BP and the Worst-Case Scenario

Cass Sunstein is a leading legal scholar and has engaged in a great deal of economic research in behavioral economics.  He is currently the administrator of the White House Office of Information and Regulatory Affairs and the target of right of center groups who oppose President Obama's regulatory reform agenda.  I am more market oriented that Sunstein and disagree with many of his policy recommendations, but I am pleased that he advises the president because he is thoughtful and approaches problems from many angles.  He recently wrote, "Worst-Case Scenarios" which asks how the government should treat low probability, high risk events like the Deepwater Horizon oil spill.  I must confess that I have not yet read the book, but I have listened to his interview about the book on EconTalk with Russ Roberts. 

The main idea is that people are not particularly good at analyzing low probability, high risk events.  In his discussion, he mentions two vice presidents, Cheney and Gore who each pushed expensive responses to these type of events: the September 11 terrorist attacks and anthropogenic global warming.  He treats both issues as having approximately the same approximate probability and cost of inaction.  For the sake of exposition, I will do the same.  Why have we spent much more on terrorism? 
Sunstein offers several reasons.  The most important is the availability of a salient event such as September 11.  It skews our probability judgments making us believe that an unlikely event is much more likely because we have a recent example; we rely on emotions and neglect probability.  Anthropogenic global warming does not have a similar catastrophic event to sell a policy response.  The probability that we ignore probability increases if our outrage is provoked because there is a single face that can be attached to the event.  In the case of September 11, the face was Osama bin Laden, the leader of al-Qaeda; there is no good face to represent global warming. 

According to Sunstein, we should beware of worst-case entrepreneurs, people who fan the flames of fear a salient event might ignite to push policy in a direction they favor.  By "fan the flames" I mean convince us that the probability of an event is much more likely because a salient event is immediately before us.  Overreaction to an unlikely event can be costly and entail its own risks.  The War on Terror has been costly in terms in lost life and budget expenditures. A cap-and-trade system to reduce carbon emissions would likewise be costly.  

An oil spill like the Deepwater Horizon is a low probability event.  Oil companies have drilled in the gulf and other places around the world for years with no comparable event.  Perhaps some, in search of a solution, are neglecting probability and our outrage has been aroused by the sloppy corporate practices of Tony Hayward, the CEO of BP.  We should beware of political entrepreneurs who would oversell the spill as a likely event to sell their programs.  I believe that a moratorium on all drilling in the gulf was an overreaction and I am surprised that it came from a White House taking advice from Sunstein.  A moratorium on new deep water drilling would be reasonable.  I also believe that pushing increased ethanol production through government subsidies is another overreaction.  Increased corn production would cause farmers to substitute corn for other crops and take corn out of the food chain driving up food prices.  It would also lead to new, less productive land being cultivated.  Increased agricultural production entails more use of nitrogen and phosphorus based fertilizers.  These chemicals spill into the water supply causing algae blooms which deplete oxygen and weaken ecosystems lowering animal and plant populations.  Besides, ethanol is simply an expensive alternative to gasoline that cannot complete in markets without taxpayer subsidies.  Rather than pick a new power source, the government would be better advised to increase the tax on gasoline and see how the market responds, but if gasoline is taxed for the pollution it causes, so should ethanol.