Additional Thoughts on BP

When news of the leak at the BP operated Deepwater Horizon broke, many blamed corporate greed as the prime cause of the disaster.  I wrote what I still consider the correct economic response concerning greed: it is a universal constant (see "BP a Bad Corporate Actor?," "Reid on Greed," and "The Oil Spill and the Government).  I also expressed doubt over the government's ability to effectively regulate oil exploration, a doubt that I maintain.  As I continue to read about the accident, I have rethought an initial conclusion. 

First and most importantly, BP does appear to a bad corporate actor, either through incompetence or intentional neglect.  Because BP has always said that they would compensate all legitimate claims, I would tentatively conclude that BP is simply incompetent.  (HT Econbrowser)  The Christian Science Monitor ("Five crucial moves by BP: Did they lead to Gulf oil spill disaster?") list five crucial drilling decisions all made to cut costs that BP made that contributed to the rig failure as determined by the Democrats leadership on the House Energy and Commerce Committee. The steps include

1.  Well design

2.  Insufficient "centralizers"

3.  Failure to run a key test

4.  Improper mud circulation

5.  Failure to secure the wellhead.

James Hamilton at Econbrowser ("More on BP") adds a sixth error, the lack of a standard failsafe device, the acoustic shut-off switch.

If BP is a bad corporate actor rather just the unlucky "victim" of an unforeseeable event then the economic consequences should apply to them and not more efficient corporations.  What type of regulation would punish BP and protect other oil companies, consumers of oil products, and third parties whose livelihoods have been impacted by the spill?  BP's feet should be held to fire to assure that they do pay all legitimate claims through the legal system.  I still believe that further regulation by the federal government would be redundant and perhaps counterproductive.  Elected officials tend to overreact to low probability, high cost events. The government should not decide what constitutes the best practices.  If they do, those practices will be cemented in place in an industry that had previously seen technological advances that have allowed safer drilling at deeper sights.  I would also remove caps on damages.  Although the caps can be exceeded for negligence or misconduct oil companies would have better incentive to internalize societal costs of oil spills if the caps were removed. 
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BP a Bad Corporate Actor?

In the two previous posts, "Reid on Greed" and "The Oil Spill and the Government," I suggested that oil company executives have always been and will be self interested and that self interest is likely to lead them to avoid costly oil spills.  I also suggest that regulation beyond law requiring oil companies to pay damages may be a costly, redundant, and unnecessary burden on taxpayers or consumers who ultimately pay for the regulatory structure. 

To guard against confirmation bias, I looked for information that suggested that BP was negligent and found an editorial in the Houston Chronicle, "Spillover effects: Some success, but new questions to answer about Deepwater Horizon disaster," that did just that.

It does not help BP's cause in the Gulf spill that two of the company's refineries account for 97 percent of all flagrant violations found in the industry, according to the Center for Public Integrity. While these matters are not specifically related, they contribute to a growing impression that BP is a corporate bad actor.

As reported in Tom Fowler's energy blog this week, most of BP's citations were classified by OSHA as “egregious willful.” A willful violation is defined as “one committed with plain indifference to or intentional disregard for employee safety and health.” That is bad news for BP, and likely will be used by critics to tar the entire industry.

These statistics do not prove BP malevolently negligent or negligent, but they are suggestive. BP could be incompetent, miss measuring the danger of a spill and the associated cost.  It could simply be an unavoidable accident given knowledge before the spill.  I have still not found information to suggest that a different regulatory structure would decrease the probability of an oil spill.      Replace this text with...
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Reid on Greed

Senator Harry Reid showed a fundamental lack of understanding of economics or enormous contempt for voters when he said of the British Petroleum (Real Clear Politics Videos, "Reid: BP's "Greed" Caused Gulf Oil Spill, 11 Deaths"),

Their greed led to 11 horrific and unnecessary deaths. It has harmed an enormous tourism industry, threatened business at countless fisheries and disrupted life for many along the Gulf Coast. As the pollution grows worse, those consequences will only compound.

A fundamental insight of Adam Smith, the father of economics, that is accepted almost universally among economists was that self interest through the working of markets works for society's well being.  In "The Wealth of Nations" he wrote,

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Greed is best thought of as a constant.  Does he really believe that prior to the spill BP was not greedy?  Does he believe that they were public interested agents devoid of greed during the long decades without spills?  While it is possible that BP is guilty of neglect, it is probable that the spill was an accident caused by unforeseeable circumstances. 

Senator Reid might have observed that BP has promised to pay all legitimate damages from the spill which are estimated between several hundred million and seventeen billion dollars.  It has lost thirty billion in market value.  A greedy firm would certainly act to limit spills and the damages they cause to avoid the heavy cost of cleanup.  Greed may well explain the lack of spills in the past. 

If Senator Reid has evidence that greed induced neglect led the death of eleven employees, he should present it to police for investigation.  If he does not have evidence, he is engaged in calumny.  Bryan Caplan, author of "The Myth of the Rational Voter," sagaciously observes, 

Merriam-Webster's Collegiate Dictionary defines a demagogue as "a leader who makes use of popular prejudices and false claims and promises in order to gain power."  Put bluntly, rule by demagogues is not an aberration.  It is the natural condition of democracy.  Demagoguery is the winning strategy as long as the electorate is prejudiced and credulous.

If Reid's economic understanding is so weak that he does not understand basic economic motives, he should not be reelected.  If he engages in demagogic rhetoric, even with a soft voice, he should not be reelected. 
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Cardinal Cormac Murphy-O'Connor On Capitalism

Writing for Timesonline, in an article titled, "Cardinal Cormac Murphy-O'Connor: recession may be jolt that selfish Britain needs," Alice Thomson and Rachel Sylvester quote Cardinal Murphy-O'Connor on the recession, capitalism and greed.

It's the end of a certain kind of selfish capitalism. This particular recession is a moment - a kairos - when we have to reflect as a country on what are the things that nourish the values, the virtues, we want to have ... Capitalism needs to be underpinned with regulation and a moral purpose.

As an ongoing crusade on economic education, I recommend leaving out the word capitalism. Greed predated capitalism. It is part of human nature.

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Acemoglu on Greed

One of my favorite economists, Daron Acemoglu of MIT, was interviewed by Russ Roberts on EconTalk today. Their discussion was based on an Acemoglu paper, "The Crisis of 2008: Structure Lessons for and from Economics," January 11, 2009. At 20:47 minutes, Roberts and Acemoglu discuss a quote on page five of the paper and provided below.

Acemoglu highlights the difference between economists' evaluation of the impact of greed on society and just about everybody else's. Greed is a constant and part of the nature of humankind. Societies create wealth by building sound laws, regulations, and institutions.

A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime. It is our collective choice to manage the greed that many in our society inevitably possess. Economic theory provides guidance in how to create the right incentive systems and reward structures to contain it and turn it into
a force towards progress.

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The Pope and Selfishness

In a My Way article, Frances D'emilio reported that Pope Benedict XVI said in his Christmas message,

"Wherever an increasingly uncertain future is regarded with apprehension, even in affluent nations...In each of these places may the light of Christmas shine forth and encourage all people to do their part in a spirit of authentic solidarity...If people look only to their own interests, our world will certainly fall apart."

The Pope has an obligation to speak on moral issues. I dispute the economic order that may be implied in, or insinuated into his statement by others.

I assume that "a spirit of authentic solidarity" refers to generous behavior towards others as taught by Christ. Let's now assume that we double our authentic solidarity by cutting selfishness in half. How would this alter economic institutions?

I would guess that little would change in the market oriented Western world, and that poor nations would institute economic reforms that would make them more like us.

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