In a Truly Free Market, BP Would Be Toast

Advocates for the regulatory state are fond of complaining that things like the financial meltdown, the BP oil spill, and the like, are the result of an “unregulated marketplace.”

But it was federal loan guarantees that first made securitized mortgages into a marketable asset.  And I wouldn’t consider a $75 million cap on liability to be exactly “laissez-faire.”

That’s right.  No matter how bad an oil spill, no matter how many billions of dollars of economic damage it causes, the company is only liable for $75 million over and above cleanup costs.  And they can probably save more than that on the bottom line by deliberately skimping on safety precautions, with a perverse incentive structure of (as Steve Horwitz puts it) “Heads I win, tails I don’t lose.”  That’s exactly the kind of incentive structure that caused Ludwig von Mises to dismiss the Oskar Lange model of market socialism as simply “playing at the market,” because the manager had nothing to lose personally.

And libertarian class analysis tells us that, despite what idealistic liberals want to believe, creating such incentive structures is the main thing governments are about.  As left-wingers like Noam Chomksky put it, the idea is to socialize risk and cost and privatize profit.  And Murray Rothbard described it as “our corporate state” subsidizing the operating costs of big business.

Let’s take a look, instead, at how a free market (a genuine free market, in which all economic actors do business on their own nickel, as opposed to the system of corporate-government collusion we’ve had for over 150 years) might deal with something like the British Petroleum oil spill.

Without a government-imposed liability cap, BP would be liable to the full value of its assets not only for cleanup costs, but for the full amount of economic damages resulting from the Deepwater Horizon disaster.   Estimates of damage to tourism and fishing center on around $5 billion, but it could be far worse if the slick spreads far enough to affect fishing and boating for Florida’s $65 billion tourism industry (just think of the Everglades).  Keep in mind, also, that we’re not just talking about one-off costs this year; we’re talking about big hits to fishing and tourism for years to come, especially as the movement of toxic chemicals up the food chain may make Gulf seafood inedible for generations.  This is not just a one-year loss of income from 130,000 fishing jobs, but possibly an end to these people’s careers.  There are also possible indirect effects if the loss of wetlands increases coastal areas’ vulnerability to hurricanes.

And that’s not even taking into account the possibility of criminal negligence by BP executives — who  apparently rivaled Massey Energy’s Don Blankenship in cutting corners for just about every conceivable kind of safety measure — and the cleaning out of their personal assets by angry juries.

And remember, we’re talking about liability in addition to cleanup costs, which were $3.8 billion for the less severe Exxon Valdez spill.

These cumulative damages stack up pretty tall against BP’s total equity, which was around a hundred billion (at least before its stock took a hit the last month or so).

So absent a liability cap, as the flood of individual and class action lawsuits ate up the company’s equity, the market pressure for holding robust liability insurance (for damages up to tens of billions of dollars) would be a well-nigh non-negotiable prerequisite for economic viability in the industry.

And let’s face it.  After what happened with BP, in a legal regime with no limits to liability short of total liquidation of a corporation’s assets, insurers will have a pretty significant interest in making sure policy-holders don’t bankrupt them.

What passed for federal regulations were ineffectual because, among other things, it’s not the federal government’s own money that’s at risk.  Things get downright chummy between regulators and regulated.  Inspectors sleeping with executives and snorting crystal meth off of toaster ovens is what you call a “public-private partnership,” I guess.

I mean, seriously.  When Congress and the White House are packed with people who all got millions of dollars in campaign contributions from all sorts of regulated industries, and most of the political appointees in regulatory bodies are former directors and vice presidents of corporations in the regulated industries, how tough do you think that regulation’s gonna be?  Last I heard, brown pelicans don’t contribute much to campaign funds.

But if relations between regulators and regulated aren’t really all that adversarial, you know what is  adversarial?  Relations between insurers and the insured.  Insurance companies are notorious for not liking to pay claims, and for taking an adversarial view of policyholders who make them.  Especially when slipshod safety measures mean a multi-billion dollar payout from the insurance company’s own funds.   And the “adversarial” relationship is likely to entail things like actual inspections to make sure the failsafe devices work, maybe requiring relief wells as a standard precaution, things like that.

Insurance companies take the kind of adversarial attitude toward the insured that liberals only wish government regulators took toward regulated industries.

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