Ensuring—and Insuring—Air Security

For some reason, many who recognize the government’s incompetence in running car companies don’t object to the TSA’s monopoly on air security.1 Yet if we look with a critical eye, there is plenty of evidence that the TSA should not have such an awesome responsibility. By now, we’ve heard countless anecdotes of fliers subjected to senseless invasions of privacy. Even worse, the TSA had been running airline security for almost eight years when the infamous Christmas 2009 “Underwear Bomber” entered U.S. airspace and threatened Americans. It’s true that the suspect, Umar Farouk Abdulmutallab, boarded his flight in Amsterdam. Yet the U.S. government insists that any flights coming into the country have boarding procedures that meet TSA standards, and so ultimately the TSA failed in its mission—in the end the “Underwear Bomber” was subdued by another passenger, not by the TSA.

For the same reasons it is not suited to run a monopoly on mail delivery or education, the federal government is not suited to run a monopoly on airport security. Because the TSA faces no competitors and receives its funding from taxpayers (regardless of their satisfaction with its performance), we should expect the TSA to behave with the same degree of incompetence and indifference as other government bureaucracies. As David R. Henderson quipped, “Why would we trust the government to monopolize airport security, when it still requires airlines to lecture us on how to operate a seatbelt?”

Free-Market Provision Requires Liability

The average person would probably reject the notion of an “unregulated” free market in air travel: Why would airlines spend the money to adequately train security personnel and to install the equipment needed to properly screen luggage? In their myopic pursuit of profit, wouldn’t the airlines cut corners at the expense of the public?

Free-market economists know, however, that there is nothing magical about government personnel or federal budgets. If the government is capable of hiring luggage screeners and buying x-ray equipment, so are private companies. The trick is simply to structure the incentives properly, to make sure that airlines take into account the full consequences of a terrorist attack.

Rather than establishing a giant bureaucracy with the authority to impose a one-size-fits-all protocol for security on all airports, the government could merely require that airlines pay the full costs of another 9/11-type disaster. The government wouldn’t have to oversee the methods that airlines implement to weed out terrorist threats. On the contrary, the government would simply verify that the airlines had the ability to pay huge damages in the wake of an unlikely but catastrophic security breach.

The Role of Insurance

Such a setting—in which individual airlines are subject to a slight chance of a financially crippling event—calls for the services of insurance companies. Any individual airline wouldn’t want to keep (say) $5 billion set aside in cash reserves for an unlikely catastrophe. Instead, each airline would take out large insurance policies to cover its legal obligations after a terrorist strike.

Although this arrangement may strike some as science fiction, it is the system we currently have in medicine. If a heart surgeon botches the job and his patient dies on the table, the deceased’s estate can sue the doctor for damages. Because of this possibility, the government requires that heart surgeons carry adequate medical malpractice insurance before having permission to operate. This is why patients can be confident that doctors can afford the huge financial penalties that only a few of them will be required to pay after doing a bad job.

An analogous approach could work in air travel. An airline could take out policies for (say) $5 billion to cover the damages in the event it is found legally liable for letting terrorists misuse their property. The insurance companies would, of course, charge large premiums, but, more important, they would have their own, independent experts evaluate each airline’s procedures.

Currently, an insurer might require a building owner to install smoke alarms and fire extinguishers before writing a fire-insurance policy. Beyond that, the insurer will calibrate the premiums based on the design of the building, the presence of flammable materials, and how dangerous the typical operations are. (For example, a day care center is less likely than an oil refinery to ignite in a fireball.)

The crucial feature is that there is quantitative assessment of the risk posed by an operation, defined in terms of the actuarially expected payment. If a change in operating procedures or building design will reduce the chance of disaster (whether a conventional fire or a terrorist strike), the insurance actuaries can estimate how much safer, in dollar terms, the client’s operations will be. Specifically, the client can see what the difference in premiums would be, with and without the change.

Armed with this information, the client can decide if the change makes economic sense. If the expense from implementing the change is greater than the future flow of savings in insurance premiums (all calculated as present discounted values), then the client won’t bother. But if the change “pays for itself” in the long run, then the client will go ahead and implement the safety-improving change, not out of concern for the public but because of the drive for profit.

In the case of conventional fire insurance, the change might be the installation of an expensive network of heat sensors and sprinklers. In the case of terrorism, the change might be the hiring of more screening personnel so that each shift can have an extra pair of eyes. Whether these changes are “worth doing” is an economic question that can be meaningfully answered only in the context of market prices.

Right now, the TSA has no such quantitative guidance when laying down the rules for airlines and its own personnel. After a well-publicized near-miss such as the Underwear Bomber, there will be a drive for the TSA to revamp its procedures to show the public that it is “doing something,” even if the revisions do little to address the security problems.

Pushing Safety to its Frontiers

Much of the public unfortunately believes the myth that there is such a thing as “safe” air travel and that it is the TSA’s job to guarantee this “safety.” But, in reality, there are degrees of safety, and consumers also care about other dimensions of air travel, such as price, privacy, comfort, and speed of boarding.

It’s true that these various attributes of the flying experience, on some margin, can conflict. For example, if we ask airlines to minimize the chance of a terrorist incident on a flight from New York to L.A., while also charging no more than (a) $500 or (b) $1,000 per ticket, then the more expensive flights will be safer. This doesn’t mean that the $500 flights will be “unsafe;” it simply means that they will be less safe.

In the abstract, we can’t say which of the two arrangements is preferable. To the extent that we think consumers should be the judge of how to spend their own money, this tradeoff can be decided in the competitive marketplace.

Although the debates over the TSA pit liberty (or privacy) against safety (or security), in practice, this is a false tradeoff when it comes to government services. The sad fact is that the TSA is not operating on (what economists would call) the “efficient frontier” of safety, price, comfort, and other dimensions of air travel.

In other words, the TSA’s procedures, in practice, impose hardships on fliers (in terms not only of privacy violations but also of higher tax bills) that are not justified by a corresponding increase in safety. The private sector (with appropriately structured incentives) could provide flights that are just as safe as today’s, at lower cost and with less-invasive boarding procedures. Or, for the same price and degree of intrusiveness, the private sector could provide flights with a far higher degree of safety.

Discrimination

By taking such critical decisions out of the hands of a government agency—which is not bound by rational cost-benefit calculations and yet, in a sense, is more accountable to public opinion—we could largely diffuse the sensitive issue of discrimination.

Currently, many Americans decry the “political correctness” of both the Obama and George W. Bush Administrations and demand racial profiling of airline passengers. Let’s stop patting down Granny, these critics say, and instead focus on the guy in a turban named Mustapha. Naturally, those Americans concerned about civil liberties deplore these calls and argue that such policies would do little to intercept actual terrorists.

By having their own money on the line, insurance companies would have the proper incentives to implement only those procedures that actually promoted safety, and their decisions would be less controversial because there would be numerical support to back them up.

Right now, life insurance companies charge much higher premiums for clients who smoke or have diabetes. Although some complain about such “discrimination,” most people understand that these are straightforward business decisions. If a particular health insurance company really were charging smokers punitive rates—perhaps because its CEO lost a parent to lung cancer and he had a chip on his shoulder—then competitors would offer lower premiums and capture the business of many of the smoking clients.

Competition

Thus far, I have focused on the different incentives facing a government bureaucracy versus a private firm. This might have given the impression that the “facts” of safety versus privacy tradeoffs are objectively known and that the TSA would dismiss these facts, while private companies would heed them.

On the contrary, as
Friedrich Hayek stressed, competition is a discovery procedure.2 That is why the current critics of the TSA are under no obligation to “suggest something better.” I am suggesting an alternative: unleashing the free market. Various airlines, competing for customers, would experiment with different approaches to discover the best combination of safety, privacy, price, etc.

In fact, the “best” combination of these attributes would probably differ from customer to customer. For example, suppose that insurance actuaries tell the airlines, “Using just metal detectors for passengers and x-ray machines for luggage, we would need to charge you $50 per passenger to cover the likely claims after a terrorist incident. But if you randomly subject five percent of your passengers to an enhanced patdown, then our simulations show we could safely charge you only $10 per passenger in insurance premiums.”

If this tradeoff had to be foisted upon the flying public as a whole, Americans would probably opt to pay $40 more per ticket and not endure the rigorous inspection. However, there is no need for everyone to endure the same procedures. If there are some fliers—either dedicated to security or just very frugal—who would prefer the chance of an occasional enhanced patdown, in exchange for saving $40 per ticket, then the airlines could cater to this segment of the population by offering distinct security lines and terminals. This is analogous to the situation in restaurant dining, where some people pay very high prices for steak whereas others pay less for burgers.

Conclusion

In the real world, there are no guarantees of absolute safety. The only way to truly prevent another 9/11-type disaster would be to outlaw air travel. Absent that, the best way to rationally balance safety concerns against other, competing goals is to return as much of the decision making to the private sector as possible.