Bloomberg View: The Lessons of the Costa Concordia; Make Economics Transparent
The HMS Incompetent
In 1912 the RMS Titanic, the largest and most advanced passenger liner of its day, sank, reminding the world there is no such thing as an invincible ship. The Costa Concordia, one of a class of cruise ships so enormous they are essentially floating towns, lies half-submerged off the coast of Italy, making the same point today. The Titanic tragedy, which claimed some 1,500 lives, ushered in a new era of maritime safety law. The question raised by the Costa Concordia debacle, in which 11 people have died and 24 are missing, is whether the world’s maritime authorities are sufficiently enforcing those measures.
Passenger reports strongly suggest that the crew did not comply with the most basic international safety standards. Their actions speak of insufficient training and discipline, which led to panic and chaos. At least some passengers say they received no safety briefing on board, and conflicting instructions about whether to stay in their rooms or abandon ship.
This is in stark contrast to procedures established by the International Convention for the Safety of Life at Sea, adopted after the Titanic sank. There should have been an emergency drill within 24 hours of the start of the voyage. Passengers who boarded later should have had separate briefings. From the moment the captain gave the abandon signal, the crew should have loaded and launched the lifeboats within 30 minutes. That may sound like too tall an order for a boat with more than 4,000 people aboard. It’s not: Large ships are designed to accomplish 30-minute evacuations. Cruise ships that take on or drop off passengers at U.S. ports must pass this test twice a year in drills required and monitored by the U.S. Coast Guard.
The Costa Concordia, which circled the Mediterranean, was not within the Coast Guard’s jurisdiction. Further inquiries will determine the extent to which its crew had been put through its paces, and whether the maritime authorities of Italy, where the ship is flagged, and the other ports it visited were vigilant in enforcing the international standards.
In the meantime, the ship’s ultimate owner, Carnival, which dominates the cruise industry with 49 percent of the business, should get serious—enforcing tight control over routes, passenger safety briefings, and the training and disciplining of crew members. The No. 2 in the industry, Royal Caribbean Cruises, would likely follow suit.
Economists Need More Than Disclosure
Academic economists have recently become the unaccustomed subjects of intense scrutiny. The 2010 documentary Inside Job drew public attention to the board seats, consulting gigs, and sponsored research that tie many of them to Wall Street. They often failed to disclose conflicts of interest in their research papers and public comments on topics that could influence decisions affecting the lives and livelihoods of millions.
At its annual meeting earlier this month, the American Economic Assn. took a step toward solving the disclosure problem. It adopted guidelines requiring economists, when making public comments or publishing papers in AEA journals, such as the American Economic Review, to detail any funding they have received from interested parties.
Disclosure, though, won’t eliminate the actual conflicts. Even the best-intentioned economists—particularly those in finance—face a litany of influences pushing them toward a rosier view of the industries they study. In a yet-to-be-published paper, Luigi Zingales, a finance professor at the University of Chicago’s Booth School of Business, likens the pressure to regulatory capture. A probusiness attitude, he notes, can increase an economist’s chances of landing lucrative consulting, expert-witness, and research contracts. (Zingales, a contributor to Bloomberg View’s Business Class blog, has accepted money for speeches to Dimensional Fund Advisors, an investment company, and Banca Intermobiliare, an Italian private bank, among others.)
Economists’ ties to industry have been particularly noticeable amid the debate over how to fix global finance. Consider Squam Lake Group, a panel of influential economists formed in 2008 to propose reforms of everything from credit derivatives and money-market mutual funds to bank capital requirements. Thanks to the disclosures on their websites, we know that 13 of the 15 members have received money from the financial industry or its lobbyists for activities ranging from speaking engagements to directorships.
For example, in 2010, as regulators were working out how to shore up the banking system, two members of the group—Anil Kashyap of the Booth School of Business and Harvard economist Jeremy Stein—wrote a paper on the potential economic costs of bank capital. The sponsor of their research: the Clearing House Assn., a trade group that represents JPMorgan Chase, Bank of America, and other major financial institutions.
Some conflicts might not be as bad as they look. Kashyap and Stein fully disclosed their source of funding, and their paper actually supported higher capital requirements. Kashyap said he saw the offer as an opportunity to make some extra money while exposing a new audience to research he was already doing. (Stein wouldn’t comment because he awaits review of his nomination to the Federal Reserve.) But here’s the problem: Nobody, not even the authors, can be 100 percent sure what they would have said if they hadn’t accepted money from the industry. Later papers by others, for example, sought to quantify the benefits—not just the costs—of higher capital. Social norms in academia probably haven’t progressed to the point where a code of conduct would stick. Hence, the immediate task is to get economists to see that, like all mortals, they may be reluctant to bite the hand that feeds them.