Risky business

There are three classes of disasters, distinguished by their cause: deliberately initiated disasters, such as the 9/11 attacks; natural disasters, such as Hurricane Katrina in 2005; and industrial disasters, such as the Northeast blackout in 2003 or the train wreck and fire in the Baltimore tunnel in 2001. Humans intentionally cause the first and by mistakes in design or management cause the third. We blame nature for natural disasters; however, if disasters are assessed by their consequences, not their causes, the death and damage from all three kinds of catastrophes actually owe their severity to a range of human actions or failures to act.

Unhappily, the consequences of all kinds of disasters are growing in severity. Who is to blame, and what should be done to reduce the consequent vulnerability of Americans to catastrophe?

Companies that deliver critical infrastructure services and government officials at all levels are jointly responsible for reducing the level of vulnerability to disaster. Although the private and public sectors place very different priorities on the relative importance of the three kinds of hazards, they nonetheless focus most of their attention on response to and recovery from disaster. By contrast, Charles Perrow, a prolific author on the subject of disasters and an emeritus professor of sociology at Yale, sensibly emphasizes in The Next Catastrophe that only a strategy of reducing vulnerability to major catastrophes in the first place has any hope of substantial mitigation of consequences.

Whereas government, especially at the federal level, considers terrorism its top priority, Perrow correctly considers natural and industrial disasters to be the top priority, on two grounds: First, they are much more likely, and second, the most effective strategies for reducing vulnerability to natural and industrial disasters will, with some exceptions such as a terrorist nuclear weapon, also serve to mitigate a terror attack as well.

Perrow does not have good news for us. He describes his book as about “the inevitable inadequacy of our efforts to protect us from major disasters.” The record of failure tells us, he says, that “we cannot expect much from our organizations,” public or private. From his detailed retelling of the stories of dozens of disasters in the United States, he concludes that most could have been avoided, or the consequences greatly reduced, if only organizations had performed well, executives had the right priorities, and governments were more strenuous in their regulations. But alas, he concludes that “prevention and mitigation will always fall short, sometimes alarmingly so, and we should begin to reduce the size of our vulnerable targets.”

After reciting one case after another in which government failed to regulate or firms failed to reduce vulnerabilities, he argues that much of our increased vulnerability to disaster results from the growing centralization of power and operations in key industry sectors. As private firms, aided by government deregulation, have increasingly aggregated their activities in the quest for greater economies of scale, resilience in the overall system has been weakened. In addition to the cases he discusses, there are other extreme examples that could be cited: a cruise ship being built for 6,400 passengers and a chicken-packing plant that ships 14.3 million chickens a week to our supermarkets.

Perrow would reverse the centralization trend, saying that the goal of regulation must be “to prevent the aggregation of power in private hands.” He would like a stronger government, a more centralized regulatory system, and more fragmented and dispersed operations by firms engaged in critical infrastructure. He is realistic enough politically, however, to recognize that this solution is a pipe dream. Thus, his recommended strategy is to “reduce the size of the targets, and thus minimize the extent of harm these disasters can do.” Yet if executives have contrary priorities, organizations often perform poorly, and government fails to regulate more vigorously, even this objective will remain a mirage on the desert of political economy.

An equally elusive challenge, in Perrow’s long list of daunting challenges for reducing the size of the target, is reversing the growing concentration of population in the more vulnerable parts of the country. But he offers little hope for how this might be achieved without citizens already in these cities exerting effective political opposition to the real estate developers and others with a vested interest in growth at whatever cost to resilience.

The Bush administration takes the view that market forces should be adequate to induce the executives of critical infrastructure firms to make the large investments needed to restructure in ways that reduce vulnerability. But this is a false hope without an understanding with government on how a level playing field for competition in an industry can be maintained. In the case of terrorist threats, firms can evaluate their vulnerability but cannot be expected to evaluate the risk of an attack without the intelligence information, to which they do not have access. Firms also tend to regard the terrorist threat as largely the government’s problem, and the government’s use of the term “war on terror” only tends to emphasize this judgment.

Industrial hazards, on the other hand, can threaten a firm’s revenue and even its ability to stay in business. Minimizing the likelihood of such disasters is a high priority, at least in well-run firms. But threats of more centralized and vigorous regulation intended to restructure whole industries are unlikely to create an environment in which firms will seek a collaborative approach with government. In addition, the federal government’s priorities are counterterrorism and the most cataclysmic natural disasters. To the extent that the federal government believes it has any responsibility for reducing industrial disasters and has regulatory power to attempt it, that authority is exercised through a wide variety of agencies. Most of these agencies regulate competition and prices, not resilience in the face of unlikely disasters. There is little coherence of regulatory policy or recognition of the interdependence of regulated services.

There is, however, one path to making at least some progress toward vulnerability reduction in our society: a serious effort to bridge the gulf of mistrust between government and industry. Senior executives of firms providing critical infrastructure services are vocal, at least in private, about the lack of shared information, of longer-term understanding about the relative roles of the public and private sectors, and indeed about a profound lack of trust between them.

Better appreciation by government agencies of the incentives as well as the constraints of market forces in resilience investment decisions by firms will pay off not only in better national security but in a stronger economy in the future. For with resilience increasingly tied to globally networked enterprises, to global supply chains, and to outsourcing of critical infrastructure services, business incentives for increased resilience will continue to grow. Globalization of the world economy is a powerful driver of business strategy and is increasingly a source of threats to the continuity of business services. Government must, therefore, work with the private sector to find ways to ensure a balance among corporate efficiency, resilience, and vulnerability to disasters. This line of endeavor is not only essential to achieving Perrow’s goal, but it is also less dependent on a strong political swing to the left, which remains Perrow’s best hope.