Suddenly, ‘drill-baby-drill’ enthusiasts are as rare as isolationists the day after the Japanese attack on Pearl Harbor or a quasi-amateur day trader after the high-tech stock bubble of the 1990s burst. Proponents of drilling now are as lonely as a nuclear power supporter right after the 1979 Three Mile Island or 1986 Chernobyl nuclear reactor accidents.
Yet, what has changed? We all knew oil spills can happen in offshore drilling and that accidents can happen in the nuclear power industry. Isn’t this sudden desertion of an opinion apparently widely held during the 2008 election campaign a little irrational?
It is irrational, and that has broad implications for economic theorizing and economic policymaking in general. And of course, it bears on the specific policies of increased offshore drilling and increasing use of nuclear power long advocated by many Republicans and recently embraced by the Obama administration.
In the minds of free-market fanatics, humans are rational, calculating machines, taking into account all information and then weighing costs and benefits. Specific individuals may make mistakes in such calculations, but the aggregated views and decisions of all people in society are deemed the most accurate estimate possible of what is happening and will happen, given the information then available.
In this view, the recent oil spill in the gulf is new information, and that is why opinions suddenly shifted.
Yet in retrospect, none of the opinion-changing events listed above was a bolt out of the blue. The specific time and location of the Japanese attack was a surprise, but military and civilian officials at all levels of government knew war with Japan was approaching, as did knowledgeable people in the media, business and academia.
There were nuclear accidents before Three Mile Island, notably the fire in the British Windscale reactor in 1957 and other smaller incidents.
The last headline-grabbing spill from a rig in U.S. coastal waters, as opposed to a tanker spill like the Exxon Valdez, was in the Santa Barbara Channel off California in 1968.
But there had been major spills from drilling rigs elsewhere, notably the 1979 Ixtoc spill in the Gulf of Mexico that spewed oil for 10 months before being capped.
And for that matter, there was ample evidence that both the high-tech stock boom of the 1990s and the housing boom since 2010 were classic, unsustainable bubbles. Yet, aggregate public sentiment was wide of the mark.
The problem is that humans don’t process information about the likelihood of infrequent events rationally. We don’t carefully weigh statistical data or listen to dispassionate analysis by all technical experts.
Instead, we give heavy weight to the most recent history and highly discount events that are fading into the past.
If the most recent notable development in some specific area was bad, aggregate views become unduly pessimistic.
And if nothing bad has happened for a long time, we can become wildly more optimistic than would result from the rational weighing of all available information.
This causes problems when “black swan” events, as described by the author, scholar and former financial trader Nassim Nicolas Taleb, have serious effects on our nation. These are events that occur from time to time throughout history, but at such infrequent intervals that people come to believe they won’t occur at all.
If such an event is the failure of a few hundred savings-and-loans or the grounding of a tanker in some valuable ecosystem, the damage may be severe, but life goes on uninterrupted for most people, however regrettable the incident.
Even Chernobyl, which killed or sickened thousands and contaminated a large swath of rural Ukraine, is fading into distant memory just as the 2004 Asian tsunami is for nearly everyone outside the affected region.
Only history buffs remember the disastrous 1927 floods in the Mississippi Valley or the global influenza epidemic that killed my grandmother 92 years ago.
This means society suffers greater losses when such events occur than it would if people really were as rational as some economists fantasize. But there are no easy solutions.
If governments were more careful about weighing objective probabilities of adverse effects, we could do more to prepare.
But if city officials in Memphis spent more money preparing for the earthquake that will take place when the New Madrid fault gives again, citizens would be outraged by “frivolous” government spending.
This is an area where popular historians and journalists may be able to play a more constructive role than any academics or elected officials.
News stories, documentaries and books about past events can raise public awareness, at least marginally.
But human nature is such that we probably will continue to re-surprise ourselves with the inevitable throughout the rest of human existence.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.