Market Failures, Regulatory Failures

Market Failures, Regulatory Failures

Nick Serpe: Market Failures, Regulatory Failures

At a press conference two weeks ago, President Obama expressed regret for his failure to prevent the oil spill in the Gulf of Mexico. ?In case you?re wondering who?s responsible, I take responsibility. It is my job to make sure that everything is done to shut this down?Where I was wrong was in my belief that the oil companies had their act together when it came to worst-case scenarios.? In an age of attacks on government per se, his mea culpa had a clear ideological thrust. The federal government?s guilt lay not in what it had done wrong, but in what it had not done at all?the crisis warranted more, not less, governmental involvement in the oil and gas industries.

The drilling operation was run by British Petroleum, on a rig owned by Transocean, on top of a mile-deep well plugged with a faulty concrete cap built by the now comically contemptible Halliburton. Yet the federal government still has a large role in such private affairs. As John Judis put it in his fascinating article ?The Quiet Revolution? in February, ?The regulatory agencies, most of which date from one of the three great reform periods (1901-1914, 1932-1938, and 1961-1972) of the last century, are intended to smooth out the rough edges (the ‘externalities,’ in economic jargon) of modern capitalism.? The goal of all businesses is profit maximization, but the short- and long-term needs of society are more expansive than this. Regulation seeks to alter the behavior of business in situations where the profitable would be socially harmful. The agency charged with the management of resources on the outer continental shelf?the Minerals Management Service (MMS)?was intended to do just that.

The agency utterly failed to fulfill its federally mandated role. In years past, it was exemplary only for the forthright flagrancy of its corruption. A 2008 internal investigation at the Interior Department (under whose auspices the MMS operates) revealed serious and repeated ethics violations. MMS officials had received some of the standard gifts from oil industry lobbyists, like free golf games, expensive meals, and Toby Keith tickets; but more astonishingly, they ?had used cocaine and marijuana and had sexual relationships with oil and gas company representatives.? Sex, drugs, and rock ?n roll. As Toby Keith must have sung at those concerts, ?We?ll put a boot in your ass / It?s the American way.?

In return for all the fun, the MMS allowed oil company reps to fill out their own safety inspection reports, which would later be traced over by regulators who had never left their office. Moreover, standard environmental impact assessments were routinely waived, easing the path to more and more drilling projects. Not all was rosy for offshore drillers, but only when other federal agencies with overlapping jurisdiction intervened. OSHA leveled the largest fine in its history last year against?surprise!?BP for failure to comply with safety standards and correct problems which had led to the death of fifteen workers in 2005.

Judis?s titular ?Great Revolution? refers to Obama?s overhaul of numerous regulatory agencies throughout the federal government. George W. Bush, no enemy of big business, had gutted them by slashing funding and appointing ?business executives, corporate lawyers, and lobbyists? to regulatory positions?like Jeffrey Holmstead, lobbyist for the Chemical Manufacturers Association turned Clean Air Act enforcer?or, in some cases, by appointing the incompetent and unknowledgeable?like Michael ?Brownie? Brown, FEMA chair during the anemic federal response to Hurricane Katrina. Obama, Judis claimed, had reversed the trend by appointing competent and non-conflicted individuals to these posts, and by boosting their funding even during a recession year.

The president had made such attempts to revitalize the MMS. According to a May 30 article in the New York Times, Obama, ?shortly after taking office, had assigned Interior Secretary Ken Salazar to clean up the agency,” but despite internal investigations, his orders never produced a changed MMS.

One reason for this, among others, was the MMS?s structural collusion with energy companies. The agency was simultaneously responsible for enforcing safety and environmental compliance and for collecting royalty revenues from drilling companies (another duty for which they?d previously been found guilty of corruption). These royalties serve as rent for the private use of the federally owned outer continental shelf, where BP?s Deepwater Horizon?s project was located. The MMS, then, was both housing inspector and landlord. It isn?t too surprising that when rent was due, it found it quite easy to overlook a leaky faucet or two.

Making the problem worse, the MMS?s position in the executive branch placed it away from congressional oversight, as did its budget structure: ?And because it is financed by the $13 billion a year it collects in oil royalties, it largely escapes the kind of scrutiny that other regulatory bodies get in the appropriations process.? The incentives were unthinkably perverse. The more Texas tea being drilled, and the fewer drilling operations shut down or denied the permission to drill, the more money went into the organization’s own coffers?money that, presumably, was not used to beef up regulatory enforcement. It?s no wonder that MMS scientists? warnings were systematically ignored by their non-scientist superiors: said one former MMS employee, ?If you find the risks of a spill are high or you conclude that a certain species will be affected, your report gets disappeared in a desk drawer and they find another scientist to redo it or they rewrite it for you.? Or that officials would accede to lobbyist claims that remotely controlled shut-off valves, like those used in Norway and Brazil, were expensive and unnecessary.

Obama and Salazar have split the MMS into three parts–the Bureau of Ocean Energy Management, the Bureau of Safety and Environmental Enforcement, and the Office of Natural Resources Revenue. Hopefully, the wall built between these offices will be high and thick, with new regulators who no longer “consider the industry they oversee to be a partner or client (or future employer) rather than an entity that they should hold accountable.” But so long as corporate money plays a large role in campaign financing, and so long as Democrats and Republicans compete to prove their fealty to powerful and potentially destructive industries, this isn?t likely to be the last regulatory fiasco.

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