The Government Can't Regulate Safety (And It Shouldn't Try To)

President Obama has come under heavy criticism for his dictatorial “shakedown” of BP and rightly so. Considering the presidencies of Woodrow Wilson, Franklin D. Roosevelt, Lyndon Johnson, and most recently, George W. Bush, it is no small accomplishment for a president in 2010 to actually commit an unprecedented violation of the U.S. Constitution. I am sure that sooner or later his extortion will be described by his supporters as “bold,” which is the new euphemism for the illegal exercise of arbitrary power.

However, during the June 15 speech* in which he announced this and other planned incursions into what is left of the free market and the rule of law, the president made one very correct observation about the Minerals Management Service (the federal regulatory agency in charge of regulating oil drilling). He said,

"At this agency, industry insiders were put in charge of industry oversight. Oil companies showered regulators with gifts and favors, and were essentially allowed to conduct their own safety inspections and write their own regulations.”

The president correctly recognizes that this is a problem. One cannot reasonably expect that a regulatory agency is going to police an industry if the policemen are all hired directly out of the companies that they are supposed to regulate. However, the president’s statement begs the question, “Who should replace these industry insiders in regulating the safety of deep-water oil drilling?”

The only possible answer is that government-appointed bureaucrats, with no knowledge of or experience with the machinery, equipment, and specific engineering principles associated with deep-water oil drilling should replace them. Of course, logic dictates that if unqualified people start making rules about how equipment and machinery that they don’t understand is operated, there are going to be a lot more accidents. Is there no way out of this dilemma?

There is an important distinction to be made between “laws” and “regulations.” A law is a statute that prohibits conduct that constitutes intentional harm to someone by another person. There are laws against murder, theft, fraud, and other crimes of aggression. A law should always be the exercise of a negative power (the new healthcare bill violates this fundamental principle).

A regulation, on the other hand, has an entirely different purpose. Regulations attempt to prevent economic agents from having the opportunity to harm another person or the environment, whether intentional or not. So, regulations either prohibit actions that do not constitute harm to other people, such as procedures that are considered unsafe by the regulator, or actually compel the regulated person or entity to do certain things that the regulator deems necessary (a positive power). This is why it was necessary for the Minerals Management Service to recruit its regulators out of the oil industry. Who else can tell an oil company how to run an oil well?

However, the president is a bit disingenuous in implying that this agency is unique in being peopled with industry insiders. The practice of hiring insiders to regulate their former employers is the norm in Washington, as is the practice of the regulated companies actually drafting the regulations that they are to be governed by themselves.

If you think that this means that the resulting regulations don’t do a very good job of protecting consumers or the environment, you are correct. Workers aren’t safer since the creation of OSHA, food and drugs aren’t safer since the creation of the FDA, consumers aren’t protected by the Consumer Protection Agency, and as we are now painfully aware, the oceans aren’t safer because of the Minerals Management Service.

However, this “public-private partnership” (formerly known as fascism) does accomplish one thing. It creates massive compliance costs for the companies that are regulated. Combined with the fact that the regulations are written specifically to give an advantage to existing conglomerates, these artificially high start-up costs have the effect of insulating large, established companies from new competition. The result in each regulated industry is a small group of large corporations that have traded their liberty for the high profits resulting from artificially limited competition.

This does not mean that there are not conflicts between government and the corporations. Since the regulations are far too numerous and onerous to be followed, the regulated companies are constantly violating them. When a consumer or environmental issue makes the news, there is an immediate call for more or better regulations to prevent a similar incident from occurring again. The politician uses the incident to seek more power, while the corporation seeks greater protection from competition. The consumer pays higher prices and gets products that are of lower quality and safety than those that would be available in a free market.

This dysfunctional relationship between government, business, and consumers is allowed to persist for only one reason: the widespread misconception that it would be more profitable for unregulated industries to gouge their customers and sacrifice their safety and that of the environment in order to reduce their costs and widen their profit margins. This incorrect assumption flies completely in the face of history.

BP will pay at least $20 billion, not in fines for violating regulations, but in compensation to the people whose lives and properties were damaged by their negligence. There are already widespread rumors that they will be broken up and sold off because of the financial vulnerability resulting from the fall in the price of their stock. Similarly, Enron went bankrupt due to market forces and its officers were prosecuted for breaking the laws against fraud. Both of these outcomes would have been the same without the existence of the regulations and regulatory agencies that governed these companies, because they occurred as the result of the government enforcing property rights, not regulations. When property rights are enforced, the profit motive discourages companies from exposing themselves to liability. Those who do not heed this natural law quickly find themselves out of business.

Thomas Jefferson once wrote, “No man has a natural right to commit aggression on the equal rights of another; and this is all from which the laws ought to restrain him.” He was right. It is a violation of liberty for the government to try to prevent crime or negligence, which it is unable to do anyway. There will always accidents, regardless of regulations that attempt to prevent them. If you want to maximize protection of consumers and the environment, regulations are not the answer.

A truly free market without artificial barriers to new competitors will force companies to constantly improve their products, services, and production processes and limit their exposure to liability. It will also force them to please their customers. The companies that do these things the best will outperform and eventually eliminate those companies that do not. This does not represent “companies regulating themselves,” as President Obama argues, but rather regulation by economic law.

Liberals constantly rail against Big Oil, Big Pharma, and large corporations in general. However, they then call for expansion of the fascist regulatory complex that created them and keeps them big. The cure for the disease is not more of the bacteria that caused it. If you want to see fairness to consumers and protection of the environment, a truly free market is the only answer.

*Transcript of entire speech

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