Stuff Happens

Several people have asked me to comment about the oil spill.  Obviously I am not really qualified—but when has that stopped me before?

Other bloggers have already expressed some of these views, but for what it’s worth here’s my take on things.

  1. BP stock has fallen quite a bit.  I don’t know how much, but I assume their losses are in the $10s of billions.
  2. The environmental damage in massive, probably in the $10s of billions.
  3. BP and the firms they hire are very technically sophisticated.  They probably know as much about how to prevent these accidents as anyone else.
  4. It’s been widely noted that people and institutions become complacent about risks when accidents haven’t happened for a long time.  People have pointed to the Titanic, Three Mile Island, the Challenger, and other similar accidents.

So where do we go from here?  The knee-jerk reaction in Washington and among more liberal economists is “more regulation.”  I don’t have any problem with that view in principle; (I favor government attempts to address externalities) but I just don’t see how the facts match the proposed solution.  It seems to me that there are two possibilities, neither of which call for regulation:

  1. The financial losses to BP are the same order of magnitude as the damage to the environment.
  2. The damage to the environment is an order of magnitude or more bigger than the losses to BP.

In case one it seems to me that we need to simply accept the fact that “stuff happens.”  And hope this will be a wake-up call for the offshore oil drilling industry to be more careful.  In case 2, I think we should just throw in the towel and give up on off-shore drilling.  Or perhaps give up on it in the bigger and deeper wells that are potentially so damaging.  (I assume that smaller wells in shallow water are easier to cap.)  My hunch is that case one is more plausible, but I have an open mind.

I just don’t see an in between case where regulation can do much good.  The oil companies already have a strong incentive to avoid these problems, and the engineers in the oil industry are extremely talented, probably more so than those who would be regulating them.  So it really comes down to a simple issue: is this a “market failure” where incentives are way out of line, or just the sort of really bad event that occasionally happens.  If there is a market failure here, I’d say shut down all the wells that are potentially this dangerous, don’t even waste time on regulation.

By this point my liberal critics have given up reading and are scrambling to write posts about how clueless those Chicago economists are in their reflex opposition to regulation.  But you know I always like to tack on something unexpected, like an O’Henry story.  So here it is:

The lesson of the BP (BP) fiasco is that we don’t need more regulation of off-shore drilling, but we do need more regulation of electrical power and biotech.  More specifically, we need the government to start strategizing about what to do if there is a massive solar flare that wipes out the power grid east of the Mississippi for months on end.  Or what happens if Craig Venter’s evil twin develops a deadly virus that spreads like the common cold.  If we are to have more regulations, I’d rather we have our regulators think about the time bombs that everyone is ignoring, rather than problems that the oil companies are probably already hard at work addressing.

What would that regulation do?  I don’t know.  Perhaps send more satellites into space to warn us of solar flares.  Of more dress rehearsals of shutting down the electrical grid if there is one.  Or stockpile transformers.  For bio-tech we might want to divert some of the money used on research to cure diseases, into research on how to prevent man-made plagues.  Perhaps we could stockpile vaccines that might offer limited protection against certain types of plagues.  Again, this isn’t my area, but from articles I’ve read we seem woefully unprepared for crises that would be 100 times worse than this oil slick.  I used to assume that the government had some sort of secret agency of geniuses that strategized all these dangerous possibilities, like in James Bond movies or Mission Impossible.  But I outgrew that naivete years ago.

I suppose it is more fun to bash the oil industry than think about two billion people dying from a human engineered plague.  But perhaps it’s time we stopped going with our gut, and started thinking more rationally about the dangers that our high technology society seems to be rushing toward with little forethought.

Stuff happens?  Yes, and maybe that means we are overreacting to the oil spill.  But that’s not what worries me.  Even if increased regulation of oil drilling does no good, it also does comparatively little harm.  What worries me is the “stuff” that may happen in areas that we don’t even seem to be thinking about.  Areas where we can’t afford a single accident.

About Scott Sumner 490 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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