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Friday, June 11, 2010

You Really Want Government Drilling for Oil?

It's about incentives.

You’ve got to hand it to the people who really dislike free markets. They see them everywhere (under every bed?) and especially wherever any serious problem arises. That no free market exists within a thousand miles makes no difference whatsoever.

Take the oil spill in the Gulf.  Market opponents are having a field day. They say this finally demonstrates the need for government to run things. Private firms can’t be trusted.

But it looks more like government can’t be trusted. The central government is, in law and in fact, the owner of the part in the Gulf where BP drilled for oil. (I didn’t say it was the legitimate owner.) The owner leased its property to a private company, BP, with a bad safety record (though a good one for sucking up to the environmentalist establishment and bureaucrats) and issued permits for the drilling operation. It then failed to keep a sharp eye on what BP and subcontractors Transocean and Halliburton were doing to its property. That might have something to do with the fact that government regulators don’t have the sort of relationship to “their” property that real private owners do, and they can always be counted on to get friendly with those they regulate. The Minerals Management Service in the Interior Department has a special conflict of interest: It makes money off the drilling it permits and regulates. Thus it could benefit from decisions that are bad for the public.

So what failed here, the market or the State? The call isn’t even close. The free market was nowhere near the scene. It has an airtight alibi. It didn’t exist.

Now with some effort you might get a die-hard anti-market person to concede this. So we move to the next step. What should replace the current hybrid (government-corporate) system? I see only two choices: full government management or full market management. Full government management wouldn’t appear terribly promising, considering that the current problems are traceable back to government management already. How would things change substantially if, instead of contracting out the drilling to a nominally private company, the government instead hired the personnel itself and paid them directly from the U.S. Treasury? Who cares if the rig says “BP, ” “Transocean,” or “U.S. Government” on it? The same fallible people would be in the same position to make the same fateful mistakes. Not much would have changed.

Incentives Matter

That’s because what matters is incentives, not whether a worker is on the government payroll. Why assume that civil service employees know more or care more than people paid by corporations?

But, it will be said, the government workers will have a mandate to protect the environment and the public. Okay, let’s go with that. Let’s say the decision-makers are environmental hawks who really don’t like oil drilling anywhere. They’ll be tough: no drilling unless it’s 100 percent safe. Leaving aside the obvious problem with this standard, that policy would have costs. The risk of oil spills may drop to zero, but we might have to forgo certain important benefits in the process. Poor people, say, might have their prospects dimmed by more expensive energy.

Is the tradeoff worth it? How do we go about answering that question? Government is no help here. It can certainly impose a plan, but constructing a plan beneficial to the public would be like playing darts in the dark. What bureaucrats think is good for us may not actually be good for us, no matter how much they care. Mises and Hayek covered this in their writings on state socialism and economic calculation.

Things are sure looking bleak. Government assurances are worthless whether it contracts out for drilling or does it itself. That leaves only the free market. Can it be trusted?

First off, let’s remember that we live in the real world. There are no iron-clad guarantees. The best we can hope for is relative security. Option A can’t be perfect. All we can ask is that it is better than Options B, C, and D. But how do we decide? When people conclude that government management is the best alternative, knowingly or not they have rigged the game. They are comparing the messy real world in which free markets would operate to an impossible government-managed smooth-running utopia, where regulators have complete knowledge and total dedication to the public interest. This is the Nirvana Fallacy, and the problem with it is that utopia isn’t on the table.

What is on the table are two options: an arrangement where incentives align economic activity with the public interest and one where they don’t. Now which setup seems more promising? One where personnel risk no capital, face no prospects of bankruptcy, and procure their revenue by force (taxation) after flattering members of special-interest-serving congressmen?  Or one where: capital had to be raised from wary investors in a competitive environment, insurance would be priced according to risk, products would have to be sold to buyers who are free to say no, and full and strict liability would haunt every decision, with bankruptcy always looming and no government bailout are even implied?

When you come down to it, the choice is really rather easy.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.