deregulation: the policy agenda that brought you the recession unveils new oil spill edition

By now, I'm sure the epic BP oil spill has saturated your consciousness. As the broken well continues to spew somewhere around 60,000 to 70,000 barrels of oil into the Gulf of Mexico every day, I thought I would share with you a couple of thoughts. I have no interest in reinventing the wheel, and the issue is obviously being covered very extensively. However, it seems to me that a disturbing truth has been overshadowed by the endless industry-government and partisan finger pointing which has characterized the majority of the discussions regarding questions of accountability. That truth is that during the last 30 years, both the Democratic and Republican parties have unquestioningly supported policy agendas of deregulation, which has effectively left extractive industries about as regulated as the financial sector.

In the last eight years, the federal government has conducted four training exercises to test the industry's capacity to deal with major spills. Amazingly, one conducted in 2002 actually simulated a deep-water leak in the Gulf of Mexico. It turns out all four exercises highlighted a serious lack of capacity to effectively deal with such an oil leak, moving the involved federal officials to report their concerns. Their primary concerns were regarding:

• coordination and communication between the Coast Guard and the Department of Homeland Security, especially involving the process for naming a National Incident Commander (NIC) to take charge of the crisis;

• a slow or inaccurate flow of information from the industry, particularly caused by companies’ desire to protect proprietary information and officials’ tendency to exclude industry representatives from the government’s command center; and

• a lack of expertise and modern technology for closing a spewing oil well leak and containing a slick through controlled burns and dispersants.

Sound familiar? Clearly, the exercises' findings have been substantiated. Yet the report also claimed that the needed safety measures and coping technologies would not be developed by the industry without the government requiring it do so. The report asserted: “Without requirements in place to require use of new response technologies they will not be developed and deployed adequately.” The logic is obvious. Developing new response technologies is expensive and may forever be unnecessary; thus, there is not a strong business case to make for their development. In economic theory, situations like this are referred to as "market failures," defined as circumstances in which a market incentive structure does not yield the most appropriate decisions or behaviors. Unfortunately for those to whom overly-simplistic ideology is appealing, it turns out the so-called 'free-market' does not always and everywhere function perfectly. If you weren't persuaded by the financial meltdown, perhaps the remarkable inability to stop the devastating oil leak provides a valuable site at which the virtues of deregulation may be reconsidered.

I'm reminded of a book written by economist and director of policy research at The Schwartz Center for Economic Policy Research, Jeff Madrick, which opens:

"It is conventional wisdom in America today that high levels of taxes and government spending diminish America's prosperity. The claim strikes a deep intuitive chord, not only among those on the Right, but also among many of today's Left. It has become so obvious to so many over the last thirty years, it hardly seems to require demonstration any longer. It is apparently so widely accepted by the public and rolls of the tongues of policymakers from both parties with such fluency that one would think the evidence needn't even be gathered."

Madrick continues: "Federal deregulation also reflects such attitudes about government. The lax federal oversight under George W. Bush has taken an increasingly obvious toll, most notably in the credit crisis of 2008 with hundreds of billions of dollars of losses accrued at major financial institutions, but also in areas such as food and drug safety, airline traffic and safety, and most tragically with the aftermath of Hurricane Katrina. But few Democrats acknowledge how much they themselves contributed to a weakened regulatory attitute in the United States. Deregulation began to gain influence with the Nixon Administration in the early 1970s, but Jimmy Carter was a sincere believer and, aside from airline and trucking deregulation, which were arguably sensible, gave financial deregulation a decided push. Under Clinton, much of the New Deal regulatory apparatus designed to restrain financial market excesses was formally and proudly eliminated in 1999, though de facto erosions of the famed Glass-Steagall restriction were underway for a decade."

"Today, an ideological antagonism toward government in the United States has deeply undermined the nation's capacity to deal with rapidly changing times. These changes include rising competition around the globe, a marked worsening in wage growth and widening of income distribution since the 1970s, the rapidly rising costs of health care, an aging population, and the need for ever-more years of education."

Perhaps to this list we should add natural disasters, like the Gulf oil leak. These excerpts point to the fact that, today, politicians from both parties appeal to the inveterate free-market-small-government ideology held by so many Americans. As we continue to confront the effects of three decades of deregulation, we would be well served to replace ill-understood ideology with rigorously tested policy analysis.

As Madrick writes, "the lesson is that pragmatic government should prevail over any categorical or typically ideological dismissal of the uses of government."

The case for regulating certain private-sector activities to ensure the broader public good may never have been so robust.