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Oil spill CEOs preparing to make the case for why business will never regulate itself. 

    We seem to be disaster-prone of late—if by late we mean the 21^st Century.  The legacy of 911, the never-ending war on terror, Hurricane Katrina, the economic meltdown, and now the Gulf oil spill has sapped our reserves, shaken our confidence, cost us our jobs, and/or spawned ugly social unrest.  Why?

            On the whole, these are manmade disasters, the causes of which we find in the rear view mirror.  Of the disasters above, which are but a sampling of our bounty, a couple may seem to be outliers, notably 911 and Katrina.  While the causes of each were multi-layered, and some choose to see each as “unmotivated” by human action, that is not really true.  The 911 tragedy had a clear relation to national policy and a lack of sufficient preventative measures in the face of a known threat, and Katrina is certainly best understood as a “man-made disaster.”

            So what are the principles that tie man-made disasters together in a pattern of familiar dimensions?  I would argue there are six fundamentals.  These are:

1. The reactive nature of government

2. Regulatory capture

3. Political capture

4. Short memories and short-term perspectives

5. The notion that technology will fix it

6. Ideological rigidity

The Reactive Nature of Government

            Take the BP Deepwater Horizon oil disaster.  While the ramifications of a major spill 40 miles offshore from some of the most sensitive coastline in North America were always known to possess a disaster potential with a financial liability in the billions of dollars and an immeasurable effect on the environment, we never bothered to enact double- and triple-safe protections.  Those will come in the wake of this disaster in the same way they came to the nuclear industry in the wake of Three Mile Island.  Chalk this up to the reactive nature of representative government.  If it bleeds, it leads, when it comes to action, but not until.

            It is impossible to build sufficient urgency to overcome political inertia until there is blood on the floor or oil on the beach.  This is an immutable law of politics, seemingly akin to the Iron Law of Oligarchy.  In the wake of the disaster, the Congressional hearing begin, as they last did week.  Outrage, grandstanding questions, and more outrage spew forth while the cameras roll.  And while we have the CEOs of BP America, Halliburton, and Transocean in the Senate crosshairs, it is nothing more than a monkey show.  See No Evil, Hear No Evil, and Speak No Evil each blame the other guy.

            Then, in what has become a near ritual in Washington, a presidential commission will conduct hearings, present findings, and pave the way for reactive legislation that will emerge from the process full of loopholes and watered-down safeguards.

            Does it have to be like this?  Heartbreak and hand-wringing aside, our system seems tailor-made to clean up the mess afterwards.  It seems so futile to even a have a knowledge class, when we so diligently ignore the best practices they propose. You can see them get shunted aside in real time if you half pay attention, as occurred last week when NPR sought out university researchers who used accepted empirical methods to argue that the oil spill was far larger than previously estimated.  Of course the original 5,000 gallon-a-day estimate was based on nothing.  President Obama pooh-poohed the probability of an increased severity of consequences.  This was not a shining moment for him, as fear left trace elements in his tone and demeanor.

Regulatory Capture

            And why does all of this occur?  Because, they say, regulators got too “cozy” with industry.  But it is so much more than that.  “Cozy” is way too trite.  Regulatory failure is strategic, intentional, and endemic.  It holds the key to the narrative of nearly all of our disasters, from mortgages to the Upper Big Branch Mine Disaster.  The Bush neocons had a word for it:  regulatory capture.

            It means dismantling the regulatory function while preserving the carcass.  It was accomplished using the revolving industry-agency door and the directive—issued from the very top—that regulatory agencies will work with industry, rather than assume an adversarial role.  I mean, that’s the sensible, civilized thing to do, right?  It forms the fundamental raison d’être of agencies like the USDA.  And it leads to episodes like the E. coli outbreak that claimed the health of Minnesotan Stephanie Smith, who, at the age of 20, was stricken with a deadly E. coli strain after eating a grilled hamburger last year.  But it could be any agency.  It could be the SEC, the Minerals Management Service, the Office of Thrift Savings, or the Fed.

            The inherent conflict of interest between the competing goals of promoting and simultaneously regulating an industry cannot be reconciled no matter how hard you lie about it.  We are not a stupid people.  So why do we accept that the same dynamic keeps happening to us over and over?

            While I do not accuse the Obama administration of promoting regulatory capture as it was pushed during the Bush years, the new administration has been slow to dismantle it and too willing to acquiesce to the status quo.  That seems evident given the poor progress made to date on financial regulatory reform.  At least this looks like it may finally be changing.  And Obama’s acceptance of offshore drilling now looks like a case of poor due diligence combined with a rather cavalier attitude to the potential environmental costs of such a policy.  He would not have gotten away with it if the subject were Yucca Mountain or nuclear waste storage.  That’s because we already had Three Mile Island.

            Luke Mitchell summed it up nicely in Harper’s Magazine last December:  “The polite word for regulatory capture in Washington is ‘moderation.’”  Some pursued “moderation” with a frightening zeal.  Charlie Savage writing in the Boston Globe in April 2006 observed:

 “President Bush has quietly claimed the authority to disobey more than 750 laws enacted since he took office, asserting that he has the power to set aside any statute passed by Congress when it conflicts with his interpretation of the Constitution.”

Many of those laws, of course, enabled sensible regulation.

Political Capture

            Some observers, like Paul Vigna, writing in his blog Market Talk, go a step further. “Forget regulatory capture,” he writes.  “The biggest problem in this nation today is political capture.”  Political capture is the ownership of elected public officials by private interests.  Those interests are private corporations and the organizations that serve them.  It leads Senators like Alabama's Richard Shelby (R), who is leading the opposition to financial reform on Wall Street,  to accept a lifetime total of $5.2 million from a single industry—in this case financial services.

            Political capture arises as the defining phenomenon of government because of the high cost of political campaigns.  Willie Sutton robbed banks because that’s where the money was; well, it’s still there, so who better to go to when you need a cool seven million to run an adequate Senate campaign?

            While the structural anomalies of the Senate are a huge detriment to effective lawmaking, if Senators were not so beholden to the interests that installed them in the first place more would presumably show the ability to think, and legislate, on our behalf.  Of course, this would only pertain to those who are not blinded by ideology.  But we might at least have a shot at some interest-based solutions.

            Political campaigning remains a game of mass media and mass events.  Both are expensive.  We could try one simple solution to reduce the cost of getting elected:  shorter campaigns.  Shorter campaigns could be less expensive campaigns, especially if enacted through legislation that entailed other electoral reforms.  These could presumably rein in permanent campaigning by restricting the tax-exempt status of candidate-focused advertising by 501(c)4s, for example.  Admittedly, the Supreme Court’s Citizens United decision complicates such a plan, but, paradoxically, it could be that decision that spurs Congress to commence another round of campaign reform.  We have witnessed efficacy of a short campaign in Britain this month.  Though the outcome was widely viewed as ruinous to orderly democracy, who cares?  When was the last time we had an orderly democracy here?

            Shorter campaigns plus campaign reform, taken together, may be the only way we reduce the permanent corruption of political capture.  And if you want to be reminded of its pernicious effects, you need look no farther than Mississippi Governor Haley Barbour, a former Washington lobbyist, who said this week of the oil-fouled waters off his coast, “We don't wash our face in it, but it doesn't stop us from jumping off the boat to ski.”

Short Memories and Short-term Perspectives

            “There will be tremendous lessons to be learned here,” Interior Secretary Ken Salazar told a Senate panel on Tuesday.  There always are.  And they are usually forgotten in short order. 

            Attorney Brian B. O’Neill, a partner at Faegre and Benson in Minneapolis, devoted 21 years of his legal career to more than 32,000 forgotten Alaskans whose lives were devastated by the Exxon Valdez oil disaster.  The claims he represented against Exxon were only resolved last month.  In the interim, O’Neill told Minnesota Public Radio on Tuesday, the affected Alaskans’ lives were further scarred by “bankruptcy, divorce, and death” as a result of the loss of their livelihoods and their way of life.  But we, in the year of “Drill, Baby, Drill,” have forgotten all that, haven’t we?

            When asked how the BP Deepwater Horizon disaster compares to Exxon Valdez, O’Neill estimated the financial devastation would be “way in excess of the Valdez.”  He put the ultimate damage at between $4-$6 billion.  That is astonishing.  And then he said that if BP fights like Exxon fought, these claims may be litigated until 2040.  Yet, even as we are in the midst of Epic Fail in the Gulf, we are already starting to forget.  Voices are urging “moderation.”  “Think about jobs,” they say. Rush Limbaugh says, “The ocean will take care of this on its own if it was left alone and left out there. It’s natural. It’s as natural as the ocean water is.”

            Beyond short memories is the preoccupation with short-term outcomes, as in quarterly financials.  These are the metrics that led Massey Energy’s Chairman Don Blankenship to “suggest” in 2005 that his workers “run coal” rather than install ventilation infrastructure.  These are the metrics of expediency that led BP to repurpose a fail-safe mechanism called shear rams, a devise that was already arguably under-engineered, in such a manner as to make them unusable in the event of an actual emergency, according to a May 3rd Wall Street Journal article.  Even then, they spent a day monkeying around with them to see if they could undo their own handiwork.  In addition, BP compromised on safety when it eschewed a remote-control shut-off switch for the well, again, according to the Journal.

            Short-term thinking led every firm on Wall Street to go all monkey-see monkey-do on derivatives.  The pressure to rack up quarterly profits has the real and documented effect of muting critical thinking about dangerous endeavors.

            The quarterly mania for profits is inextricably embedded in corporate culture and there is, at present, no foreseeable means to extricate ourselves from its destructive effects.  In this case, culture is destiny.  Corporations were not always run in a manner this short-sighted.  On the contrary, they were once about building empires in the long term.  But Wall Street calls the tune now and all that is over.  And this is what makes the integrity of the regulation process so essential.

            As Joyce Appleby, a history professor emerita at UCLA, and author of The Relentless Revolution: A History of Capitalism said on C-SPAN this week, “Capitalism does not correct itself.  It needs regulation.”

“Technology Will Fix It”

            One of the biggest fallacies of our age, the notion that technology will fix it, may yet be the death of us.  It fuels procrastination and Hail Mary solutions.  It leads to crappy tiles on the space shuttle.  It gives us the idea to attempt to engineer no less than the climate of the earth with sun shades and deep carbon dioxide deposits.

            The overreliance on technology allows us to play fast and loose with worst-case scenarios. Such thinking infected the financial markets before the meltdown.  The technical trappings of the market were said to provide fail-safe protections that last week’s thousand-point drop seems to have punctured.  And the derivative products themselves were nothing more than economic technology—“hedges’ in the parlance of the day.

            When it comes to environmental disasters, we may have already reached the tipping point where the emerging paradigm is the man-made environmental disaster.  I am not talking about the reliance on environmental engineering that exacerbates a disaster as in the case of Hurricane Katrina, but a disaster that is in fact caused by the actions of man.  The demise of the Ganges River might be one such example.  Certainly, a two-foot rise in worldwide sea levels would qualify.

            When it comes to scenarios like these, there is no technology in the world to fix it.  We are left only with the technology of prevention.  Slowly, agonizingly slowly, we take baby steps in this direction while we rack up the hottest year (so far) on record.

            In fact, and this pervades all the permutations of disaster we face, hyper-complexity is the enemy—hyper-complexity or technological overcomplication.  I am talking about an entire technological infrastructure, a matrix if you will, that is as weirdly engineered as Microsoft software.  Layer upon layer of “fixes”—technological fixes—are the source of so many failure modes that this has become a dominant narrative of our commercial culture.  From Pacemakers to peas, technological fixes yield news stories of things gone wrong. 

            And yet, like the true converts we are, we look to technology to bail us out.  And when it does not, like today, looking out to the Gulf of Mexico, we are dumbfounded.

Ideological Rigidity

            There is a good reason science cast off ideological rigidity for the most part more than a century ago.  Ideological rigidity leads to the same answer over and over.  And if that answer is wrong, well, consult the history of the Middle Ages, because that is where ideological rigidity leads us.  Either there or to Iraq, where ideology and divine inspiration led to the attempt to bring “freedom” to a would-be puppet state.  And, as in the case of Iraq, ideological rigidity tends to exacerbate the effects of the other five causes of man-made disasters.

            If your economy is heading for Niagara Falls in a boat with 300 million passengers but you hold dear the ideological view that throwing a lifeline will undermine moral hazard, well, you are going to have a much more spectacular disaster than otherwise.  If you have to lay off most of your state’s teachers under the age of 30 because you will not raise revenues, in ten years you are going to have a disastrous teacher shortage.  If you will not allow for the dissemination of birth control because of religious superstition and dogma, we are in for a world of hurt.

            Six planes in relation, from reactive government to ideological rigidity, offer modest intellectual tools to averting ever-larger disasters.  By looking at the converse, you can see a way forward:  proactive government, effective regulation, political autonomy, long memories and a long-term perspective, understanding the limits of technology, and ideological flexibility.

            Does that sound so utopian?  It sounds so eminently doable and so eminently not.  If you choose to look at things this way, you are forced to conclude we are on the wrong path and the solutions offered us in the daily political grind are false, intentionally so.  So, we flirt with disaster while the band plays on, and all we seem to care about is fighting over which tune they play.

            Meanwhile, the wake-up calls are so very loud and clear.