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Brooks Wilson's Economics Blog: July 2010

Thursday, July 29, 2010

Subsidizing the Rich?

The Chevrolet Volt and Nissan Leaf will hit consumer markets this fall.  Chevrolet is projecting the sale of 10,000 vehicles which will have a sticker price of $41,000 while Nissan is projecting the sale of 30,000 vehicles which will have a sticker price of $32,780.  The Volt can travel 40 miles on batteries and will then rely on a gasoline generator to power the electric engine to extend its range to 380 miles per tank of gasoline.  The Leaf can travel 100 miles on batteries and has no additional power source. 

Hoping to promote the sale of battery powered vehicles that the federal government sees as a replacement for the carbon burning internal combustion engine the government is subsidizing their sale with federal tax credit that can reach $7,500 per vehicle.  Even with the subsidy, the price of the vehicles will probably limit sales to upper middle income buyers wishing to make an environmental statement.  Do we really need to subsidize relatively wealth Americans who buy the new government endorsed technology?  (See Peter Whoriskey, The Washington Post, "GM Volt's price induces some sticker shock" for details.)

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Wednesday, July 28, 2010

Vernon Smith on Continued Stimulus Spending

The Great Recession was caused by the bursting of a housing bubble inflated in part by government policy that encouraged home lenders to lower credit standards.  Good politics require a government response to counter the recession even if policy has limited value.  Vernon Smith, the 2002 Nobel Laureate in Economics, adds his voice to the debate about the effectiveness of stimulus spending in the the Daily Beast ("Please, No More Government Spending!"). 
So what has been the government’s response in the current crisis? Besides spending stimulus, it was tax incentives for new home buyers and cash for clunkers if you bought a new car. All three are programs for borrowing output, homes and cars from future production and sales. Using subsidies to pump up home sales beyond what people could afford was the problem that led to the crisis. Now the problem is touted as the solution.

We are in times not seen since the Depression, when at its depth in 1934 my parents lost their Kansas farm to the bank. Such memories and the intensity of the current crisis led me and my colleague, Steven Gjerstad, to examine the last 14 recessions including the Depression. We have been surprised and dismayed to learn that in 11 of these 14 recessions the percentage decline in new house expenditure preceded and exceeded percentage declines in every other major component of GDP. Hence the sources of the current debacle are hardly new! Moreover, past recoveries in the housing market have been closely associated with recovery from recession. The latest data continue to tell us that the turnaround in housing, consumer durables, and business investment are all anemic.

Our past housing and government spending mistakes leave us with no good choices. But please no more government spending! The deficit must now be faced. Avoid any new taxes; they are unlikely to reduce the deficit without discouraging recovery.

Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies. Don’t subsidize them; just reduce their taxes even as they become larger; also reduce any unnecessary impediments to their formation. This is strongly indicated by the business dynamics program of the Bureau of Census and the Kauffman Foundation which has tracked new startup firms in the period 1980-2005. The entry of new firms net of departing firms in this period account for a remarkable two-thirds more employment growth (3 percent per year) than the average of all firms in the US (1.8 percent per year). The invigorating turmoil created by new technologies, with accompanying growth in output, productivity, and employment lead to new business formation as old firms inevitably fail. Reducing barriers to that growth encourage a recovery path which does not mortgage future output.
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Monday, July 26, 2010

Fukuyama on Immigration

Francis Fukuyama wrote a wonderful piece on immigration, "Immigrants and Crime: Time for a Sensible Debate," for the Wall Street Journal.  It is wonderful because it describes the background and motivation of most illegal immigrants to the United States and because it distinguishes between criminal and more benign economic immigrants and presents many of my own thoughts on the subject. 
But the problem of gangs and drug violence should not be confounded with the behavior of the vast majority of illegal immigrants to the U.S., who by and large are seeking the same thing that every immigrant to America has wanted since the time of the Mayflower: to better their condition and that of their families. They are not criminals in the sense of people who make a living by breaking the law. They would be happy to live legally, but they come from societies in which legal rules were never quite extended to them. They are therefore better described as "informal" rather than "illegal."

Understanding this distinction requires knowing something about the social order in Latin America or, for that matter, in many other developing countries. These societies are often characterized by sharp class distinctions between a relatively small, well-educated elite and a much broader and poorer population.

The rule of law exists in places like Mexico, Colombia and El Salvador; the problem is that access to the legal system tends to be a privilege of the well-to-do. The vast majority of illegal immigrants to the U.S. come from poor rural areas, or shantytowns in large cities, where the state—in the form of courts, government agencies and the like—is often absent. Registering a small business, or seeking help from the police, or negotiating a contract requires money, time and political influence that the poor do not possess. In many Latin American countries, as much as 70%-80% of the population lives and works in the informal sector.
The lack of legal access does not make everyone in these regions criminals. It simply means that they get by as best they can through informal institutions they themselves create. The Peruvian economist Hernando de Soto has written extensively about the lack of formal property rights, not just in his own country but throughout the developing world. The poor do not hold legal title to their homes, despite having lived in them for years, because of the insuperable barriers the system throws up to formal registration. So they squat in their homes, constantly insecure and unable to use their property as collateral.

The poor are entrepreneurial and form businesses like restaurants and bus companies, but they are unlicensed and don't conform to official safety rules. They and everyone else would be much better off if they could be brought into the formal legal system, but it is a dysfunctional political system that prevents that from happening.
I shall adopt Fukuyama's and de Soto's term informal to describe peaceful if illegal immigrants.  Most informal immigrants do not understand our emphasis on the rule of law.  They must view our legal system in much the same way that they view the legal system in their native countries, as systems that only allow them to compete at the margin, given that the margin in the United States is much nicer than the margin in Latin American.  They do understand the proud words of the Declaration of Independence.
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.
There is a conflict between the Law of God cited in the Declaration of Independence and our own laws governing immigration, a conflict that did not exist until we began limiting immigration in the late eighteenth century.  While this conflict may be inevitable due to our inability to absorb the tsunami of humanity seeking a better life that would inundate our shores if immigration were open to all, this limitation should give us discomfort.  It turns America from a lighthouse to the world to Reagan's shining city upon a hill, a noble example of freedom but not necessarily a refuge from tyranny, or perhaps worse, a club for those fortunate enough to be born within its shores. 

While it may not be in our power to absorb all those informal immigrants seeking their God given rights, we can give them a taste of the rule of law that benefits them and out country.  Fukuyama supports a comprehensive immigration reform, and while I wince at the word comprehensive, I largely agree that reform should include a guest worker program, a path to citizenship for many of the informals, particularly those who were brought here as children.  Limit entry, but make sure that those with legitimate business interests such as farmers and agribusinesses who have relied upon these workers to harvest and transport crops for generations can continue to do so.  Require proof of citizenship or a green card for employment, but don't push the cost of enforcing immigration law on employers.  They should not be made an extension of law enforcement, and frankly, I don't want my employer to acquire policing skills.  Let us maintain our identity as a freedom loving people with a zest for economic opportunity.

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Sunday, July 25, 2010

Healthcare Reform in Britain

(HT Drudge Report)  Britain is in the process of remaking their healthcare system for the umpteenth time.  Why?  They are trying to provide the best healthcare for the cheapest price in a period of rising healthcare costs, demand, and declining government resources (Sarah Lyall, New York Times.  "Britain Plans to Decentralize Health Care"). 

As countries around the world deal with government provision of healthcare, they should consider the words of H. A. Hayek from "The Fatal Conceit."

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.  (H. A. Hayek.  "The Fatal Conceit.")

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Germany and the Fat Tax

As a libertarian, I believe that an important role of government is to protect and defend our liberty from private interests who through coercion would wrest our freedom from us.  Too often, those in government act as if they are the proctors of the unwashed masses who are to stupid to act in their own interest or purposely trying to ruin "well crafted" government programs.  (HT Drudge Report)  Hugh Higgins, an AOL contributor writes about efforts by German legislators to pass a tax on obesity in "Germany Weighs Tax on the Obese." 
Marco Wanderwitz, a conservative member of parliament for the German state of Saxony, said it is unfair and unsustainable for the taxpayer to carry the entire cost of treating obesity-related illnesses in the public health system.

"I think that it would be sensible if those who deliberately lead unhealthy lives would be held financially accountable for that," Wanderwitz said, according to Reuters.
Wanderwitz would create a backwards system that provides healthcare to all then capriciously limits care to lessen the cost burden to the state. the state is the master and state objectives supersede individual freedom.  To keep costs low, the government would tax one unhealthy behavior, weight. 

Obesity adds to an individual’s health risk, but what about eating too much salt, riding motorcycles, engaging in unprotected casual sex.  I could go on; exactly half of our activities are more medically costlier than average.  Higgins quotes Jurgen Wasem who makes just this point. 
Health economist Jurgen Wasem called for Germany to tackle the problem of fattening snacks in order to raise money and reduce obesity.

"One should, as with tobacco, tax the purchase of unhealthy consumer goods at a higher rate and partly maintain the health system," Wasem said, according to Germany's English-language newspaper The Local. "That applies to alcohol, chocolate or risky sporting equipment such as hang-gliders."
Wasem taxes get closer to a socially optimal solution if all citizens are homogenous, but they are not, and if one believes that the state has the responsibility to prod, prick and poke citizens to conform to state objectives.  Higgins continues
Walter Willett, a professor of nutrition at the Harvard School of Public Health, described the idea of a fat tax as "not humane." He told AOL News that lifestyle is not the only factor in obesity, with both genetics and urban environments playing major roles.

"It's not fair to tax somebody just for being obese," Willett said. "Most people who are obese would prefer not to be so."
Assuming that the average citizen knows as much about health risks as government regulators and more about their own risk characteristics, a market system of healthcare better prices all discernable risk.  The government, with the consent of its citizens could still maintain the flexibility of markets by establishing medical savings accounts backed up by a catastrophic insurance policy for all citizens.  While the freedom of individuals to spend their own earnings is violated, at least the violation would minimize the loss of freedom and the cost to the taxpayer. 

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Friday, July 23, 2010

Kerry Avoids Yacht Tax

I don't blame anyone for avoiding taxation legally and this is just what Senator John Kerry has done by docking his new and really cool yacht in Rhode Island rather than in his home state of Massachusetts and thereby saving $437,500 in sales tax and an annual excise tax of about $70,000.  Apparently, he is not the only person to note that Rhode Island repealed its Boat Sales and Use Tax in 1993 and has since become a haven for tax avoiding yacht owners.  I just wish that he and other tax avoiding legislators would put two and two together to realize that high taxes lower incentives to work and to produce.

HT Drudge Report) Laura Raposa provides the details of the purchase in "Sen. John Kerry skips town on sails tax."  Kerry's yacht certainly deserves the title of luxury. 
Kerry’s luxe, 76-foot New Zealand-built Friendship sloop with an Edwardian-style, glossy varnished teak interior, two VIP main cabins and a pilothouse fitted with a wet bar and cold wine storage - was designed by Rhode Island boat designer Ted Fontaine.
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Friday, July 9, 2010

The IMF, Chinn and Continued Stimulus

The headline screams, "IMF presses US to cut debt," but the story itself is a tacit endorsement of Obama administration policy to continue stimulus spending until growth is on a more secure footing.  Beatty writes,
"The central challenge is to develop a credible fiscal strategy to ensure that public debt is put -- and is seen to be put -- on a sustainable path without putting the recovery in jeopardy," an IMF report said.

The balance between spending to stimulate the economy and putting budgets in order has vexed countries around the world as the recovery has looked more and more precarious...

The IMF praised US efforts to cut the long-term deficit through health system reform, but said more needed to be done now.
Menzie Chinn at Econbrowser gives a spirited defense of deficit spending given current economic conditions in "A Specter is Haunting America."  While I am more of a deficit hawk and would like to see more immediate reductions in spending, I find reading Chinn profitable because he makes well reasoned arguments using established economic methods.  He also makes good use of empirical studies.  The linked post is a little technical for principles students but well worth the investment.  Replace this text with...
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Tuesday, July 6, 2010

The Crisis Paradox and Taylor's Assessment of Financial Regulatory Reform

Like so many news stories and commentaries, John B. Taylor's article in the Wall Street Journal, "The Dodd-Frank Financial Fiasco," brings to mind what I called the Crisis Paradox: crisis is the best time politically and the worst time economically to enact fundamental economic reform.  While I coined the phrase, it is Robert Higgs' work that laid its foundation.  He offered the "Crisis Hypothesis," that the supply of and demand for government oversight and control of a market economy increases in times of crisis, in "Crisis and Leviathan," and the uncertainty hypothesis that increased government oversight and control during the Great Depression dampened investment in "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War" (The Independent Review, Vol. 1, No. 4, Spring 1997),(see also, "Depression, War, and Cold War").

Taylor believes that the Dodd-Frank financial reform bill's complexity is a risk to economic growth.  This is the Uncertainty Hypothesis.  He also observed that the bill misdiagnosed the causes of the financial crisis, perhaps because it was passed before the congressionally mandated Financial Crisis Inquiry Commission finished its work.  Simply put, Congress struck while the iron was hot to pass reform some legislators sought prior to the financial crisis.  This is the Crisis Hypothesis.   
The sheer complexity of the 2,319-page Dodd-Frank financial reform bill is certainly a threat to future economic growth. But if you sift through the many sections and subsections, you find much more than complexity to worry about.

The main problem with the bill is that it is based on a misdiagnosis of the causes of the financial crisis, which is not surprising since the bill was rolled out before the congressionally mandated Financial Crisis Inquiry Commission finished its diagnosis.

The biggest misdiagnosis is the presumption that the government did not have enough power to avoid the crisis. But the Federal Reserve had the power to avoid the monetary excesses that accelerated the housing boom that went bust in 2007. The New York Fed had the power to stop Citigroup's questionable lending and trading decisions and, with hundreds of regulators on the premises of such large banks, should have had the information to do so. The Securities and Exchange Commission (SEC) could have insisted on reasonable liquidity rules to prevent investment banks from relying so much on short-term borrowing through repurchase agreements to fund long-term investments. And the Treasury working with the Fed had the power to intervene with troubled financial firms, and in fact used this power in a highly discretionary way to create an on-again off-again bailout policy that spooked the markets and led to the panic in the fall of 2008.
Taylor's intent was not to offer support for Higgs' work but to describe false remedies the 2,319 page bill mandates and his criticism that it increases the power of the government in areas unrelated to the financial crisis should be addressed.  The bill creates "orderly liquidation" authority for the Federal Deposit Insurance Corporation that implicitly supports the "too big to fail" policy strengthening the moral hazard caused by the socialization of losses.  The bill does not reform Fannie Mae and Freddy Mac, the two government sponsored entities that underwrote or purchased a large percentage of subprime loans, nor does it reform the bankruptcy code to allow large, complex financial firms to go through an orderly liquidation.  Those interested in reform of the financial sector should anxiously read the article.    

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Monday, July 5, 2010

Germany's Austerity Program

Yesterday, I referenced an article on the influence of Alberto Alesina on fiscal policy in Europe and criticism by Paul Krugman and Brad DeLong.  Today, the Financial Times reports more on the shape of Germany's austerity programs ("Germany focuses on cutting spending").
Germany’s cabinet is poised this week to approve a 2011 budget as part of a four-year programme of public spending cuts meant to serve as an example to other European governments without jeopardising the country’s increasingly robust economic recovery.

Briefing papers for Wednesday’s cabinet meeting, released by Berlin on Sunday, argue that by curbing spending – rather than increasing taxes – the €80bn ($100.3bn, £66bn) savings programme would differ “fundamentally” from previous fiscal squeezes and offer “noticeable, better growth possibilities”.

The comments appeared aimed at heading off international criticism that German fiscal austerity would hit Europe’s growth prospects.

Germany’s economy is enjoying an industry-led growth spurt, with engineers rehiring workers and returning production almost to pre-crisis levels.

The stronger-than-expected growth and falls in unemployment were making it significantly easier for Germany to reduce its public sector deficit.
I continue to believe that cutting spending is a good method of encouraging long-run economic growth.  I am not convinced that there is any policy that effectively encourages short-run growth in the face of a severe financial crisis. Replace this text with...
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The College Premium

In a comment to the post, "Summer Job Market for Teens," a student correctly observed that teenagers and other low skill workers could earn college degrees to improve their income.  The "college premium" has grown over time.  Raghuram G. Rajan writes in "Fault Lines," his recent book on the causes of the financial crisis and policies to achieve a more stable economy, that
Much of the 90/10 differential [the 90th percentile wage earner's income vs. the 10th percentile wage earner's income] can be attributed to what economists call the "college premium."  The ratio of the wages of those who have only a bachelor's degree to those who only have a high school degree has risen steadily since 1980.  The 2008 Current Population Survey by the Census Bureau indicated that the median wage of a high school graduate was $27,963, while the median wage of someone with an undergraduate degree was $48,097--about 72 percent more.  Those with professional degrees (like an MD or MBA) earn even more, with a median wage of $87,775.
Rajan's book is a well written, provocative, enjoyable read, not an easy combination for economists describing the financial crisis.  He describes growing income inequality as a fault line in the American economy, and the failure of maintaining our international education lead as a major cause of growing inequality.  I recommend it.   Replace this text with...
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Sunday, July 4, 2010

Austerity or Stimulus?

Alberto Alesina, a Harvard economist, advises cutting deficits to revive growth in countries wishing to escape the Great Recession (Peter Coy, Businessweek, "Keynes vs. Alesina. Alesina Who?"). 
Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won't be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes. The Madrid paper, a summary of his views, was influential enough to be cited in the official communiqué of the EU finance ministers' meeting...

Alesina's own research shows mixed results from deficit-cutting. He identified 26 examples since 1980 of deficit reductions that triggered growth of gross domestic product and 21 that lowered government debt substantially. He found only nine double victories in which government policymakers managed both to expand their economies and reduce debt. (Among them: Ireland in 2000, and the Netherlands and Norway in 2006).
Paul Krugman, a Princeton economist and a Nobel laureate who supports additional stimulus spending, argues condescendingly against supporters of austerity (New York Times, "Myths of Austerity").
This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.
Brad DeLong, a Berkeley economists, worries that leaders in Washington are not concerned about ten percent unemployment because they will not pass additional stimulus spending (The Week, "Does Washington care about unemployment?").
Still, where is the panic, the sense of urgency? The Obama administration and the Democratic majority in Congress passed a fiscal stimulus plan half the size recommended by Democratic economists fifteen months ago. Since then, they have been unable to assemble a political majority to finish the second half of the job. There seems to be no appetite for addressing ten percent unemployment.
How can they give such contradictory advise?  The empirical evidence does not overwhelmingly support either austerity or stimulus.  Multipliers, the fulcrum that magnifies the stimulus, are generally found to be small and to vary greatly depending on economic conditions including the state of the economy, a government's debt as a percentage of GDP, and the type of fiscal stimulus such as a tax cut or spending increase all affect the multiplier.  With so many variables, and so few observations, it is not surprising that empirical investigations produce mixed results. 

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Saturday, July 3, 2010

June Unemployment and Jobless Recoveries

Yesterday, the government released unemployment data that indicates continued weakness in labor markets.  The unemployment rate fell to 9.5%, but only because 652,000 workers dropped out of the labor-force (Timothy R. Homan and Steve Matthews, Bloomberg, "Employment Shortfall Sets the Stage for Slowdown in U.S. Economic Recovery," see also my posts, "The Little Engine Who Could?" and "The Unemployment and Labor-Force Participation Rates").  The only good news was that private sector employers added 83,000 jobs.  The previous day, the government released data on initial unemployment claims that showed that claims increased by 13,000 to 476,000, and that the four week moving average of initial unemployment claims increased 3,250 to 466,500.  Many economists believe that initial claims are a leading indicator in the movement of unemployment rates.  Robert Gordon's research finds that recessions soon hit bottom after the four week moving average peaks.  True to form, shortly after the average peaked in April 2009, the economy resumed growth.

The above graphs compare the four week moving average of initial unemployment claims and the unemployment rate of the last four recessions.  The current recession is clearly deeper than the previous three recessions.  The graphs also show that employment recovered more slowly in the last three recessions and many have dubbed the phenomenon as jobless recoveries.

James Hamilton of Econbrowser proposes an explanation in which he finds that changes in recoveries may be more cosmetic than real ("Jobless recoveries"). The Social Security Amendments of 1958 exempted unemployment insurance from income taxation.  To benefit employees, corporations who had the choice of reducing a worker's weekly hours or temporarily subjecting them to layoff, chose layoffs which increase the unemployment rate and their workers' wages net of taxes.  The situation reversed with the Revenue Act of 1978, which subjected unemployment benefits to partial taxation under the income tax law, and the Tax Reform Act of 1986, which made unemployment benefits taxable as ordinary income.  Now workers do no derive a tax benefit from being unemployed compared to having their work week reduced.  Since the mid 1980s, temporary layoffs have become a less important component of the unemployment rate.  Hamilton includes a graph which adjusts the unemployment rate for temporary layoffs which he subtracts from the unemployed.  With this adjustment, improvements in the unemployment rate lag in all recoveries.  Brad DeLong, the first to comment on Hamilton's post, and Arnold Kling, who responds in his own blog post both note that this change in definitions also increases the severity of the current recession compared to others (Econlog, "Temporary Layoffs in Postwar Recessions").

Kling adds an alternative hypothesis: fewer industries are subject to large inventory fluctuations reducing the number of workers subject to temporary layoff.  Let me add a third: regime uncertainty as described by Robert Higgs has slowed investment and recovery (The Beacon, "Regime Uncertainty—Now Maybe People Will Take the Idea Seriously".  Are these dueling hypotheses or all partial explanations?  That question can only be resolved empirically. 

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Friday, July 2, 2010

Oil Spill Risk Analysis

Neil King Jr. and Keith Johnson wrote an interesting article about the Mineral Management Service, the regulatory agency charged with overseeing offshore oil drilling (Wall Street Journal, "BP Relied on Faulty U.S. Data").  The Mineral Management Service requires oil companies to file contingency plans (oil spill risk analysis) for oil spills based on the government's models that showed little oil would reach shore even in a worst-case scenario.
BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one.

The government models, which oil companies are required to use but have not been updated since 2004, assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models, prepared by the Interior Department's Mineral Management Service, wrong...

The oil companies may have bought into the competency of the MMS's scientists.
The government's optimistic forecasts reinforced the oil industry's confidence in its spill-prevention technology, leading to decisions that left both oil companies and the government ill-prepared for the disaster that has unfolded in the Gulf since April 20.
Although the oil companies may have believed the ocean flow models, some other scientists did not.
The government's spill models have been at the center of years of debate among scientists that study oil spills. One study in the late 1990s used satellites to track almost 100 "drifters" set loose in the Gulf of Mexico to mimic floating oil. The paths of the drifting objects were compared with what the model predicted. After 30 days, the average discrepancy was 300 miles. "We have observed differences of some magnitude," a 2003 paper said, summarizing the study.
Scientists at the Mineral Management Services remained confident of their model's prediction even as they accepted other's findings and attempted to update their models.
But the researchers, led by a team of scientists from the Interior Department's MMS, concluded that the results were "neither surprising nor disappointing," and "do not negate the utility" of the model. The scientists said the findings could lead to improvements in oil-spill modeling.
The inaccuracy of the Service's model and their requirement that oil companies use these projections are typical of inefficiencies of regulatory agencies and only add to doubts about the ability of regulation to limit catastrophic events.  They could have required the oil companies to use the MMS's oil flow projections as a base, allowing the companies to offer plans for more costly outcomes than projected by the government.

The oil companies too may have failed to plan for worst-case scenarios.  The fear of losing tens of billions in a worst-case scenario should have prompted them to have internal contingency plans that differed from the government's plans.  Maybe all oil companies with the exception of BP have such plans.  If not, why not?  Several possible explanations come to mind.  They, like many in today's society, could have believed in the omniscience of government and that government scientists had an absolute advantage in measuring the impact of a spill.  I could be persuaded that there are economies of scale and scope in developing the models and that the government, which also studies climate change, fisheries, and other subjects that might benefit from ocean flow models.  They may have believed that their liability was capped at $75 million.  If this is so, bad regulation limiting liability through law is a problem and, given the oil industry's deep pockets to influence legislation, will remain one.  The Deepwater Horizon oil spill is truly tragic and it is not possible to avoid the consequences of the occasional worst-case scenario. 

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