The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency (scientists estimate that we know only a very small fraction of what goes on at the oceans’ depths.) Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures.Well phrased, right? Rogoff then writes:
If ever there were a wake-up call for Western society to rethink its dependence on ever-accelerating technological innovation for ever-expanding fuel consumption, surely the BP oil spill should be it. Even China, with its “boom now, deal with the environment later” strategy should be taking a hard look at the Gulf of Mexico.I am not sure whether regulation will ever be able to get it right. It is simply the nature of the beast, so to say. But, here is the question: aren't the global economic crisis and the oil spill posters for it might be better to overshoot through regulation than to undershoot? After all, Rogoff himself notes:
Economics teaches us that when there is huge uncertainty about catastrophic risks, it is dangerous to rely too much on the price mechanism to get incentives right. Unfortunately, economists know much less about how to adapt regulation over time to complex systems with constantly evolving risks, much less how to design regulatory resilient institutions. Until these problems are better understood, we may be doomed to a world of regulation that perpetually overshoots or undershoots its goals.
t is extremely difficult to strike a balance between managing “tail risk” – a very small risk of a very large disaster – and supporting innovation.Overshooting means precluding that "tail risk" ... a tough call for society. The recent announcement from Craig Venter is yet another example of how things will only get even more complex ....