Daniel Sutter: The complicated case of ignition switches

Does government make better decisions than business? A first trial from the General Motors ignition switch recall begins this week in New York, and the evidence suggests that G.M. never systematically analyzed the ignition defect. This uninformed decision is an unintended consequence of a complicated interaction between Americans’ attitudes toward risk and our legal system.

First some background. In February 2014, G.M. began recalling 2.6 million vehicles for a faulty ignition switch. The switch sometimes slipped while cars were in motion, causing stalling, and preventing air bag deployment. Weighted items on a key chain may have contributed to slippage.

Economists calculate a cost per life saved to facilitate comparison of different risk reducing actions. We can do so here for ignition switches. G.M. estimated a $100 million cost to fix the defect, and I have seen a published estimate of 124 resulting deaths. Dividing yields a cost per life saved for repairing the defect of $800,000.

Does this figure show that G.M. should have fixed the defect? People make many trade-offs involving money and very small risks of death, like choosing to purchase bicycle helmets, smoke detectors, and tornado shelters. Suppose that a bike helmet which cost $50 has a cost per life saved of $5 million. A person who pays $50 for the helmet implicitly values saving a life here at least $5 million, while not purchasing implies a value of less than $5 million. Peoples’ decisions reveal values of saving lives.

Numerous studies have found that Americans frequently value life in risky choices at between $5 million to $10 million. The consistency is amazing since I doubt that most people every explicitly make the implied calculations. Consequently many economists consider a value in this range appropriate for cost-benefit analysis of risk measures. The EPA and the Department of Transportation agree, and currently use values of around $9 million.

Because the $800,000 cost per life saved is less than $5 million, many Americans would have chosen to pay for an ignition switch repair. Yet G.M. does not do risk analysis as a matter of policy. Thus the Federal government then uses a better decision making process for risk than business.

Automakers used to perform risk analysis. In the 1970s, Ford made the Pinto, a compact car that was vulnerable to fires in rear-end collisions due to the location of its gas tank. Ford compared the cost and benefit of a redesign, using the typical wrongful death jury award at the time ($200,000), and determined that the costs outweighed the safety benefits.

The analysis proved to be a godsend for plaintiffs’ attorneys in later lawsuits. A California jury in 1981 awarded the plaintiffs in one Pinto crash $125 million in punitive damages (although that amount was significantly reduced after the verdict). G.M. and Chrysler were burned by risk analysis in other cases. Vanderbilt economist Kip Viscusi, a pioneer of risk analysis, found that almost all blockbuster jury awards against automakers were in cases where the company did a risk analysis. G.M. seems to have learned the lesson.

Yet automobile designs inevitably trade off cost and safety. Our only choice is whether we make such decisions with deliberation. A lack of deliberation leads to inconsistent and costly choices – we miss opportunities to save lives at low cost, and spend lots of money saving almost no lives.

Some people might blame the plaintiff lawyers for these awards, but lawyers simply make arguments. The Americans on the juries make these awards, and so we have ourselves to blame. Jurors in interviews indicate that they find any a risk a manufacturer knows about but does not eliminate as unacceptable. The jurors exhibit a zero risk fallacy, thinking that perfect safety is possible at an affordable price.

Americans generally make better decisions than many experts acknowledge, but are prone to certain types of confusions, like the zero risk fallacy. The G.M. ignition switch case illustrates how complicated interactions of decision making mistakes and our institutions produce unintended and costly outcomes. We need to ensure that our legal system does not deter good risk decision making.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.