Tag: risk management

The Cost of Government Guarantees

John Kay’s column in yesterday’s Financial Times criticizes government guarantees to banks because they involve hidden but large costs. According to Kay:

  • Such guarantees distort competition: sheltered banks outperform rivals not because of greater efficiency, but because capital becomes cheaper to obtain.
  • Sheltered banks gain too-big-to-fail status, which creates barriers to entry for smaller, more efficient banks.
  • Relief from business risk leads to more risk taking, AKA moral hazard.
  • Cheaper private risk management incentives are reduced within and outside the bank.

Other kinds of government guarantees, such as social insurance, also involve large hidden costs. Social Security and Medicare’s guarantee of a paid holiday with medical care for the rest of retirees’ lives generates the same types of costs:

  • Labor competition is reduced because the programs induce early worker retirements, which leads to higher wage costs, on average, and lower national output.
  • Workers who believe they will receive Social Security and Medicare will engage in lower personal saving, which means less capital formation and lower economic efficiency.
  • Retirement income guarantees induce riskier personal savings portfolios, AKA moral hazard.
  • Guaranteed retirement income means poorer financial knowledge and poorer risk management.

And now, retiree political power is too big to fail as well!

How come when Kay writes about market distortions from government guarantees for banks, he gets published; but when I do the same about government guarantees for people, I get the cold shoulder from editorial page editors?

The Search for Answers in Fort Hood

The country is unpacking the recent shooting at Fort Hood and analyzing the perpetrator intensely. Along with natural shock and curiosity, a principle reason for doing so is to discover what can prevent incidents like this in the future.

When faced with any risk, including rampaging gunmen, there are four options:

  • Prevention—the alteration of the target or its circumstances to diminish the risk of the bad thing happening.
  • Interdiction—any confrontation with, or influence exerted on, an attacker to eliminate or limit its movement toward causing harm.
  • Mitigation—preparation so that, in the event of the bad thing happening, its consequences are reduced.
  • Acceptance—a rational alternative often chosen when the threat has low probability, low consequence, or both.

(There is much more to risk management, of course. This handy simplification is taken from the DHS Privacy Committee’s “framework” document.)

Taking the facts as they appear now, what lessons can we take from Fort Hood that will help protect military forces and facilities, and the country in general? Let’s go through some of them option-by-option:

Prevention: What circumstances at Fort Hood and elsewhere could be altered to prevent this ever happening again? An obvious one is gun control—if there were no guns, there could be no shooting. But this prescription is complicated by the intrusions on individual rights required to implement it. Depriving citizens of arms directly violates the Second Amendment, and effectively enforcing a gun control regime would almost certainly violate the Fourth.

Removing guns from specific locations might be more palatable and achievable, but gun rampages do not restrict themselves to restricted areas, and widespread possession of guns by law-abiding citizens is an important form of interdiction. Indeed, appropriate gun violence was the interdiction that ultimately stopped further bloodshed.

Interdiction: What steps can be taken against attackers to limit their progress toward causing harm? This is a confounding option because learning what this attack looked like as an embryo won’t tell us what the next one will look like.

Thousands of people are like Nidal Hasan in one respect or another, but they will never commit any attack. There are thousands of people with turmoil or mental illness similar to his, for example. There are thousands of military servicemembers with doubts about U.S. policies. There are thousands of Muslims in the military (whose contributions are highly valuable). There are thousands of people who have investigated or sought contact with Al Qaeda.

If the conclusion from Fort Hood were that all people who share certain traits should be investigated/interdicted, this would violate fundamental rights and values while it wasted investigators’ time: Who is troubled enough in their minds, doubtful enough of U.S. foreign policy, etc. Whose contacts with Al Qaeda or jihadi Web sites indicate a desire to perpetrate bad acts and not curiosity or enmity?

Sending investigators into this quagmire would only work as a salve until some future rampage arose from another unique set of circumstances. We would be no safer for having investigated all who were “like” Nidal Hasan in the ways we decide are material.

Mitigation: I have seen no indication that the facilities and staff of Fort Hood were ill-equipped to deal with the results of this violence. There may be marginal ways they could improve—there always are—but medical services can’t be available everywhere always. There is little prescription for change here.

Acceptance: With the confounding difficulty of prevention and interdiction before us, this option rises a little bit in currency. Television news and commentary may make it feel differently to many people, but there is a very low probability of shootings like this happening. The costs of preventing and interdicting such violence is very high. This is a candidate for “acceptance.”

Acceptance is the least “acceptable” option, of course. Nobody thinks it is ‘ok’ for this kind of thing to happen. But like so many tragedies—indeed, part and parcel of tragedy—it is the loss of innocent life for no good reason.

Fort Hood presents the country with a choice: Invest extraordinary efforts in measures that cost a great deal, that invade prized rights, and that don’t work? Or show our sorrow to the families and community of Fort Hood and make peace with the grief and tragedy of this incident.