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:

  1. If one has two efficacious means of avoiding a systemic risk, choose one avoiding  negative collateral    consequences if possible.  (p. 70)
  2. Use narrow exceptions to legal rules where possible to avoid collateral negative consequences when implementing an efficacious means of avoiding systemic risk. (p. 71)
  3. 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)
  4. 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).
  5. Avoid measures that would not leave open a reasonably robust set of economic opportunities. (p. 72).
  6. 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.

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1 Response

  1. Arden Rowell says:

    Thanks to David for these thoughtful responses.

    The notion of a cost-blind commitment is a romantic one, evocative of star-crossed lovers and soldiers sacrificing themselves selflessly in the name of honor. But Romeo and Juliet and the Charge of the Light Brigade do not remain classic pieces of art, year after year, because we admire the wisdom of their protagonists. Rather, they are imbedded in our social consciousness because they are tragedies in the deepest sense; because they exhibit the ends to which mankind can bring itself when it leaps forward in the name of a single value, heedless of cost. They are beautiful in part because we imagine the sparkling simplicity of the world of their protagonists when it has narrowed to only one principle: to be with someone we love, even if we must die to do so; or to accept certain death before retreat. But they are beautiful also because, as reflective observers, we see the sadness, loss, and tragedy that results from this sort of unilateral commitment.

    If Romeo and Juliet had reflectively considered tradeoffs, would they have seen that an alternative to suicide would have been optimal, or at least preferable? I would concede that this is not the kind of question typically posed to high school literature classes. Further, I agree with David that there is something deeply uncomfortable about asking this question in this way, and that—at least if asked in isolation—it appears to miss the emotional target of the work by a good few yards.

    But Romeo and Juliet are not modern policymakers intent on identifying and implementing the best possible policies over time in light of resource constraints, diverse interests and political pressures, technological and other uncertainty, and reciprocal risks. Perhaps we can conceive of the ballet of modern regulation as a form of fine art, but we must judge it—at least—by additional metrics beyond those we might use at a more traditional ballet. One of those metrics is, or should be, the extent to which policy-setting manages competing claims, charges, and dangers—that is, the policy’s costs, and the tradeoffs between those costs and other policy impacts. We can call this a consideration of collateral negative consequences, if by that term we mean an analysis of where the policy leaps forward to satisfy a normative commitment, and where (and at what point) it curtails a heedless romantic pursuit of that commitment because it recognizes that the cost has become too grave. But whatever we call it, good policymaking involves asking uncomfortable questions, and one of those—perhaps chief of those—is: just how far should our commitments take us? Asking this question is what keeps our policy from becoming tragedy.