The political and regulatory incentives are either to downplay risks or exaggerate them – or to do each at different times.
Do you remember swine flu? Or the millennium bug? The dangers of salmonella in eggs or of cheese made from unpasteurised milk? These scare stories played for a time and were then forgotten: but cost large amounts of money and caused anxiety and loss to many individuals.
Some scares catch on: others do not. It is nonsense to claim that the dangers of the credit expansion of 2003-07 could not have been foreseen; those who did foresee problems could not attract public attention or political support for their views. Those warning of the danger of easy availability of nuclear technology and of poor control of the former Soviet Union’s nuclear weapons have experienced something similar.
Successful promotion of a scare requires that some interest group benefits. Sometimes this is the scare-promoters themselves. Scientists have learnt that exaggerated claims are a route to a media profile and research funding. There is little downside in predicting disaster: if it does not materialise they can claim to have been instrumental in staving it off. Scares that thrive, such as the millennium bug and swine flu, have commercial interests that benefit from their propagation. Naysayers in the credit boom, by contrast, were trampled in the rush to share the riches available to those who denied or disregarded the dangers.
The regulator, or politician, confronted with warnings of danger faces twin pressures of commercial interest and public opinion. Industries are a permanent lobbying presence. Public concern, by contrast, is fickle: it may be strong when aroused, but unless supplied with a string of newsworthy events – dead bodies, corporate collapses, scandalous exposures – it soon fades.
When public and commercial interests operate in the same direction, the outcome is clear, but not when they conflict. That is why swine flu produced an exaggerated response but no action was taken to restrain the credit boom (the creation of a new collateralised debt obligation was never newsworthy).
The tension between commercial and public interest can lead to tipping points. The problem of bovine spongiform encephalopathy – mad cow disease – was at first unjustifiably minimised; but then greatly exaggerated. In the early phase, the issue was managed by the Ministry of Agriculture, Fisheries and Food, which represented the farming industry; later, the Department of Health, whose concerns were for patient and medical interests, took over.
Public anger at bankers is now so great that it threatens to overwhelm even their legendary lobbying capabilities. When Gordon Brown, the UK prime minister, last weekend accused Goldman Sachs of moral bankruptcy, it was not because the US bank’s behaviour had changed.
The most dramatic tipping point was September 11: a period, before the attacks, in which those who pointed to the threat from al-Qaeda had been marginalised was followed by one in which the threat was used as a rationale for repressive actions including invading foreign countries.
The politician or regulator has the impossible job of steering a way through these conflicting pressures. “The safety of the public must always come first” is a compelling mantra – but only if the public really believe their safety is in jeopardy. “No one could possibly have anticipated this disaster” is another common line of defence.
We want our experts to talk certainties, not assess probabilities. The explanation “we thought an event might occur but underestimated its likelihood or severity” is never acceptable: but that outcome does, and should, happen often to people who make nuanced decisions in complex environments. The political and regulatory incentives are either to downplay risks or exaggerate them – or to do each at different times.
So if, like me, you find yourself stranded by the grounding of Europe’s aircraft, pity the poor regulators. Would you rather appear on television to explain why you had disrupted the holiday and business plans of an entire continent, or to tell viewers why you had failed to respond to a well-publicised danger?