Government’s dual function

Government has a dual function in a capitalist economy. On the one hand, it must take those steps necessary to allow capitalism to function. On the other, it must protect the people from the system’s most harmful consequences.

Increasingly, the political parties have simply divided the responsibilities. Republicans protect capitalism and Democrats protect the people.
Given the polarization, it’s probably a good thing both parties exist. Americans can hope that in the midst of the messy legislative battles, we are left with a reasonably efficient economy that causes a minimum of harm.
The government’s regulatory function is an obvious battleground for the parties because it is so central to what they see as their roles. The purpose of regulations is to protect the people from the hazards of profiteering, so Democrats tend to promote them. Regulations necessarily impede pure capitalism, so Republicans tend to resent them.
Alabama is so intensely Republican that its residents seem to forget that neither partisan extreme provides a workable answer. Republican elected officials, recognizing their role in promoting economic efficiency, preach an unremittingly anti-regulatory message. Instead of recognizing that message as representing only half the task of government, Alabamians tend to accept it as the entire mission.
The extreme capitalism many in Alabama claim to embrace would eliminate almost all regulatory controls.
The dominant theory in Alabama is that regulations are inefficient and expensive to enforce. A better solution, many argue, is to curb reckless business behavior through the court system. If a business knows a financial penalty will result from harmful activity, its desire for profit will incorporate the risk of liability to those it harms.
The popularity of this justification for unfettered capitalism is so strong that even the 2010 BP oil spill — which killed 11 workers, soiled Alabama’s coast, caused incalculable environmental damage and disrupted the income of its citizens — did not dampen it. A short-term moratorium on deep-water wells ignited angry rants from Alabama elected officials, rants correctly calculated to mimic majority sentiment.
Complaints began anew last week, when a federal auction of oil and gas leases in the Gulf brought in less than hoped. Tightened regulations and the fear of future moratoriums, Republicans reasonably said, were suppressing the market.
The spill, though, demonstrates the need for effective regulatory control.
BP and its contractors had full knowledge of the financial risks of behavior that places profit over safety. Four years before the Deep Horizon spill, a BP pipeline leaked 267,000 gallons of crude in Prudhoe Bay, Alaska. The company had saved some money by failing to inspect the pipe, but it ended up paying $20 million in fines, $500 million for a new system and losing millions in revenue.
BP also knew that the 1989 Valdez disaster had cost Exxon billions. The billions of dollars in fines imposed on BP last week came as no surprise.
Despite this knowledge, according to several studies, BP and its contractors sacrificed safety in their effort to reduce the costs of Deepwater Horizon. Short-term profit trumped the risk of catastrophic loss.
Whether BP and its contractors were irrational, or whether their rationality was limited to their own interests, does not much matter. The fact is that the risk of future liability did not adequately curb their behavior.
The other lesson from the tragedy, of course, is that regulations need to be effective. Stated differently, they need to impede capitalism. Sloppy enforcement of existing regulations adds expense — to both the capitalist and the taxpayer — without preventing harm.
Americans allow capitalism to thrive because of its incredible efficiency. As with any powerful tool, it also can cause great damage. The role of government is to find a rough balance that protects both the people and the economic system.
Each party has it wrong. Together, though, Americans can hope they get it right.

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Filed under BP spill, Capitalism, Regulation

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