ig government cheerleaders wants to portray the BP oil spill in the Gulf of Mexico as a failure of ‘unregulated’ free enterprise – a classic case of what happens of private companies running amok without oversight. While it is almost certainly true that negligence on the part of British Petroleum caused this disaster, it is also true that this disaster is a failure of ‘big regulation’ as well. Let me explain.
For starters, there is a phenomenon that economists call regulatory capture. This is when regulators and legislators get into a cozy and mutually beneficial relationship where regulations are bent in the regulatees favour. All of the presents showered on the Department of Interior officials by BP are evidence of this. When control freaks push for more and more regulation of ever increasing complexity for the public good, the tacit assumption is that the regulators and legislators work selflessly for the public good. But what allows them to assume that? Have we found angels in the form of politicians and bureaucrats? I don’t think so. In the real world, the people burdened with the regulations have the biggest in the regulatory process. The rest of the public lazily assumes that the problem has being taken care of, and indeed it has, just not quite the way they think it has been. The more regulations you have, the worse this problem gets because the legal framework gets more obtuse and complicated. For instance, how many special favours are buried in the 2,700 pages of Obamacare?
As an example, take the remote arctic community of Hall Beach. The town is partially dry in that there is an alcohol committee that decides who gets a license to import booze and who doesn’t. The joke around town was that all the biggest drunks are on that committee. And why wouldn’t they be? They’ve got a big incentive to make sure that they get to keep drinking. If you don’t drink, you don’t really care enough to attend all those boring committee meetings.
A bigger example: Bill Clinton’s legal crusade against big tobacco in the 1990’s. The assumption in the media covering the story was that these lawsuits hurt big tobacco, because they are forced to make restitution for Medicare expenses incurred by aging smokers. Wrong. The tobacco companies benefited handsomely. How? Though they did have to pay hefty penalties to the states, their payoff was that upstart competitors were banned from setting up shop. You see it would be ‘unfair’ because those new companies would not have any restitution to make. Not having sold cigarettes before, they were not yet responsible for any medical bills and therefore weren’t a cash cow for the states yet. Those fines were money well spent as far as big tobacco was concerned because their payoff was a government guaranteed monopoly.
The second problem with excessive regulation is that regulations often have unintended consequences that actually make the problem they are intended to fix even worse. Take oil drilling. Drilling on land in the ANWAR region of Alaska? Banned for environmental reasons. Drilling for oil in the shallow continental shelf of the west coast? Banned, same reasons. Drilling for oil in the shallow continental shelf of the east coast? Banned. Shale oil production in Wyoming and the Dakotas? Banned. What’s left? Drilling for oil off the continental shelf in extremely deep water, where fixing blowouts is extremely difficult – that’s what’s left. Considering the cost and complexity of drilling there, nobody would be doing it if they had been allowed access to oil in the much less challenging regions that are now off-limits.
The third problem is the stupidity of the regulations themselves. Quite often regulations concentrate on irrelevant minutiae while leaving critical issues untouched. For instance, does anybody believe that BP drilling operation was completely unregulated before the Deepwater Horizon rig blew up? Of course not. Likely, they were subject to thousands and thousands of pages of regulations covering all kinds of details – most trivial. In all probability that’s why the Department of the Interior gave them a safety award. All those forms and all those requirements were filled out - to a t. The only problem was that those regulations left the elephant in the room – what do you do when the blowout valve fails? – untouched.