Speaking recently of the regulatory reaction to the Flash Crash I observed, “In the aftermath of a crisis or accident crowds have an unfortunate tendency to build momentum behind overwrought and foolish responses.”
The WSJ, in discussing regulatory reactions to the Gulf oil spill, notes that this problem has been generally referred to as the “precautionary principle.”
This principle holds that government should attempt to prevent any risk—regardless of the costs involved, however minor the benefits and even without understanding what those risks really are.
In practice such irrational “precautionary” behavior tends to accompany public panics, which themselves seem to be a product of the mass media’s success in fomenting mass hysteria. In any case, the WSJ cites Cass Sunstein as an expert on the problem:
Formerly of the University of Chicago and Harvard, and now the regulatory czar in the White House budget office, Mr. Sunstein calls the precautionary principle “incoherent” and “paralyzing,” as he put it in an essay in the journal Daedalus two years ago.
“Precautions cannot be taken against all risks,” Mr. Sunstein elaborated in his 2005 monograph Laws of Fear, “not for the important but less interesting reason that resources are limited, but simply because efforts to redress any set of risks might produce risks of their own.”
Mr. Sunstein’s insight is that there are risks on all sides of a question—doing nothing can be dangerous, but acting might be more dangerous—so the only rational way to judge regulation is to quantify the costs and benefits. If the Food and Drug Administration took a harder line in approving new medicines, it might protect the public from a future thalidomide disaster. But it could also deprive the public of cures for disease or expose it to serious peril, like having no recourse in a pandemic.