23 June 2010

Poll results -- the blame game

Hey! There's a new poll (policy drive) to the right --->>
Who's to blame for the Deepwater Horizon spill?
BP 81%61
Feds 19%14
75 votes total
In this case, I don't agree with the majority (Damian seems to be on the fence). I blame the government for the spill, and here's why: The government has a monopoly on the allowance and regulation of offshore drilling. It was the government's decision to allow BP to drill offshore, and it was the government regulators who could (and did not) dictate how BP and its subcontractors could drill offshore. To be sure, BP may have broken rules, but the government allowed that to happen, either through waivers or fines (or the threat of fines) too insignificant to affect BP's commercial calculations.

BP was not telling the government what to do; even worse, BP wasn't even bribing the government (as far as I can tell) to ignore its transgressions. It seemed that BP was merely working within the constraints that the government had imposed (or had relaxed) and then the predictable happened -- there was a spill. That spill is obviously BP's to clean up -- they have the money and technology -- but that spill was the result, predominantly, of incentives that the government established.

Note this last observation: the government is to blame NOT for the immediate blowout, but for establishing the rules of the game that allowed it to happen. As Thomas Sowell is fond of saying, the important question in politics and policy is "and then what?" and the "then" here was the spill that WOULD result from government's failure to properly regulate drilling. (Ironically, that's the title of a recent interview with Paul Erlich, a man who made a bad bet with Julian Simon.)

Now, let's assume a different scenario -- where the government gave the drilling lease and then made BP responsible, 100 percent liable, for any spill that occurred. In that case of strict liability, BP would bear all of the responsibility and all of the blame for the spill. But that was not the case. The government was telling BP what to do (or not), and BP followed those rules (again, I am assuming that BP did not break laws).

Bottom Line: There is the game, and the rules of the game. BP lost the match (caused the spill), but only because the government's rules made it so (made loss more likely).

25 comments:

  1. Beginning statistics students are asked how many people have to be in a room for there to be a greater than 90% chance that two of them have the same birthday. On first glance, students think that the answer should be more than 100 people. The actual answer is 15. You get this answer by calculating the probability that no two students in the room have the same birthday and then subtracting this probability from 1.
    In the case of deep drilling, the probability of failure of a deep rig has been estimated at 3% per year. MMS licensed thousands of rigs.
    Do the math.
    Some rig was likely to fail because there are so many of them. The oil companies seem to have lowered the percentages of failure dramatically.
    So, on failure, the question should not be 'if' but 'when' and 'who.'--Russian roulette at 5,000 feet.
    As David said, the companies did not issue their own permits.
    On the behavior of BP at this rig, that is an entirely different issue.

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  2. 100 percent liability

    My economic guess is that if the government had made every company 100% liable for any spill and the estimated failure rate of a rig was 3% a year, then there would be no oil drilling in the Gulf and more than 90% of America's oil would be imported from countries run by dictators.

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  3. Who is to blame? The government.

    This seems to be true and a non answer. The government park ranger at Yellowstone is not to blame. The soldier in Afghanistan is not to blame. The USDA meat inspector in Iowa is not to blame.

    Who within government is to blame?
    And why?

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  4. What about consumers who want it all... cheap gas, clean environment, etc. Something has to give eventually, and this time the environment is shit out of luck.

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  5. The question was framed badly. It shouldn't be either/or. Both the government and BP were to blame. Goverment has a responsiblity to properly regulate. It failed. BP has a responsibility to operate in a socially responsible/ethical manner, regardless of what the laws are. They failed.
    It may be naive to expect companies to go beyond their legal responsibilities but in assigning blame the legality of BP's actions shouldn't be our only standard.
    Letting BP off the hook by saying that they were "just doing what the government told them to" may be a fine legal position, but it is not an ethical one. We can and should expect more.

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  6. @Justin,
    Very interesting answer.
    I agree and disagree.
    Here is why.

    I try very hard to be an ethical person. I also own a few small companies.

    As an ethical person, I follow my own ethics as well as I can. These may not be your ethics nor Damian's ethics nor David's ethics. My ethics may not resonate with ethical systems in other parts of the US or in foreign countries. They are my ethics. So, in your scheme whose ethics am I responsible for following. If I follow my own ethics and after the fact you disagree, should I listen to you or follow your ethics? The dilemma is 'Who gets to decide which set of ethics control the rest?'

    For my companies to function decently, I need to follow a set of rules that do not change day to day, month to month, or, preferably, year to year. If there are no such rules, then it is hard for the companies to plan what to do next. Without rules, the companies would be playing Calvin ball (from Calvin and Hobbes).

    Once there are rules (laws), the companies will plan a strategy that makes a desirable product within these rules. The company can't plan within the rules if the rules are not known to everyone and enforced. It should not plan to follow rules that do not exist with the exception that the company's internal ethical code may be chosen to be more stringent than the set of external rules for the location that the company is in. For example, within every project team that I have led, for decades, the rules about equal treatment of people have been more stringent than societal laws.

    So the short version of my response is:

    If a particular ethical principle needs to become part of a law, do the work to make it a law. Then everyone can follow the law and know that principles that are not laws can be adhered to or not as the person believes.

    Does this make sense?

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  7. I also think the question was poorly framed, and I didn't answer it, either.

    For those who think 100% liability will do the trick, I've got a wake-up call: If damages for this spill are $60 billion, twice the biggest estimate I've heard so far, it would take three years of BP's NET PROFITS to pay off. I don't know about y'all, but that is not a killing amount. How much more is your house worth than your net profits?

    There is an ex-ante conversation in the marketplace over things of this nature, and it is all about money. That conversation doesn't do nearly enough to cover the real costs to disasters like this.

    David, I find it incredible that a person who has so much faith in an economic system based on individual achievement, drive and decision-making can so easily dismiss personal responsibility based on "rules" to a "game." This really is no game, nor is it a war - it is a society, and equating it to the simplistic analogies many use when trying to wax poetic about it render it two-dimensional and unreal.

    At the very, VERY least, BP officials ("BP" is a figment of our collective imagination, after all) should have said, "what happens when that much oil and methane under those pressures escapes to the surface? Men die. Because of this, we need to minimize the potential for death at least to the extent that others in the market are doing so. Therefore, we should have two sets of shears in the BPO. We should pump heavy mud, not seawater, to balance pressures. We should use a double pipe. And we most definitely should test the shears under the conditions, as well as immediately stop work when we note a hydraulic leak in the shears" (something my father never saw in his forty years as a mud logger).

    Men died specifically because of the positive decisions by other individuals. Not by neglect, not by lax regulation.

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  8. David, two words: "necessary," and "sufficient." It seems very likely to me that both BP and the regulator are at fault from the "necessary" perspective. However neither is at fault from the "sufficient" one.

    Eric, your math is a little funny. First, it takes 41 people for there to be a 90% chance of concurrent birthdays. Second, if an oil well had a 3% chance of failure, we'd expect something like 15 failures in the Gulf of Mexico alone every year! The actual probability is obviously much, much lower. So low, in fact, that we really have no idea what it actually is.

    And that is the heart of the problem: risk management is tough to do when you can't calculate risk with any accuracy.

    Josh, it's a good point that the cost of the spill is greater than the value of BP. However, that's not the end of the story. My piddly little company is worth either a little more or a little less than zero - depending on whether you calculated it at the beginning or the end of the month. Yet we carry insurance for several million dollars. That's what BP would have done in a rational market. The role of the regulator, then, might have been to ensure that BP was properly insured. No safety inspections, no "best practice." All that stuff is between BP and its insurer.

    And Josh, getting oil out of the ground is dangerous business. How will you decide what the right amount of safety is? Is it when the safety restrictions are so onerous that it's no longer profitable to get the oil? Or just a little less than that?

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  9. @Eric

    Good response.
    I also agree and disagree.

    First I agree that rules are hugely important. I'll repeat, the government screwed up big time.
    However I'd like to stick to my distinction between the law and ethics for a couple reasons.
    First I don't think that ethics can or should always be codified into law. For as you rightly point out, people have different ethics. Furthermore if we walk down that road then we have to start outlawing things like adultery, lying, and name-calling, or having sex with those whom you are supposed to be regulating (none of which are ethical but nevertheless I don't think should be made illegal)
    Second, even if you think such largely undisputed ethical principles can/should be codified, given the political process by which laws are made, it is highly unlikely that many valid ethical principles will be.

    So when we are talking about assigning blame I think we can say without contradiction that BP acted legally (as far as we know now) AND unethically and because they acted unethically they deserve to be "blamed," at least partially, for the oil spill.
    This blame may not be legally binding but society has many other ways to punish those whom it deems to have acted unethically.

    Finally, it is certainly possible that your ethics may be different from mine so that you can absolve BP of any blame for the accident. But, from what I can gather from your writing, I doubt that we are that far apart on this issue.

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  10. @The Outsider

    1. Thanks for checking my math on the birthday problem. I clearly remembered the numbers wrong. The probability goes over 50% at 23 people and 90% at 41 as you said. I got sloppy because we so seldom talk in numbers here.

    2. On profits and risk management

    When a company does a proforma and tries to figure out a credible cost for insurance problems arise once the insurance cost must include things like 3% failure risk when the actual failure risk is much lower, regulatory risk when you do not know whether the regulations will be enforced or kept constant for any length of time, and political risk when political considerations--upcoming elections or nationalistic fervor--change your potential risk.

    So we seem to agree that companies need predictable, accurate, and known risk factors if customers want them to make a product from something as hard to extract as underwater oil.

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  11. @Justin,

    I agree with your paragraph starting with 'So'.

    Also you are probably right that our ethics are pretty close.

    I was just trying to distinguish personal ethics from settled law so that we could have a lucid discussion.

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  12. Outsider, dude, you keep misrepresenting my claims. I didn't say the cost of the spill is worth more than the "value of BP". Far from it.

    I pointed out that twice the estimated high-end cost was still only three times their yearly NET PROFIT. Really, I know you know the difference between a company's value and its net profits for one year. I suppose you just misread me.

    Second, you obviously misread my claim of expectations for BP in this case. They didn't even do what others in their market were doing for safety reasons.

    Outsider, I've lost people in the oil fields, I understand the dangers... so don't play slippery-slope with me. There are expected standards for safety, and if a company uses the excuse of lax regulation to put its own men in jeopardy, well then it's a sad example of why we need to keep a tight leash on them. They are still responsible for 11 deaths.

    Last, do you really believe any insurance company would have payed this out? That's a freaking joke right there. And yes, I admit it's as big a joke as was our lax regulations and corporate whoring (literally, in this case).

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  13. @all -- I phrased it "badly" on purpose. I wanted people to side one way or the other. Of course, responsibility was shared. In fact, the demand side (us!) is just as responsible as far as necessary conditions are concerned.

    @Josh -- I agree that there's a moral component (but not with a positive decision "to end men's lives;" they are paid high wages for risk). I *personally* do NOT work in morally black or gray areas, and I try to do the right thing. The trouble with capitalism is the same as the virtue of capitalism -- a drive to increase profits by increasing revenues and lowering costs. This spill was part of a capitalist calculation. (Ironically, the USSR spilled FAR MORE oil and killed FAR MORE PEOPLE, for different reasons -- of politics). But my point is that capitalism exists within a framework of rules and norms, and these combined to allow for this spill. They may have been in the right balance (in terms of risk-reward) or not. I think not, since rules were badly made or not enforced -- by the Gov't.

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  14. JR emails: "You're wrong. You need to read more, much more, about the facts and circumstances that caused the "spill" (more accurately described as a gushing underwater volcano of oil). Gross recklessness and willful misconduct rising to the level of criminality was involved on the part of BP (and possibly Transocean as well).

    Maybe I should reiterate what I said the other day:
    The Deepwater Horizon catastrophe is unquestionably BP's fault. The company's reckless behavior and even intentional misconduct -- both occurring chronically and in this particular situation -- clearly warrant criminal prosecution.

    The government did play a role in the situation by indirectly enabling corporate criminal misconduct to occur on an ongoing basis through lack of proper oversight and regulation. The regulators in the Interior Dept. (and worst of all in the MMS) become utterly co-opted and corrupted by the industry they were supposed to be regulating during the GW Bush years, and Salazar has done nothing substantial to clean house and enforce the law vis-a-vis oil drilling safety issues during the past 2 years.

    But to blame the government for the catastrophe in the Gulf is like blaming the police for the second murder committed by a criminal because the cops were too incompetent to catch and imprison the criminal after his first murder. Regardless of government failures (which absolutely must be remedied), BP is still the criminal responsible for the Gulf catastrophe.

    And did I ever mention that I used to be a lawyer -- initially I worked for a big law firm representing corporations concerning environmental compliance issues and litigation, then I was a criminal prosecutor -- so I know whereof I speak concerning the propriety of criminal prosecution in this instance."

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  15. Josh, I actually strengthened your claim. I'm suggesting that the cost of the spill might be higher than BP's profits from now to eternity!

    I didn't misread your claim about BP's actions. I'm just not willing to accept that what everybody else does is necessarily the right standard. Maybe everybody else is overspending on safety. Or underspending. How would we know?

    I'm not talking about a slippery slope. And I'm not defending BP. All I'm doing (trying to do) is point out that it's not as simple as saying, "a) BP had a major accident that b) they didn't do every single conceivable thing they could have to prevent, therefore c) they were negligent or reckless or whatever."

    By the way, I'm glad to see somebody else is actually worried about the people who died. I've heard a lot about the fish and birds, not so much about the men. Good for you.

    Why wouldn't an insurance company pay out? That's what they do. I'm not sure why you think that's a joke.

    David, I find your last paragraph a little strange. "The trouble with capitalism is...." Compared to what? In fact, the feature of capitalism you mentioned as being problematic (drive for increased profits) is exactly the same one that would have made it -- rather than top-down regulation -- a better option for drilling in the gulf. Don't you agree?

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  16. JWT emails: "David, you have been in the tropical sun too long!!! Your blame argument is completely specious. By extension of your logic, Wall Street Bankers had no responsibility for the collapse of the world wide economy because they didn't break laws. At least none that they can be prosecuted for breaking.

    I think what you are proposing is called anarchy.

    Get out of the sun or buy a big hat."

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  17. JR emails: "From the standpoint of the applicable law, that's a more complex issue than you (and other people) realize. 'Willful' conduct as legally defined isn't the same as 'willful' conduct in colloquial usage. Unfortunately I'm really jammed up with work right now, so I don't have the time for a proper explanation. But, very briefly: willfully doing the acts that resulted in the violation of law (and spewing hundreds of millions of gallons of oil into the ocean is unquestionably a violation of the law), constitutes a willful violation of the law."

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  18. I'm not sure whether JR's email is exactly relevant. BP either is or isn't legally liable, and they either did or didn't break the law. Neither of which has much to do with whether they acted efficiently or ethically.

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  19. It goes back to a known-knowns within the field of economics: if markets fail so do governments fail.

    The conventional wisdom is if markets fail, government intervention via regulation, staffing a bureaucracy, and funding a bureaucracy through taxing the supposed failed market (taxing firms and immediately passing the tax onto to end-user consumers) solves the problem. Failure becomes a “turkey tax” with all the expense trimmings.

    However, the conventional wisdom casts a blind eye at the known-known: governments fail.

    Moreover, the regulation, bureaucracy, and tax remain after it’s found that: governments fail. It’s rare for reversal of regulations, bureaucracy and tax.

    The entire government intervention scheme remains long after it’s determined that governments fail. Milton Friedman explained these economic phenomena for all to see, in his book Free to Choose.

    Take Friedman again: an underlying problem with failed government policy, yes, and those policies that seemed to solve a problem yet did not solve anything: the extension and perpetuation of such government regulation, tax, and bureaucracy is clearly related to Friedman’s fourth category of spending: if other people are spending other people’s money on other people ……….

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  20. So you intentionally frame the question as a false dichotomy in order to make a point that could have been made without such a dichotomy? And then you make a fine distinction between the "spill" and the "blowout" so that you can categorically blame the goverment while giving yourself wiggle room to blame everyone else as well when push comes to shove.
    Definately too much sun.

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  21. http://www.nytimes.com/2010/06/25/business/25bizcourt.html?hp

    The Supreme Court and Jeffrey Skilling

    On law and ethics

    You can't convict a person for breaking a law when even experienced prosecutors and judges don't know what the law means.

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  22. Don Boudreaux makes a good distinction between the law - of which ignorance is no excuse - and the legislation - of which ignorance is a very good excuse.

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  23. @Justin -- I hope that you're not talking about me -- with "spill" and "blowout". I *did* frame it in binary, but NOT to make a false dichotomy...

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  24. DW emails: "You didn't give us an opportunity to vote to blame it on the Bush adminstration..."

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  25. JWT emails: "O.K., this is getting good. As I understand it, you would like to have 12,000 government inspectors to keep BP from cutting every corner
    possible and another 12,000 to keep Goldman Sachs from cheating and stealing from everybody in sight.

    Geez...I thought libertarians were for individual responsibility. Must be somebody else."

    I reply: "You misunderstand me.

    It's NOT something to solve with MORE inspectors. There are plenty on the job now -- they are just not allowed to enforce the laws..."

    JWT replies: "O.K., now I am really confused. Why do you think that inspector wasn't doing a good job while he was negotiating with BP for a job? Or why do you think that if 17 inspectors is right for fifty wells, why is it right for five hundred? Just some puzzles from a confused gringo."

    I reply: A corrupt government is the root of this problem. BP does NOT have monopoly power to tell the government what to do, but it can (or did or didn't) pay bribes or take advantage of bad rules or lazy regulators. And now we all pay. It's the incompetent government.

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