TT's Lost in Tokyo — by TokyoTom

Another BP post!

1. Over on his The Money Illusion blog, Chicago-school economist Scott Sumner has a curiously uninsightful post up on the BP oil spill: “Stuff Happens“. Perhaps some of my friendly enviro-hater readers here might like it, but I didn’t. I left the following comments (still pending approval as I copy them here) (emphasis added):

Scott, what you’re rather glaringly missing with your cost-benefit analysis – which blithely ignores the real face of “externalities” – is the institutional setting, which can be summed up as a tragedy of the government-owned and (rather expensively) mis-managed comonns.

Ed Dolan is exactly right about incentives problems facing BP and regulators, none of whom really directly own the downside risks, which instead are borne by fishermen, oystermen, shrimpers, the tourist industry, those who value wildlife and a clean environment, and those who consume what harvesters catch. Some of these are very marginalized communities, but all face tremendous difficulties organizing and expressing their interests effectively with respect to resources on which their very livelihoods may depend, but in which they have no ownership rights.

On the other hand, the oil industry are very powerful actors, very well organized and represented in the corridors of power and influence (remember Cheney’s secret energy meetings, and that BP was one of Obama’s largest donors?), and are adept at shifting risks to others (though self-damage is possible when catastrophic losses occur). As Ed Dolan rightly notes, this is built into their very nature as a result of the government grant of limited (zero) liability to shareholders, who have disincentives to monitoring too closely or to questioning whether profits come at the expense of others who – because of government ownership – have no effective voice regarding losses they bear.

It’s hard to feel much sympathy for either the oil cos or government in theis Avatar-like situation, but I don’t mean to castigate either as “evil”. Rather, we simply need to take a close look at the problems of Moral Hazard that our government interventions – from grants of limited liability, to government resource ownership and concomitant inept and occasionally management – have been fuelling.

Answers lie not in gross CBA analysis, but in letting resources users own the rights to manage and harvest wild resources (which would give them direct claims agains polluters), AND to determine when and where seabed resources are developed. (NOAA’s successful experiments with “catch rights” need to be vastly scaled up.) We would still have oil & gas development, but the fishermen would do a vastly better job of policing the oil companies – who would have to face other resource users with full incentives and abilities to protect their livelihoods. (Obversely, oil companies would also be better managers if they had control over the very valuable fish harvest rights in particular blocks, and would manage to in a way that would reflect such value.

Sincerely,

Tom

Austrian-leaning Ed Dolan, whose recent post on Moral Hazard and agency issues I have just noted, joins in on the comment thread. 

Sadly, Sumner is not alone in paying little attention to those who are at the short-end of the messy oil stick.

2. Liberal blogger Matt Yglesias has a useful blog post up in response to Scott; unfortunately his comment thread has fallen into blind, clear-sighted partisan bickering.

3. I see Richard Posner now has a similar blind piece of blather up at the Washington Post: “From the oil spill to the financial crisis, why we don’t plan for the worst”; more on Posner perhap’s later.

4. Sadly/fortunately, for those of you who haven’t seen or (or could use a little further diversion) this litle one-minute “BP kittens ” YouTube video does a better job than virtually all discussions I’ve seen in noting relevant agency and institutional failure issues.

Ed Dolan (Professor at Stockholm School of Economics in Riga, Latvia and editor of the Austrian classic, The Foundations of Modern Austrian Economics (online here), and author of the classic pamphlet TANSTAAFL: An Economic Strategy for the Environmental Crisis (1971), has a post up at his new economics blog that ties together the above subjects, each a favorite of my own.

As I noted in a recent post referring to BP and ocean ecosystems :

Aren’t there huge and obvious commons-related problems that stem from government ownership and “management” of resources – be they federal lands, the seas, our fiat currency, or our financial institutions and publicly-listed companies?

But enough of me; here is the meat of Mr. Dolan’s post, What Oil Spills and Financial Crashes Have in Common: Gambling with Other Peoples Money (emphasis added):

:What do the Gulf oil spill and the recent financial crisis have in common? Both of them are the result of risk-taking gone wrong. …

The real trouble comes when you have a chance to gamble with other people’s money. Then you start looking for strategies that usually give you at least a modest payout even though they involve a small chance of catastrophic loss. These are called negatively skewed risks. You take these risks, even if you know they have a negative expected value, because you think you will pocket a gain most of the time. You expect that when disaster finally strikes, you will be able to walk away with your past winnings in the bank while sticking someone else with the loss.

Several common situations in business life give rise to the temptation to gamble with other people’s money. Executive compensation plans that emphasize short-term bonuses, include golden parachutes, and lack clawback provisions are one example. Not only top executives face such incentives–mid-level traders, engineers, and analysts may also take risks in the hope of bonuses or promotions, with the expectation that the worst that can happen in case of catastrophe is that they lose their jobs. Stockholders may condone such risk taking because they are protected by limited liability.

Both the Gulf oil spill and the financial crisis had their origins in negatively skewed risks. Investigators in the Gulf disaster are looking at whether BP and its contractors underplayed downside risks when they made technical choices, ignored warning signs, and neglected preparations for dealing with a worst-case spill. In the financial crisis, negatively skewed risks involved excessive leverage, manipulation of ratings, design of complex securities, and several other factors.

What can be done? Regulations can be made stricter, but who will regulate the regulators? Who will ensure they are not captured by special interests? Compensation plans can be changed–but if shareholders do not take the initiative, can outsiders fix the system for them? Corporations can be held to strict standards of legal liability, but individuals who make bad decisions are not necessarily the ones to pay when their corporate employers are found liable.

There is no magic bullet. We can only hope that after a couple of really big disasters, people will be more alert to early warning signs the next time.

What Ed has failed to note is that both the financial crisis and the BP oil spill/Gulf crisis are examples of the “Tragedy of the Commons” – when the commons are either the government pocketbook itself, or resources owned/managed by the government. Solutions to management of the Gulf lie in giving more rights – such as “catch rights” and a veto over oil and gas development – directly to resource users like fishermen. With their livelihoods on the line, they would be much more diligent than government can ever be in making sure oil and and gas development proceeds safely.

Another BP post! [links updated] I have just stumbled across  by Jeffrey Tucker’s May 27, 2010 post on the Mises Economics Blog regarding the Obama administration’s decision, in response to the BP mess in the Gulf, to suspend consideration of applications to drill in the Arctic.

TokyoTom June 8, 2010 at 5:14 am

Jeffrey, how true – but how ironic and sad that, like Lew, you only look at the potential impact on US consumers (and businesses) of Obama’s (much, much, MUCH delayed) action to suspend consideration of applications to drill in the Arctic (and now elsewhere on the OCS), but ignore the PRESENT and very real impact of incompetent and corrupt government management on all of the people who live in, on and draw their LIVELIHOODS from the Gulf of Mexico commons that are now being despoiled by the BP spill. I mean, aren’t losses to fishermen and others in the Gulf region staring us in the face?

See, e.g., the reports here on marginalized fishermen http://twitter.com/Tokyo_Tom/status/15689063688 http://twitter.com/Tokyo_Tom/status/15689222932And it’s a shame that, rather than float ideas on how to end the Tragedy of the Government-Owned/-Managed Commons – such as expanding fishermen’s rights to manage Gulf resources – you see fit to suggest that the real solution lies in more Avatar-like Drill, Baby, Drill! resource exploitation under the current and obviously flawed rules. As for the rest of you, generally my disappointment with shallow, partisan thinking continues. Perhaps a cut and paste from a recent post will serve? http://tokyotom.freecapitalists.org/2010/06/04/bp-39-oil-spills-inconvenient-quot-ecosystems-quot-reason-tv-rants-quot-dying-oceans-quot/

I continue to scratch my head on the knee-jerk reactions by Austrian-libertarians on problems regarding management of common resources: are not our physical and electronic communities commons? Don’t commons support many people directly, and us all indirectly? Aren’t there huge and obvious commons-related problems that stem from government ownership and “management” of resources – be they federal lands, the seas, our fiat currency, or our financial institutions and publicly-listed companies? Don’t we all know that government gets in the way, frustrating the ability of people with differing preferences to search for and reach mutual accommodations, and instead putting them at loggerheads in zero-sum situations? The unbecoming reflexive hostility indicates that even those who think they have their thinking caps on cannot see past the partisan conflict that government itself generates. Kind regards, your resident Austrian misanthrope, Tom

2. For those who want to put their thinking caps on, I note that I have a number of posts on managing commons resources – see my posts on Nobel-Prizewinner Elinor Ostrom for starts – and on fisheries and on federally-owned oil and gas resources like the OCS and ANWR. They might provide a little grist for the mill.

Another BP post!

Warning: salty language from salt-of-the-Earth people kittens:

[View:http://www.youtube.com/watch?v=zt617zYAbng:550:0]

The creator can be found here on Twitter: http://twitter.com/tremendousnews.

This seems to be getting some play, so head’s up you culture-watchers!

While this unfortunately skirts addressing the Federal Government’s role in engendering the BP catastrophe, one has to wonder — Does it make any sense to treat corporations as “persons”, given the differences in incentives structures?

Another BP post!

I continue to scratch my head on the knee-jerk reactions by Austrian-libertarians on problems regarding management of common resources: are not our physical and electronic communities commons? Don’t commons support many people directly, and us all indirectly? Aren’t there huge and obvious commons-related problems that stem from government ownership and “management” of resources – be they federal lands, the seas, our fiat currency, or our financial institutions and publicly-listed companies?

Don’t we all know that government gets in the way, frustrating the ability of people with differing preferences to search for and reach mutual accommodations, and instead putting them at loggerheads in zero-sum situations?

The unbecoming reflexive hostility  indicates that even those who think they have their thinking caps on cannot see past the partisan conflict that government itself generates.

But I dither.  Allow me to gather here for interested readers some scraps of information regarding the state of our oceans.

1.  From my initial response to Lew Rockwell‘s “Feel Sorry for BP? ” post:

Lew: “the environmentalists went nuts yet again, using the occasion to flail a private corporation and wail about the plight of the “ecosystem,” which somehow managed to survive and thrive after the Exxon debacle.”

Me: Seems to me your “facts” about the damage done by Exxon Valdez to the “environment” – including the small segments used by by man – and recovery/compensation are basically counterfactual:

http://en.wikipedia.org/wiki/Exxon_Valdez_oil_spill

http://www.alternet.org/environment/22260

Further, it seems you don’t have any real clue as to the escalating damage that man is doing to our shared ocean “commons”. These two TED talks might help open your eyes:

http://www.ted.com/talks/jeremy_jackson.html

http://www.ted.com/talks/sylvia_earle_s_ted_prize_wish_to_protect_our_oceans.html

4.  I note that I have already posted extensively on oceans/fisheries management; for interested readers here are links to some of those posts:

http://mises.org/Community/blogs/tokyotom/search.aspx?q=ocean

http://mises.org/Community/blogs/tokyotom/search.aspx?q=fisheries

http://mises.org/Community/blogs/tokyotom/search.aspx?q=whale

5. Finally, one wonders whether, if fishermen in the Gulf of Mexico had clear “catch rights” or similar property rights, and had control over oil gas exploration and development decisions, they would not have done a good deal better in overseeing BP, and whether BP would not have been quite a bit more careful.( Likewise – if BP owned the Gulf, and received revenues from permitting fish harvests!)

Well, one may well argue that, if BP were a person, it would be “a career criminal”, but surely not all corporations behave in a criminal matter.

Nevertheless, I think we all recognize that although corporations are owned, managed and staffed by real people, the incentives that people in such organizations face and their consequent collective behavior – what we call the behavior of “the corporation” – may differ quite markedly from those of ordinary, living and breathing humans who live in communities, and from people in groups that do not have limited liability (a feature that underlies the pervasive and increasingly enormous and costly  “moral hazard” problems that our society now confronts), unlimited life and purposes, other favors granted by the state, which have less political power, and for which the “principal-agent problem” is less severe.

So does it make any sense to treat “corporations” under the law – or for purposes of discussions on LvMI pages – as if they have the same rights as real persons?

Allow me to refer to a post I did in wake of the recent Citizens United decision by the Supreme Court : Speech and Sociopaths: Does it make sense to collapse, for Constitutional and legal purposes, the distinctions between human beings and corporate “persons”?

My other posts on the Citizens United decision are here.

Daniel McCarthy, senior editor of The American Conservative, posted a thoughtful essay the June 1 issue, Better Red.

Here are a few excerpts (emphasis added); skip to the last paragraph if you’re in a rush:

Everyone’s worst fears for America are coming true. The traditional Left sees increasing inequality and falling real wages for workers. The libertarian Right grows alarmed at the federal government’s ever heavier hand in the economy—from bailouts to healthcare reform—and the steady erosion of civil liberties before the flood tide of the national-security state. Cultural conservatives, meanwhile, lament a toxic environment of competitive sex and recreational violence. Americans still enjoy freedom of a sort, but not old-fashioned economic or political liberty, only the chimeras of lifestyle choice.

You can sleep with whomever you want, but there will be no legally binding commitments, and whether you keep your house or your children will be up to a judge. You can quit your job at any time, but good luck finding another. You can vote for the Republican or Democrat of your preference, and they will both give the country bigger government and more wars. Even which church to attend is a consumer choice, as self-interested and trivialized as which soft drink to buy. For all the fetishization of choice, Americans are taught by their institutions that there is only one way to live: casually, unconcernedly, without strong connections to anything but the provider state and its flag.

This is not the world that conservatives or progressives, or for that matter libertarians, wanted to make, but all deserve a share of the blame. The welfare state has deprived millions of Americans of the will, as well as the ability, to manage their own lives. Indiscriminate application of a free-market ethos to other spheres of life has reduced attachments to whims, atomizing society. And for all their hand-wringing about culture, conservatives have not applied themselves to creating art or literature, but have spent their energies glorifying militarism and shivering in fear of leftist and Islamofascist phantoms. They locate the ills of society not in the state or the oligopolized market, but in bad people—Commies, terrorists, McGovernites [and envirofascists! ed.] —who can be bombed, jailed, or tortured away.

A different kind of economy, politics, and society can be imagined, one characterized by smaller government, more widely dispersed property, and an interesting local life not defined by big bangs delivered from a glowing screen. Progressives like Christopher Lasch have tried to describe such an alternative. So have left-libertarians like Karl Hess—they are Left not because they are “libertines,” as the canard goes, but because they look critically at concentrations of power. And so, too, have traditional conservatives—and now Red Tories like Phillip Blond. …

In practical politics, too, American conservatives have often made a point of promising to tame the market and create what George H.W. Bush called a “kinder, gentler America.” Yet the results have been disappointing. Richard Nixon entertained the idea of creating a negative income tax to benefit the poor—but his escalation of the war in Vietnam (and Laos and Cambodia) and the Watergate scandal put the lie to the myth of Nixon’s bleeding heart. George W. Bush’s “compassionate conservatism” and vows to foster an “ownership society” may have sounded distant echoes of G.K. Chesterton’s distributism. Yet Bush, too, is remembered for other things—like Enron, Abu Ghraib, Lehman Brothers, and “Mission Accomplished.”

Conservatives of many stripes have recognized that there is something deficient in the American tradition. Yet attempts to supply the missing element have not only failed, they have served to provide rhetorical cover for further consolidation of wealth and power in Washington and Wall Street. …

McCarthy’s appeal is echoed in Tom Friedman’s recent essay calling for greater personal and civic responsibility (and “more and better” regulations, too, of course).

In the U.S., however, the greatest escalations of police powers have taken place under Republican presidents elected in the name of “values voters” or the “silent majority.” Anti-liberal leaders like Nixon and the second Bush have only made matters worse—the culture coarsens all the more while the demands of national security displace those of hearth and home.

As actual morality disintegrates, politics becomes deeply moralistic. This is not a paradox: it is always easier for the virtucrat to demand that government reform society than for him to reform himself or his own neighborhood. Conservatives no less than liberals have indulged in morality by proxy, according to which the measure of a man is not how he behaves but how he votes and what ideology he professes. Control of government has become a substitute for leading a good life …

America does not just suffer from the absence of similar institutions to give authoritative voice to counter-values. We have national institutions, but not of the traditional, pre-liberal kind. Ours are the White House, the Pentagon, and the Federal Reserve. Everything else is the domain of wealth and private interest—including Congress and our churches. …

Here is McCarthy’s challenge, which to me speaks directly to the mission of The Ludwig von Mises Institute and other Austrian institutions of excellence:

There is no way around that: without formal institutions of authority, informal hierarchies rooted in excellence of character will have to do. George Washington, after all, had a higher place in the hearts of his countrymen than George III did in those of his subjects. Today the place for such ethical leadership is not in the White House, but in legislatures and the splintered institutions of civil society—perhaps most of all in the nonprofit sector of think tanks and universities, the closest things we have to what Samuel Taylor Coleridge described as the clerisy. Our universities have fallen far short of their missions, but institutions such as the Tocqueville Forum, which hosted Phillip Blond at Georgetown, may yet provide seeds of regeneration.

Further to my preceding BP posts regarding the gaps between (i) Austrian insistence that we focus on individual rights and plan formation and (ii) the penchant of some (many!) libertarians to support corporations while bashing citizens groups which are unhappy with the impacts of corporate actions on others, I stumbled across the above-captioned essay by Bruce Dixon, Editor of The Black Commentator (May 12, 2010, AlterNet).

I here are some liberal quotes (no pun intended; emphasis added):

If BP were a person it would be a career criminal, a pathological liar and an international serial killer with a rap sheet several times the size of the Chicago Yellow Pages.

Apart from Mr. Dixon’s questions, it seems to me one must ask – does it make any difference, either to the broader statist environment that we find ourselves, or to the behavior of BP, that BP is a corporation that is granted unlimited life and whose shareholders are excluded from any personal liability for corporate acts? I think that it undeniably matters, and quite deeply.

Just as libertarian and other commentators have suggested that we need to insist that firms that engage in the banking business be partnerships with unlimited liability in order to control the moral hazard engendered by the current system, so too should libertarians insist on restoring personal responsibility and ending corporate limited liability. If we do so, we will certainly see much greater efforts by those who own and/or manage business enterprises to control risks and behave responsibly – which will take pressure off of spiralling calls for corrupt and inept governments to “do something”!

I thought I would bring to readers’ attention this concession/semi-confession by James K. Galbraith in testimony to the US Senate Judiciary Committee earlier this month.

Galbraith’s testimony is interesting and useful, but nevertheless shallow – he completely misses the role of government regulkation and money manipulation in fostering moral hazard run rampant, or the insights of Austrians, who generally had a great idea of the problems – for decades 

Galbraith focusses solely on financial fraud, and ignores the deeper failures of Keynesianism. His litany of failures is sobering, but he provides zero insights into why those failures occurred – other than the greed understandably manifested when those who govern are busy playing with OPM – Other People’s Money. Still, I can’t argue with his closing(emphasis added):

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.

Readers might also enjoy this interview/debate Galbraith did on the Scott Horton Show/Anti-War Radio with Robert Higgs, Senior Fellow in Political Economy at the Independent Institute.

Galbraith is Professor of Economics at The University of Texas at Austin, and is author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.

I have already criticized Lew Rockwell’s May 5, 2010 piece, “Feel Sorry for BP?”; and commented on a response that I received from Stephan Kinsella; I’d like here to  focus on a curious inconsistency.

1. I note that Lew Rockwell asserted that: (emphasis added)

“The abstraction called the “ecosystem” — which never seems to include mankind or civilization — has done far less for us than the oil industry, and the factories, planes, trains, and automobiles it fuels.”

and

“the environmentalists went nuts yet again, using the occasion to flail a private corporation and wail about the plight of the “ecosystem,” which somehow managed to survive and thrive after the Exxon debacle.”

While I questioned whether Lew really intended to assert that resources like air, that we use freely from the atmosphere are “far less” important to us than the oil-derived energy we use and disagreed with his facts about the continuing effect s of the Exxon Valdez spill), I agreed with him that the “ecosystem” is an abstraction that may often be unhelpful (emphasis added):

Austrians understand that focussing on the “ecosystem” is often an unhelpful abstraction and distraction from the fact that there are competing and conflicting interests held by people in resources that are not effectively owned or managed. The Austrian focus is on how to enable those with conflicting desires to coordinate their planning …

This perspective was neatly summarized by Roy Cordato, who said (emphasis added)

“by placing environmental problems within the context of personal and interpersonal plan formulation, we discover that they are not about the environment per se but about the resolution of human conflict.”

“The “social cost” approach to environmental economics has led to the “dehumanization” of issues related to the environment [where] [p]ollution or “tragedy of the commons” problems are not problems because of the damage that some people may or may not be inflicting on others, but because they create what amounts to disembodied harms. A problem occurs because some goods are “overproduced” while other goods are “underproduced.” In its more extreme form this has led to a separation of the concepts of costs and harm from human beings completely, substituting notions such as “costs to the environment,” and damage to the ecosystem.”

“pollution problems …  create an interpersonal conflict over the use of means and therefore obstruct efficient plan formulation and execution. Pollution is therefore not about harming the environment but about human conflict over the use of physical resources.”

“Humans cannot harm the environment. Instead, they can change the environment in such a way that it harms others who might be planning to use it for conflicting purposes.”

Even while I agree with Cordato about he focus on plan formation, concepts such as “ecosystems” and the “environment” may still be useful, and are often simply short-hand for resources “in the commons”, that is, resources that people value but are either unowned, partially-owned, commonly-/community-owned or government-owned. Some readers may recall that Elinor Ostrom the winner of the Nobel Prize in Economics last year, is a political scientist in the Austrian tradition who has devoted her career to studying human management of common resources? Lew himself expressly recognized the usefulness of “environment” in this case:

in a world in which government owns vast swaths, and the oceans are considered the commons of everyone? It becomes extremely difficult to assess damages to the environment at all.

2. Despite Lew’s focus on the abstraction of the “ecosystem”, it was curious that Lew (a) asserted that “BP is by far the leading victim” (my emphasis)  and that “The incident is a tragedy for BP and all the subcontractors involved while (b) severely castigating what I referred to in my post as “those nasty enviros” and their nature-loving, misanthropic motives. Lew’s words:

torrents of environmental hysteria.

the environmentalists went nuts yet again

he environmentalists, with their fear mongering and hatred of modern life [are happy about the disaster]

The environmentalists are thrilled because they get yet another chance to wail and moan about the plight of their beloved marshes and other allegedly sensitive land

The main advantage to the environmentalists is their propaganda victory in having yet another chance to rail against the evils of oil producers and ocean drilling. If they have their way, oil prices would be double or triple, there would never be another refinery built, and all development of the oceans would stop in the name of “protecting” things that do human beings not one bit of good.