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BP (Stefan Wermuth)
BP (Stefan Wermuth)

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Regulation can be capitalism's best friend Add to ...

In the years before BP's Macondo well leaked oil all over the Gulf of Mexico and spoiled the party, the U.S. Minerals Management Service, which regulated the offshore oil industry, operated like a brothel. The industry was the john. It paid the MMS (through royalties) and in return was pleasured by deliciously delicate regulations. The intimate relationship literally extended to the bedroom, according to a recent investigation of the agency's conduct from 2002 to 2006, which found that several oil industry representatives had sexual relations with MMS staffers. The orgy is over. This summer, the Obama administration disbanded the MMS for coddling the industry it was supposed to discipline.

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No industry likes to be regulated. Deregulation was the mantra of the Reagan-Thatcher years. Regulation was deemed anti-entrepreneurial, a straitjacket on essentially honest Big Business and a job-killing burden. Business libertarians also argued that regulation was useless, in the sense that Big Government could not prevent accidents or disasters. Such things were an inevitable part of the industrial learning curve. If too many planes crash, the industry will design safer aircraft. As for negligence, the courts could rule on that.

The philosophy took root. Regulatory agencies were starved of funds (in part because deregulation's twin brother, Ever Lower Tax Rates, led to budget cuts), deprived of the ability to go after the bad guys and allowed to cozy up to the industries they formerly disciplined. "Self-regulation" or "regulation lite" became all the rage. In the 1990s and 2000s, the financial derivatives market went largely untouched-a decision that led to the U.S. subprime mortgage market blow-up and all the subsequent misery.

The MMS was a particularly horrific example. At the beginning of 2010, federal inspectors devoted to offshore drilling in the Gulf numbered just 60 for more than 4,000 locations, according to a memo prepared for a hearing of a House of Representatives subcommittee. Over the years, oil industry regulators have become lobbyists, and vice versa. The Center for Responsive Politics says the oil industry has more than 600 registered lobbyists in Washington, of whom 430 have held government jobs, including former members of Congress and directors of the MMS.

In spite of the BP well blowout, the epic stupidity of leaving the derivatives market unpoliced and other regulatory failures, right-wing governments and pundits continue to fight regulation, arguing that tough rules and oversight will kill jobs. But maybe it's the opposite. Maybe industries, and their investors, have suffered precisely because regulation has become overly lax.

If you were to come up with a short list of the most effective regulators on the planet, the U.S. Food and Drug Administration (FDA), the Nuclear Regulatory Commission (NRC) and perhaps the Federal Aviation Administration (FAA) would rank at or near the top. In spite of allegations of data manipulation at the FDA during the George W. Bush era, the agency is still considered the gold standard, not only because it is considered independent, but because it uses a precautionary approach, as opposed to a rules-based one. That means no drug is allowed on the market until thorough testing shows that it's safe.

Sure, pharmaceutical makers gripe about the hurdles they have to clear. And yes, there have been scandals over unsafe drugs, but nothing as massive as the Macondo disaster. The U.S. pharmaceuticals business is vast and hugely profitable. The idea that investors want a gutted FDA is laughable.

The NRC has been in business since 1975. There hasn't been a major civilian nuclear disaster in the United States since Three Mile Island in 1979. If there had been one, the industry would be gone by now, just when it's needed most. The NRC does more than check reactor design for flaws. It also gets involved in operational safety. That's one factor that helps American nuclear plants operate at about 90% capacity, the highest average of any country. As for the FAA, don't you wish all countries in Africa, Asia and South America had the equivalent?

Business will naturally place profits over safety, and they have a vested interest in underestimating operational risk. The 41-year gap between the infamous Santa Barbara, California, offshore spill and BP's Macondo disaster lulled regulators and drillers into thinking that sinking a well through 1.6 kilometres of ocean and another five kilometres of the Earth's crust was no more risky than popping a hole into the Texas scrub.

It took about four months to plug the well. The stock market value of BP, which had been Britain's most valuable company, fell by about half. A strong offshore drilling regulator might have caught the safety flaws before they nearly destroyed BP and the Gulf economy. Regulation can be capitalism's best friend.

Follow on Twitter: @ereguly

 

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