The Question No One Is Asking: Was GM’s Risk Assessment About That Faulty Ignition Switch Reasonable?

Eric Posner weighs in.
April 10 2014 12:50 PM

In Defense of GM

No one is asking the right question: Was the company’s risk assessment about the faulty ignition switch reasonable?

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The question that faced GM was whether to issue a mass recall to reduce that fractional increase in the risk of death. How does one answer this question? When the government evaluates safety regulations, it uses a concept known as the “value of a statistical life,” which is derived from studies of how much people need to be paid in order to accept a slightly greater risk of death—for example, the difference in wages for a safe versus dangerous job. The current standard is roughly $7 million. The $7 million figure implies that an ordinary person would be willing to pay about $5 to avoid a 0.0000007 risk of death in a given year. If we required GM to do a cost-benefit analysis, just like a government agency, the company should have fixed the ignition switch if the cost was less than $5 per car, multiplied by the number of years left in the car’s useful life.

Mary Barra, the CEO of GM, said it would have cost $100 million to recall the cars in 2007. She didn’t say why she picked that year, but if that’s the year that GM had the information to fully appreciate the magnitude of the problem, it’s the right year to use for evaluating GM’s behavior. At that point, the affected cars averaged about eight years left on the road. If it takes half an hour to change the switch and it costs $100 per hour to hire a mechanic, for a total of $50, then the figure she provided sounds about right.

How much money should GM have spent per car based on the value of a statistical life? About $40, or $5 per car multiplied by the average eight years of remaining time on the road. So, it’s close, but if it cost $50 to repair an ignition switch, then GM acted reasonably by saving this money rather than recalling cars for the sake of a benefit of $40. If GM understood the potential for more fatal accidents earlier, say in 2006, when fewer cars were on the road, then it should probably have acted. This is why it’s important to figure out just what GM knew, and when, before condemning it.

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There are complicating factors. If it turns out that more deaths can be traced to the ignition switch defect, then GM looks worse. Maybe GM should have done more testing early in the production process; maybe engineers underestimated the risk that the faulty switch posed to drivers. And I have ignored the cost of injuries and damaged property, which would change the cost-benefit analysis. People disagree about what the value of a statistical life is; perhaps it is higher or lower. My goal is not to exonerate GM but to illustrate the type of analysis needed to evaluate its culpability.

Members of Congress, and commentators, are pretending to be horrified that a corporation would attach a price to human life when deciding whether to replace a faulty part. But all corporations that manufacture dangerous goods must do exactly that. If carmakers treated human life as literally priceless, they wouldn’t let cars leave the lot. People constantly take small risks to save money; their preferences are embodied in the products they buy.

The mantra that corporations put profits over human lives is irresistible but meaningless. The excessive reaction to a routine design-defect episode has all the marks of what Timur Kuran and Cass Sunstein have called “availability cascades”—salient events that engage people’s anxieties and are then exaggerated out of all proportion by media hype.

Because legislators feel that they must respond to the public frenzy they have whipped up, availability cascades frequently lead to bad laws and enforcement practices. Indeed, the GM recall is just the latest; there has been a vast increase in the number of recalls over last several years, four times as many as in the 1980s even though today cars are much safer. Toyota just announced five recalls totaling 6.39 million vehicles on account of defects to which zero crashes have been linked. No one is asking whether this new recall regime is protecting drivers or just jacking up the price of cars.

Eric Posner, a professor at the University of Chicago Law School, is a co-author of The Executive Unbound: After the Madisonian Republic and Climate Change Justice. Follow him on Twitter.