Regulation

May 17, 2010

Mark Thoma writes:

[W]hen I listen to market fundamentalists argue for their side, [..] I get envious. It’s such an easy argument to make. No matter what the problem, the solution — though stated in many, many creative ways — is always the same. Get government out of the way and let markets do their magic. A tax cut, a reduction in government spending, or easing of regulation will always make things better, not worse. And if there are problems in markets, they can always be blamed on government. Even when fundamentalists admit there is a market failure because it cannot be denied, they can (and do) argue that the government will still make things worse if it intervenes. Thus, no matter the problem, there is always a simple explanation and a simple solution.

What I’m jealous of is advocates for government intervention and regulation who don’t have nearly the same burden of proof as market advocates.  As far as government apologists are concerned, if you can show that the world is in some way less-than-ideal, the case for government is complete. Something’s not right? Just make a law that orders it to be right! Done!

But perhaps whining about who has it easier doesn’t really help anyone. We’ve just had a massive oil spill, and now the question is, “What does this tell us about the need for regulation?” It’s too easy for me to just say, in my usual, dogmatic, un-nuanced way, “the government will make it worse!” So I’ll just suggest that if you think this incident implies a need for more regulation, here are a couple points you should think about:

1. Costs and Benefits — The easiest regulation would just be an outright ban on using oil. I suspect there might be some problems with enforcement (and/or your government would be overthrown), but it should be easier to enforce oil prohibition than, say, alcohol prohibition. But it’s a bad idea in any case. You don’t want to hear it, but we really would be worse off if we didn’t use oil and coal to supply most of our energy needs. Oil is cheap to extract and easy to use. Resources that we don’t use for producing energy can be used for other things, and not just things that crazy right-wingers like myself want. If you’re worried that poor people can’t afford medical care, you should be worried about making a major component of their budget, energy, more expensive. If you require them to buy solar panels or use only wind energy, they’ll have even less money for medical care. Please don’t say that alternative energy sources really are cheaper than oil and coal, but people are just too silly to realize it. You’re just being ridiculous in the way that libertarians often are, by imagining that you live in the most convenient of all possible worlds for your argument. There’s no free lunch here. Either you ban the use of fossil fuels, which is really expensive and inconvenient, or you let it keep going and try to craft sensible regulations.

2. Uncertainty and Expertise — Speaking of argumentational convenience, it would be nice if you could find some kind of memo written by the top executives at BP saying, “We realize that this offshore drilling business is unsafe and carries an extremely high risk of major environmental damage, but who cares? We only care about short-term profits!” Sadly, your job is not so easy. The offshore drilling platform did have disaster-preventing systems. They didn’t work, as the WSJ reports. In a fair argument, you aren’t allowed to say, “Well, we need have regulations that require shut-off systems to work.” That would be nice, and if regulation was just a mechanism for making your wishes come true, I suppose I wouldn’t be generally opposed to it as I am.

So the problem in regulation, when you decide you aren’t going to ban an activity but want to regulate it, is to determine what regulations are sensible and necessary. Apparently, BP’s experts believed that the systems in place would be sufficient to prevent the current spill. Shouldn’t your argument that more regulation is necessary require you to come up for some plausible case for why government regulators would have known better? You can’t just require every safety mechanism imaginable, for the same reason that you don’t want to ban the use of oil entirely. Safety is expensive, and at some point, the reduction in risk is not worth the cost.

On the other hand, for any specific accident, you can always name the mechanism that would have prevented it. Apparently, the current spill would have been avoided if BP had installed a remote-controlled shut-off mechanism on the Deepwater Horizon (and, by assumption, it worked, unlike the automatic shut-off mechanism that was in fact installed). What if, on September 11, 2001, the government had required TSA to screen carry-on bags for box-cutters? Disaster averted! And cheap! Too bad that is completely idiotic.

This is the same point I made about getting short-changed in Prague. Indeed, it would have been trivially cheap for me to count my change in that instance and avoid getting ripped off. But in order to do that, I would have to implement a rule whereby I count my change not just that time, but every single time I make a cash transaction. And such a rule is not trivially cheap.

Maybe regulation isn’t impossibly hard, as the “market fundamentalists” would have you believe, but it’s not trivially easy, either. You can’t just pass a regulation that forbids bad stuff from happening. Regulation costs money, both in figuring out which rules you need, and in implementing the rules. How many people suffer or die while waiting for a drug to get FDA approval? Not zero. How many people would die from unsafe drugs if there were no FDA, and companies could sell whatever they wanted? Not zero, either.

I have to admit that there’s a market failure here, because “it cannot be denied.” Argue for regulation if you want. But an argument has to have rules, and just thinking about the benefits of a potential regulation is not enough, because there are costs, too. Even worse is in hindsight to name the regulations that would have prevented a disaster, as if you knew them beforehand. Most importantly, the story of the BP disaster might not have heroes or villains, but rather just imperfect people, doing their best (subject to some constraints).

Something tells me this post could have been shorter.

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2 Responses to “Regulation”

  1. Rrrobert! Says:

    Though we don’t have any documents saying “we expect our safety systems not to work,” we do have documents that show BP was aware of certain obvious problems. And we don’t need documents to understand why regulation is, at least theoretically, in order for these circumstances. BP’s costs and benefits for developing an oil well are radically different from the publics C&Bs for allowing them to do it.

    BP invests in safety as long as they expect it to be profitable. They can tolerate a certain amount of risk of a spill because they expect to profit from the well.

    The public also expects to see costs and benefits from the well, but they’re very different – the public has a governmental interest in the availability of cheap energy (though it is dramatically oversubsidized), a direct fee they charge for the lease, regulatory costs, and expected costs from the risk of a spill. Even with various policies in place to rationalize the various risks – strict and broad liability for spills, in particular – there is no reason why the government’s CB analysis on safety should be the same as BP’s. In fact, we would expect them to be very different.

    So there is at least a theoretical role for regulation here. In an economically efficient world, regulators would assess the public costs and benefits of various safety mechanisms for each well and require them. Alternatively, they could adjust the lease fee to increase public benefits; I think these are economically equivalent, though I invite your thoughts.

    Belling the cat is more difficult. Instead of using case-by-case cost analysis, regulators often use blanket rules to perform the same function. These impose some costs but avoid others, and the hope is that they at least balance out. In some cases, they can and do mandate “best available control technology” on the theory that whatever is out there, it almost certainly has positive impacts. Again, this might impose costs that outweigh benefits, but the hope is not. Regulation is further complicated by things like technical capacity of regulatory staff and the possibility that an industry will corrupt regulators by offering them cocaine to snort off a toaster oven.

    But actually, when people talk about regulation they are almost never actually talking about whether regulation is appropriate, nor are they talking about how best to design regulation. What they are actually doing is arguing about values. That is, advocates for increased regulation are generally really talking about increasing costs to industry because of a perceived cost imposed by that industry on the public (if we’re being charitable about people’s motives). Likewise, deregulatory advocates are actually talking about reducing costs to industry because of a perceived excess of said costs.

    In other words, it’s an argument about values using symbolic terms appropriated by people who don’t have the economic vocabulary to conduct the debate using the terms you might want. When you start looking for what people mean, rather than what they say, politics is much less frustrating.


  2. I shouldn’t have brought up memos, because it’s too reminiscent of the post-September 11th argument that I hate. “Who knew what, and when? What clues were missed?” Indeed, some FBI agent somewhere had a vague notion that at some point, terrorists might use hijacked airplanes to target major buildings. Before 9/11, that memo was one possible lead out of a million, and it turned out to be right.

    If BP was paying for memos to inform them about possible risks, that means they were attempting to make risk-reward tradeoffs.

    And on that point, you can’t get this disaster as a direct consequence of greedy executives. In addition to their greed, they have to be too stupid to realize that they are going to be forced to pay for the clean-up. Maybe under the rule of their good friend George Bush, BP could have used taxpayer money to enlist child slaves for cleaning up the spill, but Obama has been in office for a year now. Shouldn’t they have anticipated this administration’s boot-to-the-neck policy?

    You’re basically saying that maybe BP calculated an optimum risk of catastrophe of 2% per year, while the optimum risk level for society is (say) 1%. That’s fine, I wouldn’t necessarily want to disagree with that. Maybe the shortest form of my point, which you also mention, is that incentives are what really matter in the end, and incentives don’t disappear just because you have regulation.


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