What is risk worth: does assuming greater risk equal greater productivity?

This blog suggests that establishing transparency about who bears what risk must be an integral, non-financial part of evaluating and making policy, as exhausting and inconvenient as that may be!

Advertisements

Well, that was exhausting! Applying for Seniors thingies and squaring away MyGov and the ATO involved phone calls, secret questions, password and mobile number resets, multiple emails, text message codes … but all in a good cause, protecting the security of my information, managing the risk of hacking and data breaches.  What’s not to like, especially as we witness major cyber-attacks such as the WannaCry ransomware exploit and the more recent Petya attack?

Most people find the subject of risk management rather dry and boring (not to mention exhausting), but as my example shows, managing risk is something close to home, and we usually feel good if we are in control.

However, as my example also shows, this comes at a cost, in this case time and effort, and sometimes in money, like buying insurance.  One way of reducing those costs is to wear the risk: to assume a higher risk profile.

The point I have been pondering is whether this is a genuine productivity gain i.e. efficiency that gets more for less, or is it a re-arrangement of the deckchairs which loads the costs forward into the impact if the risk event occurs?  I also wonder about the translation of this question into public policy where governments essentially assume risk on behalf of citizens.

To unpack that thinking a little.

The thread I am pulling has a slightly obscure origin – it is called Baumol’s cost disease (or the Baumol effect), described by economists Williams Baumol and Bowen in the 1960s.  William Baumol died very recently aged 95 and still working …

The basic idea is that services like health care, education and government public administration activities are heavily labor-intensive where there is little growth in productivity over time because productivity gains come essentially from a better capital technology.

To quote Wikipedia, “… the same number of musicians is needed to play a Beethoven string quartet today as was needed in the 19th century; the productivity of classical music performance has not increased. On the other hand, the real wages of musicians (like in all other professions) have increased greatly since the 19th century.”

The bottom line is you either get less symphony, or much more expensive symphony. This seems to be holding true even as computers and information technology have marched in to these sectors.  A current conceit is that digital transformation and even artificial intelligence (AI) will deliver the longed-for productivity increase. I think the jury is probably still out on that one.

But to come back on point, notwithstanding the obscure observations of Messrs Baumol & Bowen, governments have diligently assumed a productivity dividend in their public services, either implicitly or explicitly and demanding that agencies deliver the same (or more service) with less resources.

From a taxpayer perspective what’s not to like: less wasteful public servants, lower taxes even perhaps? However, I suspect what we frequently get is actually less public service rather than more efficient public service.  Sometimes that is OK, particularly depending on how much government you are inclined to think is a good thing.  Deregulation can be a beautiful thing.

But what if some of that enthusiastic deregulation is not so much about reducing costs or producing efficiency and productivity, but rather about assuming a higher risk profile: shifting the deckchairs, crossing your fingers and praying there is no ice-berg ahead?

This was the stuff of the GFC back in 2008 – punters were assured the financial engineering had made dubious investment products safer. But instead the ‘reforms’ had stored risk in all sorts of imaginative places, from whence it emerged with a vengeance.  In another poignant example, while it is still relatively early days in the aftermath, it seems likely that with the London tower fire there is a regulatory, compliance or enforcement failure somewhere in there.  The ongoing program of tower inspections seems to indicate this is a systemic issue. Costs were saved, but these ‘benefits’ were generated not by efficiencies but rather by the imposition of now obviously unacceptable risks on people who were not only not able to control them, but who were simply unaware of them.

One of the great things about money (apart from the fact that it is very handy to let you get the stuff you want) is that it allows you to compare things that are otherwise incomparable – apples with pears, airports with motorways, pensions with superannuation.  Hence the term ‘bottom line’ – money lets you sum it all up and make a call – a blessing for policy decision-makers. But I suggest that risk is another common denominator which can and must be used to inform decisions, and critically, it cannot itself be reduced to money.  Indeed as the GFC demonstrated, there can be risks to money itself. Figuring out how to compare risk profiles and establishing transparency about who bears what risk must be an integral, non-financial part of evaluating and making policy, as exhausting and inconvenient as that may be!

A note on the featured image:

After arriving in Sydney I lived in a bed-sit in Surrey Hills, then a far socio-economic cry from the current hipster paradise. One day on a walk in the rain a poster caught my attention, torn in half by the partial collapsed of the wall on which it had been pasted.  The rain had saturated the paper and the diffuse light lent the scene a soft intensity, amounting to a compelling and slightly disturbing image.  Hot-footing it back to the bed-sit I  grabbed the Polaroid camera I was experimenting with at the time and persuaded a neighbor to come along and hold an umbrella over me while I captured the shots.  Many years later I painted the image as shown as an element in a larger multi-media piece.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s