The Economist has a nice survey on risk. Here’s one chart on the cost per life saved of various regulations. Bottom line: the cost per life saved of many regulations is absurdly high and we are often required to buy more safety than we want. John Morrall, whose study the Economist bases its figures on finds that almost half of the regulations that he studied do not pass a cost-benefit test.

Thanks to Zev Safran for the pointer.

Like John Maynard Keynes and Milton Friedman before him, Robert Shiller is that rare economist who uses economic theory to design new and better ways of doing things. I highly recommend his book, The New Financial Order. (Indeed, I hope that Shiller will one day receive a Nobel prize for his work in economic design.) For some time, I’ve also been wanting to recommend The Atlantic magazine. This month’s issue is superb and includes the best piece on the state of the American economy that I have read (the link will take you to the online version but the magazine itself contains a number of useful charts and much else – buy it!). From that piece comes this quote on Shiller’s work:

A more radical variation on this concept comes from Robert Shiller, an economist at Yale, who believes that continuing financial-market innovations may soon enable private insurers to offer “livelihood insurance” that could protect workers from potential declines in their occupations (though not against an individual worker’s underperformance within a flourishing field). Similar products might insure against the eventual devaluation of specific academic degrees in the United States (such as those in software engineering or Russian language), or even against declines in the performance of the U.S. economy as a whole, relative to the rest of the world. (As Shiller notes, the fact that the past century was a good one for America does not necessarily mean that the next one will be.) Collectively, these products might lessen the large and arguably increasing risks inherent in the U.S. capitalist system.

These are bold ideas; it may be hard at first to wrap one’s mind around them. And it is perhaps ironic that financial markets–which are regarded by many people as amoral if not immoral–might ultimately solve some of the problems that socialist and utopian thinkers have been trying for centuries to address. But as improbable as livelihood insurance may sound, advances in data collection, data analysis, and financial-risk theory are lowering the technical barriers to such a system. Government action could help the creation of livelihood insurance on a large scale. Part of the government’s role would be technical–for instance setting the standards for the collection and sharing of personal income data that are necessary if livelihood insurance is to work. But two equally important tasks would be the articulation of a new vision of society–one where people are protected against the unexpected shocks that accompany rapid economic change–and the promotion of financial-services products that can sustain that vision. Without large markets covering a wide range of occupations, carriers offering livelihood insurance might have difficulty hedging their risk sufficiently.

Addendum: Robert Shiller’s homepage has lots of useful information.

At first, the U.S. POW camps for captured Germans were dominated by Nazi’s who threatened and even killed anti-Nazi “traitors.” But as American thoughts turned to the post World-War II era the camps were cleaned up and a reeducation plan was begun. In other countries, this might have been a euphemism for torture and forced labor but in the U.S. camps it meant libraries filled with books that the Nazi’s had banned and open discussion sessions led by professors from Harvard, Brown, Cornell and elsewhere. The story is told in The Washington Post Magazine article, Learning Freedom in Captivity.

Here is one interesting quote:

By mid-1944, new leadership had been installed at Concordia and many of the worst Nazis had been removed. Concordia’s canteens and library were filled with books that had been banned by the Nazis. Treichl read and reread the American bestseller The Road to Serfdom by Friedrich Hayek, which detailed the flaws in socialism and contrasted it with democracy.

Treichl went on to become head of Austria’s largest bank and honorary president of the Austrian Red Cross. To this day he has kept his beloved copy of The Road To Serfdom.

I find this story heart-warming and a fascinating tidbit of history but it also troubles me. What are we to make of a reeducation camp with The Road to Serfdom as text? Clearly, we cannot dismiss such a thing as a contradiction in terms because apparently it did some good. More broadly, Hayek warns against the hubris of social engineering – yet what was the post WWII reconstruction of Germany and Japan but social engineering on a grand scale? How do these lessons apply to Iraq? Could we fail in Iraq precisely because we do not have the power to reeducate?

In a hard-hitting NYTimes op-ed, Nicholas Kristoff writes:

I’d like to invite Richard Gephardt and the other Democratic candidates to come here to Cambodia and discuss trade policy with scavengers like Nhep Chanda, who spends her days rooting through filth in the city dump….Here in Cambodia factory jobs are in such demand that workers usually have to bribe a factory insider with a month’s salary just to get hired.

Along the Bassac River, construction workers told me they wanted factory jobs because the work would be so much safer than clambering up scaffolding without safety harnesses. Some also said sweatshop jobs would be preferable because they would mean a lot less sweat. (Westerners call them “sweatshops,” but they offer one of the few third world jobs that doesn’t involve constant sweat.)…

The Democratic Party has been pro-trade since Franklin Roosevelt, and President Bill Clinton in particular tugged the party to embrace the realities of trade. Now the party may be retreating toward protectionism under the guise of labor standards.

That would hurt American consumers. But it would be particularly devastating for laborers in the poorest parts of the world. For the fundamental problem in the poor countries of Africa and Asia is not that sweatshops exploit too many workers; it’s that they don’t exploit enough.

Be sure and look at Kristoff’s heartbreaking audio-slide show, the Realities of Labor available at the above link, halfway down the right hand side. Hat tip to Life, Liberty, and Property.

Brad DeLong laments that international capital in the late twentieth century did not flow to poorer countries the way it did in the late 19th century. Tyler comments here.

The key point that I think Brad and Tyler both miss is that in the late 19th century a lot of the capital was flowing within the structure of the British Empire. Whatever its faults (and there were many), the Empire did provide investors with the rational expectation that their property would not be expropriated. More broadly, the capital flows of the 19th century were accompanied by flows of intellectual capital – in the form of the rule of law and similar institutions. Japan and the East Asian tigers show that it is possible for a country to adopt these institutions without the imposition of Empire but it is not easy.