5 ms·

> The regulator can still set legal penalties high enough to stop any innovation, if they want to. A liability model has a couple of advantages despite this:

> The regulator can still set legal penalties high enough to stop any innovation, if they want to. A liability model has a couple of advantages despite this: 1. The regulator has some slack to not set penalties insanely high. As long as they're seen enforcing those penalties against someone periodically, and as long as the penalties sound like a big number to the general public, they can look like Stern Serious Regulators who are doing their jobs properly. The difference between a $5M fine and a $10M fine can have huge financial implications, but to the political circus those numbers are both roughly the same size, i.e. big. This allows the regulators to be more reasonable if they want to be. 2. Using liability rather than specific procedural rules lets the people closer to the ground decide how to most efficiently mitigate risk. Suppose that you run a factory, and sometimes people get injured by careless operation of a rotary saw. A naive regulatory approach might be to require that an additional person be watching whenever the rotary saw is in use. And that would probably help with safety somewhat, though at great cost. But if the regulator instead just requires workman's compensation payments to be made when someone gets hurt, then you can try to figure out a better way using your own knowledge of how your factory operates. (Historically, the adoption of workman's comp laws led to factories hiring engineers to make the equipment harder to accidentally misuse. That rotary saw, for example, would have had a cheap guard retrofitted -- and that would improve safety much more, for a much lower cost, than the "have an observer at all times" rule.)

js8 3y ago
The liability model has a big downside, though. Because sometimes people in charge are idiots, they ignore common sense and make risks. So they possibly get burned only when accident happens, which costs human health and lives. Regulation is intended to prevent human harm by setting and enforcing a safety standard.
- pjscott 3y ago
  The usual hack for dealing with this is to require liability insurance. The insurer has incentives to set premiums at a level that reflect risk, along with reasonable contract conditions -- e.g. "Put guards on all your rotary saws, and yes we will be sending inspectors in to make sure they're being used properly." (How is this different from an ordinary procedural regulator? Because the insurance market has competition, which means that the insurance companies aren't only trying to optimize for reducing risk -- they're trying to reduce risk efficiently. And if they're not very good at it, they can be outcompeted by someone who is.)
  - gusgus01 3y ago
    Why would they check that the guards are in place when they can reject the claim after an accident happens because the guard wasn't in place? Who regulates the insurers?
- AnthonyMouse 3y ago
  That only applies to large rare risks. If a risk is common, anyone who ignores it quickly goes out of business from the liability, so anyone still in business is taking effective measures. If a risk is rare and has a low impact, ignoring it frequently is the right thing to do. You're left with things like plane crashes, which have to be minimized even if they're already rare. But that kind of regulation is extraordinarily expensive, and then the same regulatory model gets applied where it isn't needed.
  - roenxi 3y ago
    > You're left with things like plane crashes, which have to be minimized even if they're already rare. I know we're all trying to be moderate here, but I'm not very good at that: 1) It is irrational. The cost-benefits of aircraft safety make no sense. Planes are held to a standard that we don't hold buses and trains to. We should strive to make rational decisions as a matter of policy. 2) There is no reason to think the US regulators are any good at what they are doing. As the thread root comment points out, the incentives are terrible. US industrial policy over my life time has consistently led to Asian growth and US stagnation in ways that were predictable. The US has banned most of the avenues that it could grow by, and coincidentally growth has largely stopped. Very similar story in Europe too, big focus on banning stuff (plus a bit of redistribution) and small focus on how to achieve more prosperity. The US is dedicating the lives of countless smart people to taking a thing that was going to fly through the air like a bird and ... not changing the outcome much. They could have been doing something else that was more useful, like competing with China for telecoms leadership. I don't think the evidence is there for this "having" to be minimised. The big picture looks a lot like people are behaving emotionally, that is sometimes leading to irrational decisions and those irrational decisions have added up to cause real harm. People should be more accepting of other people taking reasonable risk.
    - actionablefiber 3y ago
      > Planes are held to a standard that we don't hold buses and trains to. Or highway/pedestrian/cyclist safety, for that matter?
    - 3y ago
- BurningFrog 3y ago
  Aren't all models vulnerable to "sometimes people in charge are idiots"?
- konschubert 3y ago
  That is where mandatory liability insurance comes into play. Because the insurer will check... and if the people in charge are idiots, the insurance will charge them high premiums. I am not sure how well this works in practice - but I think the idea has real merit.
  - aero142 3y ago
    There is an issue with correlated vs uncorrelated risks. This is the reason that only the federal government can offer FDIC insurance for banks and disaster insurance in Florida. When banks fail, they tend to all fail at the same time and there is no insurer that could hold enough reserves to actually pay out if they all fail together. Private insurance can cover fire insurance for homes, but is unlikely to have enough in reserves to pay if a category 5 hurricane floods half the homes in Florida.
    - harimau777 3y ago
      To make sure that I'm following, is what you are saying that the risk is that there's a big enough disaster that the insurance company(s) can't pay everything that's owed to those who have been harmed?
      - aero142 3y ago
        Correct. I'm saying that private insurance is good at insuring uncorrelated risks, like car wrecks, but usually, only the federal government can enable insuring correlated risks. Suggesting that mandatory liability insurance can a good policy alternative to regulation is correct, but if you are regulating something large enough with correlated risks, only the federal government can every really provide insurance. Banks pay FDIC insurance, and bank failures are usually covered by this, but it's pretty clear that the pool of money to save banks is backstopped by the federal government in case of a cascading failure. Even for uncorrelated risk, if the payout event is bad enough, it can't be insured. For example, insurance on a nuclear plant is backstopped by the federal government, because no private insurer could ever really insure the worst case scenario.
  - deleted 3y ago
- robertlagrant 3y ago
  > Because sometimes people in charge are idiots, they ignore common sense This ignores that regulators are also people, with the same traits, but with no vested interest in making anything work.
mcguire 3y ago
1. If the penalties are not insanely high, it just becomes another cost of doing business issue. 2. If you look at IRBs, how much do you think Scott Alexander is going to be able to pay for liability insurance? The review model does have some advantages.
- pjscott 3y ago
  Making it part of the cost of doing business is precisely the point -- you allow business to go on when it passes a cost/benefit test, and the business tries to minimize that cost by taking safety measures. There's a middle ground between "basically nonexistent" and "insanely high".
harimau777 3y ago
Isn't #1 a downside? Regulators can impose penalties that sound like a big number but which corps just treat as a cost of doing business.

js8 3y ago

The liability model has a big downside, though. Because sometimes people in charge are idiots, they ignore common sense and make risks. So they possibly get burned only when accident happens, which costs human health and lives. Regulation is intended to prevent human harm by setting and enforcing a safety standard.

pjscott 3y ago
The usual hack for dealing with this is to require liability insurance. The insurer has incentives to set premiums at a level that reflect risk, along with reasonable contract conditions -- e.g. "Put guards on all your rotary saws, and yes we will be sending inspectors in to make sure they're being used properly." (How is this different from an ordinary procedural regulator? Because the insurance market has competition, which means that the insurance companies aren't only trying to optimize for reducing risk -- they're trying to reduce risk efficiently. And if they're not very good at it, they can be outcompeted by someone who is.)
- gusgus01 3y ago
  Why would they check that the guards are in place when they can reject the claim after an accident happens because the guard wasn't in place? Who regulates the insurers?
AnthonyMouse 3y ago
That only applies to large rare risks. If a risk is common, anyone who ignores it quickly goes out of business from the liability, so anyone still in business is taking effective measures. If a risk is rare and has a low impact, ignoring it frequently is the right thing to do. You're left with things like plane crashes, which have to be minimized even if they're already rare. But that kind of regulation is extraordinarily expensive, and then the same regulatory model gets applied where it isn't needed.
- roenxi 3y ago
  > You're left with things like plane crashes, which have to be minimized even if they're already rare. I know we're all trying to be moderate here, but I'm not very good at that: 1) It is irrational. The cost-benefits of aircraft safety make no sense. Planes are held to a standard that we don't hold buses and trains to. We should strive to make rational decisions as a matter of policy. 2) There is no reason to think the US regulators are any good at what they are doing. As the thread root comment points out, the incentives are terrible. US industrial policy over my life time has consistently led to Asian growth and US stagnation in ways that were predictable. The US has banned most of the avenues that it could grow by, and coincidentally growth has largely stopped. Very similar story in Europe too, big focus on banning stuff (plus a bit of redistribution) and small focus on how to achieve more prosperity. The US is dedicating the lives of countless smart people to taking a thing that was going to fly through the air like a bird and ... not changing the outcome much. They could have been doing something else that was more useful, like competing with China for telecoms leadership. I don't think the evidence is there for this "having" to be minimised. The big picture looks a lot like people are behaving emotionally, that is sometimes leading to irrational decisions and those irrational decisions have added up to cause real harm. People should be more accepting of other people taking reasonable risk.
  - actionablefiber 3y ago
    > Planes are held to a standard that we don't hold buses and trains to. Or highway/pedestrian/cyclist safety, for that matter?
  - 3y ago
BurningFrog 3y ago
Aren't all models vulnerable to "sometimes people in charge are idiots"?
konschubert 3y ago
That is where mandatory liability insurance comes into play. Because the insurer will check... and if the people in charge are idiots, the insurance will charge them high premiums. I am not sure how well this works in practice - but I think the idea has real merit.
- aero142 3y ago
  There is an issue with correlated vs uncorrelated risks. This is the reason that only the federal government can offer FDIC insurance for banks and disaster insurance in Florida. When banks fail, they tend to all fail at the same time and there is no insurer that could hold enough reserves to actually pay out if they all fail together. Private insurance can cover fire insurance for homes, but is unlikely to have enough in reserves to pay if a category 5 hurricane floods half the homes in Florida.
  - harimau777 3y ago
    To make sure that I'm following, is what you are saying that the risk is that there's a big enough disaster that the insurance company(s) can't pay everything that's owed to those who have been harmed?
    - aero142 3y ago
      Correct. I'm saying that private insurance is good at insuring uncorrelated risks, like car wrecks, but usually, only the federal government can enable insuring correlated risks. Suggesting that mandatory liability insurance can a good policy alternative to regulation is correct, but if you are regulating something large enough with correlated risks, only the federal government can every really provide insurance. Banks pay FDIC insurance, and bank failures are usually covered by this, but it's pretty clear that the pool of money to save banks is backstopped by the federal government in case of a cascading failure. Even for uncorrelated risk, if the payout event is bad enough, it can't be insured. For example, insurance on a nuclear plant is backstopped by the federal government, because no private insurer could ever really insure the worst case scenario.
- deleted 3y ago
robertlagrant 3y ago
> Because sometimes people in charge are idiots, they ignore common sense This ignores that regulators are also people, with the same traits, but with no vested interest in making anything work.

mcguire 3y ago

1. If the penalties are not insanely high, it just becomes another cost of doing business issue. 2. If you look at IRBs, how much do you think Scott Alexander is going to be able to pay for liability insurance? The review model does have some advantages.

pjscott 3y ago
Making it part of the cost of doing business is precisely the point -- you allow business to go on when it passes a cost/benefit test, and the business tries to minimize that cost by taking safety measures. There's a middle ground between "basically nonexistent" and "insanely high".

harimau777 3y ago

Isn't #1 a downside? Regulators can impose penalties that sound like a big number but which corps just treat as a cost of doing business.