17 June 2010

quick, or not so quick hit #2

Meanwhile, oil continues to gush.

This naturally pisses people off. Man-made disasters have that effect, and rightly so. I continue to be confounded as to what people expect the President to about resolving the on-going issue, since there isn't much technical skill and material that we don't already have to bring to bear. And that situation of "leadership frustration", aka: the cult of the President as a national Father who has omnipotent powers to fix everything, was apparently not much resolved by the President's address from the oval office the other night.

What doesn't confound me is that people then take to complaining about BP as a breakdown of "capitalism". That does not surprise me as the bias against markets and capitalism is pretty strong among the masses. What should be stressed is how little this resembles a market failure however.

Put it this way. If you have a rational actor who you know to be a flagrant possibility of disregarding the rules, and you set up rules, then don't use them, enforce them, and otherwise impose credible and swift penalties for violating them, I don't see how that's going to work. In a market environment, an oil company has large public relations and legal incentives not to spill oil. It tends to annoy people when their fish taste like Quaker State for one, but also oil companies naturally want to be in the business of finding and selling oil. Not cleaning up oil from suffering and dying pelicans. Credible legal penalties can exist for people who are harmed by a reckless oil company. This is before considering any governmental regulatory positions that an oil company may be subject to following, and which it subsequently hasn't followed.

What concerns me is how a situation existed where those regulatory positions were not obeyed. Obviously little credible threat existed that those positions would cause costs and harms to the business operations of the company. A sensible analogy here would be to examine putting people on probation in the criminal justice system. In exchange for "good" behavior, people stay out of prison. If there is "bad" behavior, they may end up in prison or jail and suffer otherwise unwanted penalties. When this system works, people tend not to violate the conditions of their probation and we get the benefits of not having them commit further criminal acts (as well as not having to impose costly penalties like incarceration). When it does not, people violate the terms and not much of consequence happens as a result. In a case like BP, this was a company which had an oil refinery fire not long ago (2005 I think), and a list of serious and severe compliance violations going back several years that lapped the field of their competitors. This was, in other words, a company that should have been operating on probation long before this latest atrocity was put in motion. The question becomes: why weren't they? My answer to that is regulatory capture and corporatism. Apparently the "liberal" answer to that is something like "greed/profit caused negligence". If that were so, then why don't other oil companies have disastrous records of regulatory compliance? Are they apparently less greedy or less profitable? I think the appropriate response to the cause of the problem isn't "BP's greed did it" nor is it "the government did it". I think the appropriate response is that both are at fault. This has the capacity of being a very boring and unsatisfying reply however since it implies that a) there's not much we can do right now about the continuing oil spill, which is really the only reason we/most of us care in the first place and b) it implies that there are very few new policy solutions needed. It seems more like the policies that were already in place needed to be properly and credibly enforced against a bad actor instead of looking the other way because there are billions of dollars involved.
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