January 09, 2005
Response to Tsunami Comments--Posner
Let me respond briefly to a few comments that present interesting analytical issues.
One such issue is whether, given the large, perhaps infinite, number of low-probability disaster scanarios, it is possible to defend against all of them without bankrupting a nation, or the world. It is not possible to defend against all of them; indeed, it is not even possible to imagine all of them. Ideally, they should be ranked by expected cost (probability times loss), and the expected costs compared with the costs of prevention. A disaster-protection budget could then be determined and allocated across the different disasters in such a way as to minimize the total net expected costs. The approach will not work perfectly because of uncertainty about both probability and loss with respect to many of the possible disasters (and also means and costs of prevention, in many cases). But there appears to be no better approach.
My book Catastrophe: Risk and Response lists a number of disaster scenarios, with some effort at estimating probabilities, losses, and precaution costs. However, to create a comprehensive ranking along the lines suggested above would require consideration of a number of additional disaster scenarios--including tsunamis, which I mentioned only in passing in the book. Such a ranking would be a worthwhile research project.
A related point is that poor countries may not have the resources to create tsunami warning systems or take other precautionary measures that wealthy countries could afford to do. I would rephrase the point as follows: the budget for disaster prevention will depend on the competing claims on public and private funds. The more urgent those competing claims, the rationally smaller will be the budget devoted to disaster prevention. It is really the same point that I made in my original posting in noting that value of life estimates are positively correlated with per capita income. This is not because the lives of poor people are worth less in some ethical sense than those of the rich, or even that poor people consider that their life is worth less. One must understand that the value of life estimates, while useful in cost-benefit analysis, are really just arithmetic transformations of estimates of willingness to pay to avoid a risk of death. If a person will pay $70 to avoid a .00001 risk of death, we divide the first number by the second and call the resulting figure of $7 million the "value of life." The reason for the transformation is not to make an ethical point but to facilitate comparison between the costs and benefits of precautions.
Obviously a person who can avoid starvation only by taking a risky job will demand less to assume the risk than a rich person would. That is rational behavior and if we forbid him to take the risk and force him to starve we won't be doing him any favor.
But to keep matters in perspective, although per capita incomes in the nations affected by the recent Indian Ocean tsunami are roughly 10 times less than the per capita income of the United States, the four countries principally affected--Indonesia, Thailand, India, and Sri Lanka, have an aggregate GDP of hundreds of billions of dollars. A tsunami warning system might cost only a few million dollars a year.
Posted by posner at 05:43 PM | Comments (4) | TrackBack (0)
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"the four countries principally affected--Indonesia, Thailand, India, and Sri Lanka, have an aggregate GDP of hundreds of billions of dollars. A tsunami warning system might cost only a few million dollars a year."
So perhaps the US should have paid for it, since considering our probable eventual contribution to disaster relief, it might have been worthwhile from the American viewpoint alone.
But if we did THAT we get moral hazard issues galore in addition to encouraging even more free-rider behavior.
Posted by John Hall at January 9, 2005 06:40 PM | direct link
"Obviously a person who can avoid starvation only by taking a risky job will demand less to assume the risk than a rich person would. That is rational behavior and if we forbid him to take the risk and force him to starve we won't be doing him any favor."
Do you do me a favor by compelling me to manage the risk of another?
http://www.no-treason.com/archives/2005/01/08/good-investment-for-whom/
Posted by John T. Kennedy at January 9, 2005 07:08 PM | direct link
"Obviously a person who can avoid starvation only by taking a risky job will demand less to assume the risk than a rich person would. That is rational behavior and if we forbid him to take the risk and force him to starve we won't be doing him any favor."
Wow, so I guess the reason we have hungry kids in America is because we were so shortsighted as to ban child labor!
Are there no workhouses? Are there no mines?
So I suppose you have no problem with the fact that our armed forces are almost entirely made up of poor young people and they are exclusively sent to die by rich folk who dodged the draft?
I guess next time a soldier dies you can tell her distraught mother that, "Well, if we hadn't sent her to Iraq, she would have had to work for $5.15 an hour at WalMart. Here is her last paycheck, don't spend it on beer."
The choice is not between letting the poor take risks or letting them starve. Desperation is NOT the only marketable quality a starving person has, and if it is, then we should all chip in to teach him/her some skills. Then if they still want to be a firefighter for the glory, everyone can sleep at night, not just economists.
Posted by Corey at January 9, 2005 10:27 PM | direct link
I'm surprised that neither blogger highlights the crucial
difference between home mortgages and student loans: student loans are profitable for the borrower, but home mortgages are not. (Home mortgages are technically a form of investment, but only be prepaying future consumption.)
This strengthens Becker's point that people would be willing to take out large
student loans since they are willing to take out even larger mortgages. The
student loans, unlike the mortgages, actually increase the borrower's ability to
repay, by increasing his future income.
This weakens Posner's point that if lack of bankruptcy protection is
appropriate for student loans, it ought to be appropriate for mortgages too. One
reason it makes a difference is that we might think that because of consumer
ignorance or transaction costs the default rule should be bankruptcy protection
for consumption loans but no bankruptcy for investment loans. Why, then, would
education investment be different from, say, investment in apartment houses? --
Because the purchased capital can be used as security if it is an apartment
building instead of an improved brain.
Of course, not all student loans are for investment. Some do *not* increase
earning ability-- maybe. Loans to people getting B.A.'s in English come to
mind.
But, first, I'm not sure such a degree doesn't have a high material
return. If you looked at English majors 20 years down the line, I would not be
surprised if you found they had, on average higher incomes than business majors.
The reason is not necessarily that English is so useful in making money, but
that it may be that the kind of people who major in English are those with the
intellect and family background to be successful in business.
Second, I think it would be appropriate to deal separately with education that
does not have the high material return that most education does. The easy
justification for most government-aided student loans is that they are loans
that have positive return to the borrower, and are merely filling in for market
failure arising from bankruptcy. This is Becker's main point-- that this is
legitimate, but it doesn't need any government subsidy on top of special
repayment rules. The more difficult justification is that even non-income-
generating education has positive externalities. That may be true, but it surely
depends on the type of education. If so, we should target the subsidy to the
externality-generation kind of education. Training to become a research
scientist has positive externalities; training to become a diesel mechanic
probably doesn't.
Posted by Eric Rasmusen at January 10, 2005 10:28 PM | direct link
