Wednesday, June 16, 2010

Crazy Capitalists and Rational Terrorists: Welcome to Barack Obama's Alternate Reality

So Obama finally got around to meeting with BP two months after the spill and last night he gave a speech about it comparing the oil spill to a war. After the administration's characterization of terrorist attacks as "man caused disasters" it is beginning to look like they actually don't know the difference between an accident and a war.

But I want to discuss one line of the speech, albeit a very centrally important one, as reported in this article. (The entire speech is here). The reason I want to focus on this one point is that it seems to me to be illustrative of the fuzzy logic of the Left with regard to the issue of capitalism and government regulation.
Obama also included a gratuitous swipe at conservative straw men, who were somehow still in charge of the drilling oversight organization Minerals Management Service and believe in a "failed philosophy that views all regulation with hostility – a philosophy that says corporations should be allowed to play by their own rules and police themselves."
Now this is standard issue leftist talk: if government does not regulate business they will do horrible things to you and me. But wait a moment, is not capitalism supposed to be built on greed? Are not profits the point? So there is an in-built temptation to cut corners to increase profits and that is what consumer protection regulation must address.

But does anyone seriously expect us to believe that BP deliberately cut corners that would increase the likelihood of a massive oil spill that is going to cost BP and its shareholders billions to clean up? OK, I accept that leftists actually have convinced themselves that capitalist companies like BP are really evil and sinister, but I thought that they were supposed to direct their cunning energies to doing things that increase profits, not wipe them out.

Who benefits from this disaster? Not the shareholders: dividends have been canceled for the rest of the year and share prices are underwater. What about the management? I don't think anyone will get a bonus for engineering this fiasco. How does this disaster improve BP's competitive advantage, increase its profits or make its shares worth more? It does none of those things.

Yet here is Obama gratuitously assuming that BP was just longing for the chance to have a billion dollar accident and the only thing standing between them and the realizing of their fondest ambition was government regulators sternly saying "No." This view of BP (and large corporations in general) is that they are a bunch of crazy Russian nihilists who can't wait to commit suicide in as flashy a manner as possible.

Now if Obama was talking about a terrorist suicide bombing, then the crazy Russian nihilist thing would work for me. The problem is that he treats Muslim terrorists as if they were rational (we must address their "grievances") while treating rational capitalists as if they were religious fanatics (we have to regulate them or they will blow themselves up).

Is BP filled with crazy Russian nihilists? Only a person with a very shaky grasp on reality could think so. Obama either think so or else he is just playing politics and counting on people being too stupid to think it through. Honestly, I don't know which explanation is more likely.


Paul said...

Craig, I've agreed with you wholeheartedly with everything I've read here the past few months - until now. Although I don't totally disagree with you now, just parts.

In this case I think we are learning and evidence will prove that BP was indeed negligent. That they did cut corners to cut costs on a "nightmare well" that was eating cash and profit. Of course they didn't do it trying to cause a disaster, they were doing a bad job of managing risk! And they lost the gamble.

Some of the problems in the current "capitalist" system:

First - Limited Liability and no personal responsibility. Shareholders won't loose their homes if corporations take atrocious risks and CEOs and Senior managers won't go to jail.

Second - In some cases (such as this one) there is no way to fix or repair or compensate much of what is lost so there is a real public interest and necessity in protecting against these kind of worst case scenarios.

Third - Shareholder need more power and information to adequately control risk taken by the managers and the incentive (through greater liability) to do it.

It is really a matter of making sure that the Capitalists that are taking the risks are actually commensurately liable and responsible both corporately and personally for the consequences. When that isn't possible (the intangible damage of destroying an ecosystem) some legal consequences are necessary - either criminal after the fact or regulatory preventative.

Craig Carter said...

First, its kind of scary that someone agrees with me that much!

Second, I appreciate your comments. Let's try to see if we really disagree all that much.

1. My main point was that Obama is naive to think that corporations have no stake in preventing this kind of disaster while governments are good at preventing them. Sometimes accidents happen and nobody is to blame. The world is like that. More regulation is a knee jerk reaction.

2. I fully agree with you that BP should spend every single dollar of equity in that company to clean up the mess if that is what it takes. Making sure they do is the proper role and responsibility of government. I don't care if they go bankrupt or not. If they do, then the next company will think twice about taking similar risks. There should be a financial incentive to avoid disaster and there is under the existing system (i.e. the one Obama is trying to get rid of).

3. I completely disagree that limited liability companies are bad. If it were not for limited liability companies Canada and the US would probably be as poor as Cuba. The limited liability company is one of the great engines of prosperity in human history. I think your concern for holding the guilty parties responsible is covered by my point 2.

4. If someone broke a law, by all means he should be punished. But note (and it is not a pedantic distinction) a law is very different from a regulation. If you want more on this distinction, I can give it.

5. I agree with you that there is a public interest in protecting the environment. But how to do so is the question. Is a government knows best approach the best? Or is making sure that companies cannot pollute with impunity the best approach? I'd rather see BP held responsible for the actual clean-up costs than have government take over responsibility for making sure nothing like this ever happens again.

6. I'm worried by your third point because if we eliminate risk-taking we eliminate much of our wealth as a society. There is risk in almost every aspect of life from travel to surgery. I just want us to remember that placing the heavy hand of government regulation on energy companies carries a lot of risk with it as well.

7. I totally agree with your last paragraph. I think we want the same thing in the end. I'm reacting to Obama's usual "The Nanny state is here to protect you from the evil Capitalists" and I'm saying "But who is going to protect us from the Nanny State once all the evil Capitalists are under the thumb of the State?" After all, the USSR had total state control of corporations and pollution was out of control in that country while government regulation was at its height.