. EDA is a broader tool than CBA and it is useful to systemic risk avoidance, because it helps identify systemic risks and it helps us identify collateral consequences that we may wish to take into account. CBA is not a useful tool for identifying systemic risk or identifying collateral consequences in a qualitative sense. It’s a particular means of quantifying consequences already identified by some other means.
The case against CBA comes from the economic dynamic theory’s goals, to avoid systemic risks while keeping open a reasonably robust set of economic opportunities. Those goals imply that most costs are irrelevant, because they generally simply change prices somewhat, without significantly influencing economic opportunities. The case also arises from the book’s showing that we cannot know the value of systemic risk avoidance, so that CBA has little value in that context. We know we want to avoid terrorist attacks, economic collapse, and serious climate disruption, but we do not know how costly these disasters will prove in dollar terms.
Any normative commitment implies keeping the commitment in the face of costs that may seem great relative to one step needed to keep the commitment. That is what commitment is about, persistence in keeping that commitment in the face of costs. And it certainly implies that some advantages and disadvantages are more important than others, so that a mere summation of costs and benefits is not helpful.
I look forward to reading Arden’s work on Reregulation and the Regulatory Timeline. The question of how to operationalize policy choice over time depends in part on what our objectives are. I hope my book helps clarify what our most important objectives should be and something about how to analyze real world consequences. Different normative commitments will imply different analytical emphases.