Archives for May 13, 2010

America has been suffering from two serious leaks. The first was the financial disaster in which companies began to shed money and jobs as if they were a broken oil well. The second is an actual broken oil well. Interestingly, these leaks share a common cause.

Newsweek’s Isikoff and Hirsh wrote an excellent article on how BP works Washington.  The gist of it will hardly shock people: BP has made use of lobbying money and political connections to avoid and mitigate lawsuits and regulation. The article alleges that BP’s corporate philosophy is that it is cheaper to operate  equipment without proper maintenance and then deal with the results of failure. While it is good business to take the least expensive avenue, this approach has helped cause  disasters that have killed people and done environmental damage.

On the face of it, this would not seem to be a cheaper way to operate. However, it can be-provided that the costs of this approach is limited or borne by others. There is, as has become widely known lately, a cap on the damages that BP would have to pay. While there has been talk about raising the cap, the legality of retroactively applying this is in question. Having such a cap in place allows companies to enjoy a limit on their costs, thus enabling them to take greater risks by transferring the cost beyond the cap to others.

In addition to the cap, BP (and other companies) enjoy considerable influence in Washington. While this lobbying costs millions of dollars, it is money well spent. This money seems to have bought BP considerable protection and influence. This has enabled BP to continue to follow its operating philosophy of doing things as cheaply as possible by avoiding or severely limiting its responsibilities when problems occur (such as the explosion at the Texas City refinery).

As such, the company can avoid the expense of proper maintenance and safety while shifting the majority of the risk (and the cost when such risks become reality) onto others. These include the people killed, the environment that is contaminated, the people put out of work, and the taxpayers.

This is, of course, eerily similar to the situation of the financial companies. They were able, via lobbying and influence, to reduce the regulations limiting their actions and to get much of the risk transferred to others. When the companies gambles failed and they were losing money, the government folks provided many of the companies with taxpayer dollars. While some companies were allowed to fail, many were considered “too big to fail” (or too well connected). Thus, the rest of us paid the cost of the very profitable risks taken by these companies.

While oil and financial companies would prefer to avoid disaster, we (through our elected officials) have provided them with encouragement to take dangerous risks. We do this by allowing caps on damages that do not serve to deter them from acting in dangerous ways. We also do this by allowing the true cost of disaster to be paid by others. Thus, the companies have excellent reason to take risks. If they win the gamble, they keep the winnings. If they lose, someone else pays.

What, then, should be done?

One challenge is to limit corporate influence. This would require serious changes in campaign funding, lobbying and other forms of influence buying. Since the people who would be making such changes are the very people who are at the corporate troughs, it seems unlikely that there will be major reforms-unless the citizens decide to really push the issue.

Another challenge is to change the laws so that operating in such risky ways is not a good bet. This can be done by raising the caps on damage settlements (but not excessively so-there are good reasons to have limits to liability) and ensuring that corporate leadership is held accountable for misdeeds. Also, putting an end to public bailouts would be worth considering. The overall idea is to craft laws that put the risks and costs primarily on the companies rather than others. This would encourage companies to be more responsible since their profits would be at risk.

It might be objected that such laws would be bad for business. After all, if companies were held accountable and could not shift the risk to others, they would be less able to make profits and increase their hiring.

This is a legitimate concern. The laws need to be crafted so that they do not impose undue burdens on companies or make business too risky for companies. However, it is clearly unfair for the corporations to be able to shift the costs to others while they keep the profits that such shifting enables. Profits that are gained by shifting the

Also, even with such restrictions companies would still be rather profitable.  BP, for example, makes billions in profits. As such, it could afford to have better safety while still leaving a large profit margin in place.  In fact, history shows that regulation that reduces disastrous risks tends to actually be good for companies. This has been shown in the banking industry and elsewhere. At the very least, better regulation could help companies avoid damaging public relations disasters which can be rather costly. Most importantly, effective changes to the current policies could help protect the rest of us from these risk takers.