Outsourcing externalities

One of the major problems with capitalism is the outsourcing of externalities, expected or unexpected events that have broader effects beyond the company causing them. Transocean’s Deepwater Horizon problem, with the thousands of gallons of oil pouring into the Gulf, is a classic example of an externality, and it provides an interesting example of how regulation can actually increase the costs to the populace when a disaster of this nature takes place.

People are understandably infuriated at the outcomes from the well explosion. They are reacting by fleeing companies connected to the event. BP alone has lost $17 billion of its market capitalization, according to The Wall Street Journal. BP representatives have made regular comments about accepting responsibility for legitimate claims. The well’s operator, Transocean, has sought protection from unlimited liability under an 1851 law, the Shipowner’s Limitation of Liability Act. According to the Associated Press, this would limit the company’s liability to $27 million. This seems wrong on its face to most people, and it has enraged Senator Chuck Schumer, who wants the law repealed. Admittedly, Senator Schumer has been known to get apoplectic over a lot less; he seems to have a propensity for getting excited. But this is an easy opportunity for him to capitalize on public anger over the spill.

What he does not mention is that this 1851 regulation had its own externalities, its own unforeseen consequences. If Transocean’s liability is, in fact, limited, the Shipowner’s Act is explicitly the cause of Transocean’s ability to outsource the externality to American taxpayers (or other unfortunate parties involved who may be held to greater levels of liability under joint and several liability laws). I am doubting that Congress, almost a decade before the French developed the first ironclad battleship, had floating oil rigs in mind. Who can blame them? But Congress in recent years has shown a penchant for demonstrating far less foresight, and they are on a roll.

Sending attorney general Eric Holder to Louisiana to threaten criminal prosecution is not the kind of action that leads to good legislation either. There are significant ethical issues involved in this problem, as there are in all externality situations. The environment needs to be protected in a time when unemployment is high. There needs to be strategic thinking about how to address justice concerns and allocation of liability, as well as addressing how to minimize the probability of these “black swan” unexpected events happening.

Shutting down new drilling in the Gulf for six months, as ordered by the president, will do this to some extent. It will also insure that rigs are sent elsewhere in the world, and with them American jobs. These issues are joined at the hip, and when anger causes sudden swerves in a deliberate problem-solving track, you rarely get better ethical decisions. What you get is short-term solutions, and the externalities that go with them.

But I am well aware that as long as the public is watching the BP camera showing oil pouring into the Gulf, deliberate decision making is unlikely. We are witnessing a risk management failure at BP of enormous proportions. I just returned from a Gulf coast vacation, and I wonder if I will be able to go on another one in the near future. I shake my head thinking of the damage to wildlife. What has happened is devastating.

I do not expect to be listened to on this issue, because populist anger is all the rage (pun intended). But we must carefully discern what must be done to minimize harm from what seems just to do in the moment to eliminate all risk and get revenge on those we blame. If not, we should not be surprised at the externalities we outsource to future generations.