Wednesday, May 26, 2010

The Politics of Regulation

In today's Washington Post, Steven Perlstein shares thoughts on the politics of regulation after Deepwater Horizon. The title gives you his main point: "Time for Industry to End Its War on Regulation."

Perlstein cites examples of oil, coal and financial regulators being too close to, or too cowed by, the industries they oversee. He believes regulation was too lax under the Bush administration and considers it laughable that industry observers would suggest that 16 months into the Obama administration, regulation has already become too tight.

Perlstein describes the value of regulation as helping stave off low-probability events that could have devastating consequences. In the financial sector, he acknowledges that regulation may "trim profits" for the businesses involved, but insists we remember the benefit associated with this cost:

The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits - in particular, the benefits of avoiding low-probability events with disastrous consequences. Think of oil spills, mine explosions, financial meltdowns or even global warming. There is a natural tendency of human beings to underestimate the odds of such seemingly unlikely events - of forgetting that the 100-year flood is as likely to happen in Year 5 as it is in Year 95. And if there are insufficient data to calculate the probability of a very bad outcome, as is often the case, that doesn't mean we should assume the probability is zero.
Mr. Perlstein assumes that in the absence of regulation, businesses would reach a different - and inappropriate - conclusion than would regulators about the events worth guarding against and the measures necessary to prevent or mitigate them. This fits the Hollywood stereotype of evil businessmen conniving to maximize profit without regard for the consequences, but falls short of the reality we have seen in our industry. The professionals operating U.S. nuclear plants maintain a high regard for the public good, starting with protecting workers and the environment. Many live close to the plants in which they work and know their families would be among those affected by a wrong decision made at their plant.

Perhaps in a sign of things to come, Mr. Perlstein closes with a call for business to stop fighting government regulation:

It's time for the business community to give up its jihad against regulation. We can all agree that there are significant costs to regulation in terms of reduced sales and profits, stunted job growth and even, from time to time, stifled innovation. But what we should have learned from recent disasters is that the costs of inadqueate regulation are even greater. Strong and efficient conomies require strong and effective government oversight.
We agree on the importance of a strong, credible regulator in assuring public safety and confidence in potentially hazardous industries. While Mr. Perlstein argues for business to accede to whatever level of regulation government decides, we believe it is vital for regulation to be commensurate with risks and consistently applied. That takes input from the regulated businesses and careful weighing of benefits and burdens on all stakeholders.


Phil said...

The nuclear industry has a whole different culture of safety compared to other energy industries. As well as a more comprehensive regulatory regime. It's hardly comparable at all.

sefarkas said...

When the regulators demonstrate that they are technically competent in the area of engineering they are trying to regulate, then they will have a seat at the table. It is difficult to swallow the dictates of a group with superficial knowledge of technologies being used to solve real problems. This goes for nuclear, mining, banking, farming, and any other industry you can name. Not only is this the basis of conflict between industry and its regulators, it is also the basis of conflict between employees on the front lines -- sales, operations, engineering -- and the cadre of managers above them with an over reliance on accounting skills who attempt to schedule money flows in the face of uncertainty.