Red tape isn’t working – so let the private sector cope with risk

04 Sep 2003

A version of this article by Tom Miers appeared in The Scotsman on 4th September ‘03.

What do you fear most? Hot weather or a terrorist bomb?

Two recent bombs, in India and Iraq, have killed dozens. A UN summit has been called to discuss a change of policy towards Iraq. Meanwhile, less prominent in the press, the recent heatwave in France has killed up to 15,000 people.

What does this tell us about human nature and risk? Clearly, heatwaves are much more dangerous than terrorists. Even the attack on the twin towers in New York was dwarfed by this summer’s catastrophe in France. But humans are notoriously bad at assessing risk. Intuitively, we ignore the odds. Our fear of terrorism is, absurdly, much greater than that of heatwaves. Our politicians move mountains to combat the terrorists (which just encourages them) while dithering in the face of more serious dangers.

Fortunately, men of commerce have understood how to cope with risk for centuries. They have devised mathematical tools, such as insurance or modern derivatives, to minimise it.

All too often, however, our politicians ignore these useful devices. Instead they burden our lives with rules, regulations, and red tape. These usually cost more to implement than the risks they are designed to deal with.

Here are two examples. Last week it was claimed that new maritime regulations designed to combat terrorism might force smaller Scottish ports to close. Greater security throughout the transport industries and elsewhere is imposing huge costs on the economy, despite the small risk from damage caused by terrorists.

Meanwhile, in Edinburgh, new fire safety rules are affecting the housing market. Landlords complain about a long list of improvements they must make to their properties. These include ripping out existing doors and installing fire doors. Aside from the wanton damage to Georgian and Victorian interiors, this is a serious disincentive to renting. The likely effect is higher rents for young, low income people who like to share.

The problem is that politicians rarely calculate the cost of the regulations they impose. And even if they do, they have no way of telling if that cost is justified by the risk. Further, regulations are hard to change – so there is little incentive to find better and cheaper ways of coping with risk.

Instead, risk should be left as much as possible to the private sector. Only the market can use experience and the profit motive to price risk accurately and find the right balance of safety measures. Competition ensures that premiums are kept to a minimum. Both insurers and their customers have an incentive to develop new and cheaper ways for dealing with risk.

Take the case of fire hazard. Insurance companies have to pay out for fire damage, so they calculate their premium to reflect the actual risk of fire. If that risk is greater with several tenants sharing a flat, premiums rise. Both tenants and insurers look around for new ways of reducing the risk, and therefore the premium. This stimulates new fire safety technology in the way that an inflexible government rule would not. The end product is lower costs and greater safety.

So here is a proposal for the Scottish Executive. Much red tape is, of course, imposed at the EU or UK level. As a rough guide, in 2003 Westminster has passed 2,000 statutory instruments to the Scottish Parliament’s 400. But for that which is home grown we need a systematic approach to reducing the burden on industry and individuals. This might be a useful task for Scottish Enterprise. They should examine each regulation generated by the Executive or local councils against a set of questions: Is there a viable private sector alternative to the new rule? What is the cost of implementing it compared to its benefits? Might new technology render the regulation obsolete in the future? If so, when should it be reviewed? If the answers to any of these are ‘yes’, ‘greater than’, ‘yes’ and ‘soon’, then it should be referred to Parliament for full debate with recommendations for alternatives, amendments or ditching altogether.

Such an approach would stem the tide of red tape which is so damaging to our economy. We could then hold the system up as a model to Whitehall and Brussels. Applying the same analysis to EU and UK regulations might be an effective way of lobbying for change.

Tom Miers is Executive Director of the Policy Institute, and Edinburgh based think tank. His e-mail address is tmiers@policyinstitute.info