Month: February 2014

California’s Environmental Mal-Litigation

Fred Foldvary Current Events, Economics, Law , , , , , ,

The worst intervention by governments, aside from aggressive war, is excessive litigation. Taxes are burdensome, but they are predictable. The reason that enterprises are not entirely crushed by taxation is that much of the tax burden is at the expense of land rent, so it ends up destroying the economy’s surplus, but not totally wreaking the economy. Regulations act as a tax to impose costs on enterprise, and much of the cost is passed on to workers and the public, so they make us poorer but don’t totally stifle the economy. Subsidies create distortions that generate inequality and the boom-bust cycle, but subsidies is what politics is all about. The worst intervention, that does the most to crush enterprise and employment, is vicious litigation.

A prime example of litigative intervention is the California Environmental Quality Act. CEQA is codified at the Public Resources Code Section 21000 et seq. As California’s web site for CEQA states, “Most proposals for physical development in California are subject to the provisions of CEQA.” The “frequently asked questions” web section explains that “CEQA is a self-executing statute.” That means that “its provisions are enforced, as necessary, by the public through litigation and the threat thereof.” Past court cases can be seen on the web site of the California Natural Resources Agency.

As described by a “Schumpeter” blog article in the 25 January 2014 Economist, “The not so Golden State,” this law “has mutated into a monster.” Anybody in California may file a CEQA lawsuit against any project using environmental protection as an excuse. The plaintiffs win half the cases. If someone sues a company and loses, the defendant still has to cover his legal expenses. Many of the lawsuits under CEQA are also against governmental development projects and against permits by local governments to enable private development.

Suppose a developer seeks to build an industrial park. If he hires non-union workers, the union attacks with a CEQA lawsuit. So the builder hires expensive union labor. Suppose someone owns a gasoline station, and a competitor wants to set up a station nearby. The station owner stops the potential competitor by filing a CEQA case. In 2011, there were 254 “California disinvestment events,” in which companies employing more than one hundred workers either left the state or expanded in another state rather than in California. This is estimated to have gotten worse in 2012 and 2013.

The litigations and regulations of California fall hardest on manufacturing. California’s high sales tax and low property tax also induces cities to favor retail stores over manufacturing. Hostile policies in California are largely responsible for the flight of manufacturing to other states and to foreign countries. As noted by the Economist article, electronic devices are designed in “Silicon Valley,” the region from San Francisco to San Jose, but manufactured in Asia. Some environmentalists realize that CEQA does little to protect the environment, but attempts to reform the law have stalled. The frivolous lawsuits reward lawyers, unions, companies seeking to stifle competition, and “not in my backyard” opponents of development.

Litigation is the worst way to handle social problems. Lawsuits impose unpredictable and expensive costs on enterprise. Such laws let opportunists exploit legitimate job-creating industries. Excessive litigation is further rewarded by making the winning defendants of lawsuits have to pay their legal costs. We then get excessive malpractice suits that force doctors to buy expensive insurance. Federal and state laws that enable litigation for job and housing discrimination and environmental protection end up enriching lawyers who get much of the gains.

The best ways to handle environmental destruction is with covenants and easements, along with a liability rule for damages. If some development harms the natural environment, then the government assesses the damage, and the polluter pays for the damage, either as a one-time charge or as periodic payments for on-going pollution. Developers know in advance that they are liable for damage, and so they would have the incentive to prevent the payment by doing their own environmental assessment. The issue would be between the developer and the state, without involving attorneys and court costs.

Economic theory has recognized for the past hundred years that the optimal policy for pollution is a charge paid by the polluters, passed on to the customers, fully compensating society for the damage. That can be done by a pollution tax.

English common law traditionally provided law-suit protection against potential negative effects and damages to one’s property. Litigation can be a useful enforcement and restitution tool, but it has to be within a sensible legal system. In the English tort system, if a plaintiff loses a law suit, the loser has to pay the legal costs of the winner. So if a company sues another firm just to stifle competition, using the environment as an excuse, and that company loses the lawsuit, then that company has to pay the legal costs of the winning competitor. That would stop frivolous or phony law suits. And that is why the lawyer lobby will stop such a legal reform in the USA.

Imperialisms, Old and New: Sykes-Picot and the United Nations

Brandon Christensen Current Events , , , , , , , , , , , , ,

Foreign policy expert (and Reason contributor) Michael Young had an op-ed out last week on nationalism and imperialism in the Middle East. Writing in The National, Young argues that Western imperialism should not be blamed for the problems of the Middle East today. Young argues that the power vacuum left by the collapse of the Ottoman Empire guaranteed that violence would play a prominent role in the region, regardless of where the lines of borders had been drawn, or who had drawn them.

Violence would play an important role, Young argues, because aspirant hegemons and various types of nationalisms (Arab, Iraqi, Lebanese, etc.) would be eager to expand their influence and power throughout the Middle East. This is an interesting hypothesis, but it strikes me as disingenuous largely because there is no way to prove such an assertion wrong. The fact that violence could have happened in the absence of European imperialism does not excuse the cartographic crimes of European states. The carving up of the post-Ottoman Arab world happened (interesting counterfactuals notwithstanding).

Young’s argument fails on another account as well. He writes, for example, that:

None of the protagonists in Syria’s conflict has cast doubt on its borders, or has called for a Sunni or Alawite state. Their rhetoric has almost entirely been couched in nationalistic terms, with their aim being the control over all of Syria. Even Mr Al Assad has never expressed interest in falling back on an Alawite mini-state, and if he does so that would only be because he can no longer hold Damascus.

There are two arguments worth scrutinizing here. One, there have been calls for a Sunni state. Two, the nationalist rhetoric is itself a product of Western imperialism. For example, these power struggles for the center occur because secessionist or federalist options are not available to factions in the region. The lack of options stems from the inherent inability of these post-imperial states to govern without a strong man. Strong men are required in the post-imperial Middle East because the states that were drawn up by European diplomats were arbitrary and ahistorical, and therefore lack legitimacy in the eyes of the people.

Post-imperial states are not considered legitimate by their citizens because they never had a say in how to go about structuring such a state (not even through the traditional channel of war). They had no say in where the borders should be, or who they could trade with, or how to best accommodate foreigners. Because post-colonial states are not legitimate, violent centripetal forces are constant. This pattern continues unabated because those who eventually end up controlling the center receive legitimacy from the international legal order, as exemplified by the United Nations and financial lending institutions such as the IMF.

By recognizing the legitimacy of Sykes-Picot’s arbitrary states and the sanctity of its borders, the UN and other Western institutions contribute directly to the bloodshed and impoverishment of the region. Because these states have been legitimized by the UN, violent factions can simply seize control of the center and they will automatically gain legitimacy from the very international order that has sustained this chaos. Why bother trying to gain the legitimacy of an impoverished populace when you can simply capture the rent associated with running a post-imperial state?

The West would do well to start working on a foreign policy that looks at recognizing devolutionist tendencies in the post-imperial world as a legitimate option. Recognizing the mistakes of Western imperialism would be a good start. Western recognition would also give these breakaway movements a sense of legitimacy when it comes to working with international organizations such as the IMF or WTO. Official recognition could open up diplomatic options that are currently unavailable to stateless societies in the post-imperial world.

By continuing to not view devolution as a legitimate option for Middle Eastern (and other) societies, the West is doubling down on its moral failure of a hundred years ago. Recognizing centrifugal forces as a legitimate political process would also bring the post-imperial world and the West to a more level standing with each other, as the West would welcome new states into their international orders rather than picking winners and losers through cartographic exercises. In an era where inequalities are shaping up to play prominent roles in policy debates, this last tweak in diplomacy could very well contribute (politically at least) to a more equitable world.

Немного об Олимпиаде

Evgenii Grigorev Current Events ,

Привет, друзья! На днях у меня состоялся интересный разговор с одним другом, предметом которого стала Олимпиада в Сочи, которая, как вы знаете проходит в эти дни. Олимпиада пока что проявляет себя как истинно русское событие: с размахом, “на широкую ногу” – как принято говорить у нас. Одна из самых дорогих Олимпиад в истории, да? Если не ошибаюсь. При этом “за кадром” остались всевозможные нарушения, о которых не принято говорить, и кто знает – какая реальная стоимость этих Олимпийских Игр?

Сейчас в России весьма двойственное отношение к текущим мероприятиям в Сочи. С одной стороны, у нас определенная гордость за то, что мы смогли устроить такое дорогое и богатое мероприятие, что в принципе и было ожидаемо, так как Россия довольно богатая и большая страна, вы знаете. Но с другой стороны Олимпиада – это как фасад здания, которая совершенно не отражает настоящей ситуации в городах нашей страны. Поверьте мне, все далеко не так хорошо и празднично. Я не буду сейчас расписывать про минимальные размеры оплаты труда, минимумы проживания и всякие денежные эквиваленты… В большинстве своем народ не понимает, зачем было делать ТАК ДОРОГО. Ведь не для кого не секрет, чем такие колоссальные затраты (по некоторым оценкам от 250 до 1500 миллиардов рублей – разделите эти цифры на 33 и получите примерный эквивалент суммы в долларах) могут обернуться бедствием для российской экономики в ближайшие годы.

Признаюсь, я не смотрю Олимпийские Игры. Не потому что я бойкотирую спорт или не проявляю к нему интереса, а потому что я боюсь что мне это зрелище понравится и я перестану ясно отдавать себе отчет, сколько денег в это было потрачено, и из чьего кармана они потом будут восстанавливаться. Центральный Банк России пообещал восстановиться после таких трат за 4-5 лет, и мне реально страшно смотреть в налоговые квитанции, которые ожидают нас всех в ближайшие годы.

Keynesianism, the Global Economy, and Responsibility

Brandon Christensen Current Events, Politics , , , , , ,

Economist Joseph Stiglitz has an op-ed out in Project Syndicate lamenting bad policies for the current economic stagnation of the West. This response comes from economist Peter Boettke, and I think it is an important and woefully neglected one:

Since 2008, and before, [Stiglitz] has been constantly complaining about neo-liberal policy and how its lack of attention to the appropriate regulatory framework and disregard for fundamental policy priorities has produced the mess we are in.  In fact, he made the argument very simply even while he was in positions of tremendous political power in the Clinton administration and at the World Bank — if only the world would listen to me, and engage in the appropriate interventions then the mess would be avoided.  But who were the so-called neo-liberals that weren’t listening to him?  What neo-liberal thinker had the same powerful positions that he held?  Did F. A. Hayek or Milton Friedman actually come back from the grave to serve as head of the CEA or as Chief Economist at the World Bank?  Or did all this disruptive inequality and global imbalance happen on the watch of other thinkers.

I think Boettke is right, but I also think both economists are wrong in a sense, too. First of all, global poverty over the past twenty years or so has been halved thanks to the very neoliberal policies that both economists are disagreeing about, and that both economists have more or less endorsed. With this important, praiseworthy accomplishment in mind, why would these guys want to spend so much time pointing fingers at each other?

I know why they are pointing fingers (because of the terrible shape that Western economies are in), but I am a little baffled at the audacity of Stiglitz and other Keynesians who have held the levers of power for sixty years to point the finger at something other than themselves.

Really quickly: Some of might ask why Boettke and Stiglitz agree on neoliberalism abroad and disagree on policy at home. My short answer would be because the West already has the institutions (property rights, other individual rights, etc.) that economists have identified as necessary for a market order, so their debates about policy occur within the same theoretical framework. Post-colonial states (“developing states”) have virtually none of the institutions that the West, and so it easy for economists with different theoretical paradigms to agree on generalities concerning these developing countries (“they need to open up to world trade and focus on property rights before they do much else”). Does this make sense?

From the Comments: Regulations, Market Failures, and the Fait Accompli

Brandon Christensen Liberty , , , ,

Dr Amburgey raises an excellent point in Adam’s equally excellent, most recent post. Responding to a link by economist Peter Boettke on the effects that institutions have on political economy, Dr Amburgey writes:

Very nice post; it crystalizes many of my objections to what I sometimes see here, a neglect of the literature on market failure in general and opportunism specifically.

[Dr Amburgey quoting Boettke:] “In my book, Why Perestroika Failed I argue that in assessing the workability of utopian schemes we must first subject them to a coherence test, and then a test of their vulnerability to opportunism. Schemes that are incoherent are deemed impossible; schemes that are coherent but vulnerable are impractical; and only schemes that are both coherent and invulnerable should be considered in the feasible set of workable utopias.”

An anarchist regulatory regime *is* a utopia, but raising taxes on corporations as an alternative is not? Then why propose such a policy in the first pace? I think it’s because Dr A doesn’t realize that his utopia is incoherent. Workable, absolutely, but not coherent.

Do you see how his argument is proposing a utopia, though? There are a number of theoretical responses to the market failure argument. Economist Peter Boettke lists four general responses to the market failure argument: Definitional, institutional, entrepreneurial, and comparative analysis. Adam’s post is an example of a defintional rejection of the market failure argument. I make institutional arguments all the time. Rick’s post on entrepreneurship is a good example of the third. Perhaps we need to do a better job of explaining that our arguments are rebuttals of market failure arguments, but I also think that such rebuttals are implicit in most of our writings.

Dr Amburgey also takes Adam to task for ostensibly failing to see the current regulatory apparatus in place (even though Adam’s initial post was all about current regulations and what to do about them). Dr Amburgey thinks Adam’s argument is all about unicorns and pixie dust:

Unicorns: We’ll completely deregulate one of the most oligopolistic industries in the history of the universe and then the invisible hand of market competition will make everything ok.

Okay, but market competition would include a market for buying and selling regulatory apparatuses. That is to say, regulations themselves would not disappear were they to be withdrawn from the purvey of the State, but rather they would be subject to market competition.

There is also the fact that the oligopolies Dr Amburgey identifies are a result of the state-sponsored regulations.

Pixie dust: “The oil companies should be liable for the full cost of any damages done by their rigs.” Yup. We’ll just add that on to the long list of tort reforms barrelling through the American legislative and judicial systems.

Just because the political system is currently preventing the reforms necessary for full liability does not mean that Adam’s argument is “pixie dust.” Is it not logically sound? If the logic is there (and I see no reason why it is not) then the reforms necessary can take place. Whether or not they will take place is an entirely different topic. I think they could, but only if we can get enough smart people like Dr A to see how they are not thinking their arguments through.

Sure. But they weren’t doing anything they didn’t want to do anyway [see the point just above] they were just externalizing the downside risks. As Adam points out “If the site is not economically viable then there is no reason to drill there.” Classic corporate capitalism in the contemporary US. If it works we get the profit, if it doesn’t you bear the cost.

I don’t think we are disagreeing here. Here is where our misunderstanding begins: Adam’s argument (as I understand it) is that Big Oil is able to externalize these costs through the regulatory apparatus. I think you would have to agree provided you think through the logic of your statement. We all agree that Big Oil was able to externalize the risks involved in drilling off the Gulf, but how, for example, do firms go about “socializing the costs”? If they don’t go through the existing regulatory apparatus, how do these firms achieve the externalization of costs?

“It looks to me like Adam is proposing an alternative for regulating how oil is drilled for by corporations.”

It looks to me like Adam’s alternative for regulating oil [NOT just drilling] is to not regulate it at all. Did I miss some regulations that he would keep?

Again, I don’t know how I can be more clear: Just because government regulations would not exist does not mean that no regulation would exist.

Order, Order, Order

Jacques Delacroix Current Events, Politics , , , , , , , , , ,

In the conventional wisdom, as you become older, you tend to like order more and more. That is, with age, one is supposed to become more “conservative” in the traditional sense of the term. Personally, I have escaped the curse. Instead, I find myself resenting more and more the growing imposition of petty rules by public entities.

It began a few years back when the city of Santa Cruz banned sleeping. OK, let’s be honest, you may still sleep legally in your bed. The city made it illegal to sleep in public. It’s true that the homeless are a plague here. Many are in a near-constant state of NDUI (not driving under the influence). Many are poor lost souls who are a danger to themselves and occasionally to others. Thus, three or four years ago, a local shopkeeper walking to work was knifed to death in broad daylight. Her killer had spent the previous 48 hours in a shelter muttering about and to his Bible. No one reported him,of course because he had not done anything illegal until then. Next!

The ban on sleeping made me acutely uncomfortable at the time. First, it was plainly inhumane. Second, if you prevent human being from doing what their human nature demands, they will find another way to do it. So, informal camps proliferate in the wooded areas juxtaposing the town. Here, in Central California, we are in a period of prolonged drought. Do we need unattended campfires and campfires attended by people who don’t play with a full deck?

A petty use of power, municipal power, applied in a search for orderliness led to greater and far more dangerous disorder.

I don’t even know if there are enough night shelters for everyone who wants one. I know that there will always be sane but houseless people who don’t want to be in a shelter, by choice. A sizable part of me respects their choice. You may not force people in places where they don’t want to be without due process. The Constitution is completely clear on this. And, I am not in favor of more shelters anyway because I believe they attract the economically feeble to Santa Cruz thus aggravating the problem.

You don’t have to be a “soft” to want the Constitution respected.

Now, since then, there as been a multiplication of city rules. This happens while the crime rate plunges. The fewer crimes the more rules. The crime rate is tanking all over the country; Santa Cruz city rules can hardly take the credit. What am I to think?

Here is a quiz: The Santa Cruz City Council is dominated by:

a Republicans;

b Democrats;

c Leftists to the left of the Democratic Party

Not far is the independent harbor. I used to admire the Santa Cruz (Small Yacht) Harbor. It was the only government and quasi-government organization I knew that stayed clear of reliance on taxes. Harbor users -in their many guises- supported the maintenance of the harbor. They included boat slip renters like me, of course, but also beach goers whose coffee paid for the rent the coffee shop paid to the harbor in return for an excellent commercial location. Harbor users also included patrons of the good restaurant that dominates the harbor entrance with its million dollar view. The restaurant goers gladly paid solid parking fees, of course, and a portion is remitted to the harbor.

I also liked the way the harbor administration put to work underused resources such as the large general parking lot reserved for boat owners that tends to stand more than half empty after four pm. The harbor had an agreement with the self- same restaurant to hold musical barbecues once a summer week evening on the beach it, the harbor, administers. The restaurant got its profits from the sale of barbecued food and the harbor pocketed full parking fees from those not holding slip stickers. The arrangement drew crowds. It was all a little bit untidy but not much. Twice, on such a barbecue evening, I leaned spontaneously out of my truck to congratulate the officer directing parking and to assure him, unsolicited, that this particular slip owner, me, was not (NOT) inconvenienced at all.

And then, someone retired and there was a new sheriff in town. Under the new harbormaster, several things that were allowed became forbidden overnight. The harbor hired a full-time parking enforcer, like the town next door. Suddenly, the one harbor employee the average harbor user interacted with was the parking enforcement officer. This necessarily hostile and heartless functionary supplanted the traditional harbor officers who save boats, and sometimes lives, every weekend. The mood changed and not for the better. I am not speaking for bitterness about parking fines here; with my slip rental goes a permanent parking sticker permit.

Maintaining a stricter order often requires stricter rules that make most people unhappy. Eve if it’s only a little bit unhappy, the bad feeling accumulates.

Then, stand-up surfboards had to be segregated from boats. Boats are limited to 5 m/h inside the harbor anyway. Some boats under sail inside the harbor regularly exceed the speed limit. Those are steered by aces. How bad can a collision be under these conditions, really? Has there been a single collision involving a standup board? Did a boat owner complain about stand-up boards being in the way? Maybe. Did ten complain? I doubt it. (I have not asked; I don’t trust I would get a valid answer I could cite.) My point is that one can always find a complainer or two. If you handed out free ice cream to poor children and cleaned carefully afterward, there would be some curmudgeons to object. I am sure there are boat-owning slip renters who complain even about the ocean swells. But everyone knows that good harbors are bustling with activity. Those who detest the corresponding moderate disorderliness have no business in a harbor at all. They should be reminded of the fact that there is a long waiting list for their slips instead of listened to.

The art of civilized administration requires that complaints be ignored up to a point. It also includes remembering the second most important American maxim: “If it ain’t broke, don’t fix it until it is.”

Then, there are the new signs that shout at you that fishing from docks is “prohibited.” For as long as I remember, 20 year-plus, children fished from the docks. It was an excellent, healthy, commendable form of leisure for kids, including poor kids, if you ask me. Were there ever any accident as a result, even one? I don’t think so. The signs affirm further and vengefully that the prohibition is: “strictly enforced.” No joking with serious matters here! We are not kidding. Don’t even think of enjoying yourselves!

The posted “minimum” fine is $174. Think about it: Your otherwise well-behaved 12-year old gives you the slip to try to catch a sardine or two. He gets caught. You are into it for about twenty hours of minimum wage. This comes close to a violation of the Eighth Amendment, prohibiting cruel and unusual punishment, I think. There may also be here a subtle breach of contract involved here. When I first rented a slip in the harbor, fishing from the docks was common practice. The locked dock that was part of the rental gave me special access to a pleasant fishing spot. Then, after twenty years, the contract becomes unilaterally modified to my detriment. The harbor did not bother to re-negotiate the contract.

I agree that this is a very small kind of tyranny but it’s tyranny all the same. The habit of being oppressed nearly always begins small in democratic countries. Our tiny liberties are eroded slowly until we don’t even remember we ever had them.

In the same period, I have heard the crew of one of the few remaining commercial fishing boats left in the harbor complain that they are made to feel unwelcome. I have no proof that their allegation is correct but, I wonder, why would they make it up? It jibes with the other forms of turning of the screw I mention. There is no doubt that the harbor would be neater without fishing boats. Fish smells and the rushed commercial fishermen drop the occasional dead fish into the harbor water. And, well, it’s a yacht harbor, after all. And, by the way, if slips only went to middle-aged nuns who work as librarians, the harbor would be even neater.

Occasionally, I take my grand-daughter to buy live crabs directly from a boat. It’s an expedition for her. It’s unforgettable. It shows her that some food does not come from the supermarket. But who am I to lay claim to such privilege? And who the hell are the commercial fishermen to insist on making a living from a harbor originally created by the Army Corps of Engineers with tax money?

On 2/3/14, coming out of a restaurant, my family and I were treated to a wonderful geyser-like spout of water reaching much higher than a three storied building. No, it was not a whale; the scene was a couple of miles inland, on a busy commercial artery, at a street intersection. We watched in utter fascination for more than fifteen minutes. (I posted a still picture of the event on my Facebook. Look for it.) I am obviously no expert, but I believe that while I looked on several hundreds of thousands of toilet flush- equivalents of city water were lost forever. I know, I know, accidents happen; no system is perfect. But why did it take so long to cap the leak? There is a fire station five or six blocks away.

I almost forgot to tell you: At the very same time, the same evening, there was an important meeting of the Santa Cruz Water Commission to make recommendations about water rationing to the City Council in view of the current drought.

Would I make this up? Would I dare? Do I have the talent?

In my immediate surroundings, the only rule or law I have seen abolished in the past twenty years or so concerns dogs. They used to be prohibited on the main commercial drag of Santa Cruz, Pacific Avenue. The prohibition has been rescinded. Dog owners are numerous and determined. Their victory renews my faith a little in democracy. I wish I could cite more examples though.

Sometimes, the ugly thought crosses my mind that public entities are increasingly run for the benefit of their nominal employees. Karl Marx was almost right about classes, maybe . (See, on this topic: “Karl Marx Was Right (Pretty Much)“)

More on local government action: “Coyotes: How Government Bureaucrats Think“

Liberdade, homofobia, heterofobia…

claudio Liberty ,

Neste pequeno texto em meu blog, mostro uma correlação que, geralmente, é esquecida por alguns. Confira aqui.

“Illegal Immigration: Bad Faith and Mental Confusion”

Jacques Delacroix Current Events, Politics , , ,

I wouldn’t change a word to this old posting.

Risks Of Regulation

Adam Magoon Current Events, Economics, History, Law, Liberty, Politics , , , , , , , ,

A bit dated but still very relevant.

Regulation; the four letter word of the business world.  Many people see regulation as a protective shield from the ‘dangers’ of the businessman; a way to protect people, property and the environment.  The oil industry is one of the most heavily regulated enterprises in the United States.  Despite being intended to protect us; these regulations failed catastrophically on April 20th, 2010 when the Deep Water Horizon oil rig suffered a mechanical failure resulting in an explosion which sank the rig two days later(1).  Yet, when the disaster happened, we were met with pleas for more government oversight and more red tape.  The regulations on that industry, both in the Gulf Mexico and throughout the country, helped cause the Deepwater Horizon disaster and removing them would help prevent similar disasters in the future.

Regulations in the Gulf of Mexico begin with the Minerals Management Service (MMS).  Created in 1982 due to the Federal Oil and Gas Royalty Management Act the MMS “both regulates the [gulf oil drilling] industry and collects billions[of dollars] in royalties from it”(2, 3).  The MMS’s responsibility to regulate includes monthly inspections, issuing safety documentation, and issuing safety citations(3).  Royalty collection is based on number of barrels of oil removed and varies from well to well.  The MMA also provides  “royalty relief“ to a number of rigs based on previous legislation. Until November of 2000 the royalty relief was issued based on the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, better known as DWRRA.  This act “relieves eligible leases from paying royalties on defined amount of deep-water production”.  At depths over 2,526 feet oil companies did not have to pay the United States royalties on 87.5 million barrels of oil, between 1,312 and 2,625 feet the relief was 52.5 million barrels and between 656 and 1,312 feet the relief was only 17.5 million barrels.  While this act expired in the year 2000 it was replaced by an incentive program that allowed royalty relief to be “specified at the discretion of the MMS”(4).  This incentive program provides more relief if a drilling site is “more expensive to access” even if it is at the same water depth as another rig receiving less relief (2).  The royalty relief system provides incentives for Oil Rigs to operate in deep waters, especially those classified as “Ultra-Deepwater” by reducing the royalties paid on those sites(5).

While not specific to the gulf, there are a variety of moratoria on drilling throughout the country.  These moratoria take two forms.  The first set, known as “leasing moratoria” are general bans on drilling in select areas , the second set are temporary bans due to specific incidents.  Since   the fiscal year 1982 congress has denied funds to the MMS to “conduct leasing for the specified Outer Continental Shelf areas”.  Currently there is a “blanket moritorium” on leasing in effect “through 2012” that covers a large portion of both the East and West coasts( 2).  One of the largest bans on drilling however exists in the Arctic National Wildlife Refuge(ANWR).  Located in the “northeast corner” of Alaska over ten million acres of land are off limits to drilling.  In this wildnerness it is estimated that there exists “between ten billion and sixteen trillion barrels of oil” that could supply twenty percent of U.S. demand for nearly thirty years(6).  The most recent temporary bans have been a result of the Deepwater Horizon disaster.  A “30-day pause in offshore drilling” followed the sinking of the Horizon rig(11).  This did not only cover BP’s rigs but all offshore drilling “based on water depth”(7).  That ban was removed by a federal court, but was replaced with a revised ban that will be in effect until November, 2010(7).

Beyond physical limitations on drilling there are also economic regulations.  There are a number of federal subsidies and tax breaks for the drilling industry.  David Kocieniewski says that “examination of the American tax code indicates that oil production is among the most heavily subsidized businesses”.  These tax breaks occur for a number of reasons.  Many are simply to lure oil companies to American shores, others were “born of international politics” or “date back nearly a century”(8).  Beyond that the United States government has put “Liability Limits” on drilling operations.  The Oil Pollution Act of 1990 limits an oil companies liability for damages to only $75 million dollars.  Any remaining damages, up to $1 billion, are payed through the Oil Spill Liability Trust Fund.  This fund is “financed primarily through a fee on imported oil”(1).  Senator Robert Menendez from New Jersey recently introduced bill, S. 3305 which would raise that cap to $10 billion(9).

All of these laws and regulations have one thing in common.  They increased the probability of a catastrophic oil spill in the Gulf of Mexico.  Each regulation increased the risk of such a spill in some way and when combined they resulted in the disaster that is causing massive destruction in the Gulf today.  The Minerals Management service was organized to be the overarching regulatory body for the Oil Industry.  Why did it fail in its duty?  Why did “spills from offshore oil rigs…in U.S. waters more than quadrupled this decade” despite the MMS’s oversight(10)?  This question was answered by economist Walter Block in his book The Privatization of Roads & Highways (12).  Quoting Cecil Mackey, former Assistant secretary of transportation, he says:

“As the more obvious regulatory actions are taken; as the process becomes more institutionalized; as new leaders on both sides  replace ones who were so personally involved as adversaries in  the initial phases, those who regulate will gradually come to reflect,     in large measure, points of view similar to those whom they regulate.”

Quite simply, the MMS adopted the views of the Oil Industry completely negating their ability to regulate it.  Congressman Nick J. Rahall confirms this saying “MMS has been asleep at the switch in terms of policing offshore rigs”.  Using numbers supplied by the MMS in the prior 64 months before the incident “25 percent of monthly inspections were not performed”(3).  Are we to believe another agency would be any more efficient?  Bureaucracy and corruption are not the only things to blame however; legislation played a vital role in this disaster as well.  DWRRA, for example, incentivized the risk to drill in deep waters.  Under DWRRA the greater the depth being drilled the greater the royalty relief amount.  These waters are inherently less safe to drill in.   It is easy to compare the difficulties in dealing with a site 5000 feet below the ocean against one 500 feet below the surface.  These incentives were made worse when DWRRA expired.  Under the new program “the most economically risky projects would receive the most relief”, safer projects on the other hand would receive “little or no relief”(4).

While acts like DWRRA incentivize the risk of deepwater drilling the greater incentive to drill in the Gulf of Mexico is simply that there are so few places to drill in the continental United States.  The United States Exclusive Economic Zone extends “200 nautical miles” from all of it’s shores(2).  Yet, much of this area is off limits to drilling.  The “blanket moratorium” issued by former President George H.W. Bush in 1990  restricts drilling in “all unleased areas offshore Northern and Central California, Southern California except for 87 tracts, Washington, Oregon, the North Atlantic coast, and the Eastern Gulf of Mexico coast”.  The Gulf of Mexico is the only economically viable offshore area left for them to drill.  This of course pales in comparison to the Arctic National Wildlife Refuge.  Most of the 10-million-acre area is not even adjacent to the ocean, surely drilling on land or in shallow water is much safer than drilling 5000 feet under the ocean(6).  Beyond helping to cause the spill in the first place the government is increasing the risk of future disasters.  The temporary ban issued in response to the Horizon spill “neither improves safety nor mitigates risk”(11).  By forcing drilling to stop you immediately cause a number of problems.  Reentering a location is as dangerous, if not more so, than the original drilling operation.  Experienced workers have been fired, laid off, or relocated and will need to be replaced with less experienced ones.  Equipment in worse quality will be all that remains when the moratorium ends(11).

The economic regulations were the proverbial straw that broke the camel’s back.  A single tax break for the Deepwater Horizon oil rig covered “70 percent of the rent” or “$225,000 a day”.  Or, as policy analyst Sima J Gandhi describes it “We’re giving tax breaks to highly profitable companies to do what they would be doing anyway”(8).  These breaks are not only an unfair advantage, they incite these companies to make riskier choices.  If the potential cost of the Deepwater Horizon rig wasn’t offset by these breaks it may not have been economically viable to drill in such a dangerous location.  On top of the lower cost of the initial operation; the Liability Caps ensured that any potential risk was marginalized by the government.  The $75 million limit that has been in effect since 1990 was a message to the industry to attempt increasingly risky drills(1).

The oil companies should be liable for the full cost of any damages done by their rigs.  The worry that “operators and nonoperators in the U.S. Gulf of Mexico will be unable to obtain adequate protection from insurance” is totally unjustified (1).  If the site is not economically viable then there is no reason to drill there.  If BP and Transocean knew they would have been liable for all damages they would not have received a citation for “not conducting well control drills as required and not performing ‘all operations in a safe and workmanlike manner'”(3).  There would have been an incentive to spend money on safety, training and equipment instead of the incentive to take risks knowing they would be protected.  Or as one lawyer explained the situation “arbitrary liability caps are just not reasonable.  You cannot decide the expense of a disaster before it happens.  Liability caps allow companies like BP to avoid bearing the responsibility for the full cost of the damage they inflict”(9).

The oil has stopped flowing from the bottom of the Gulf; for now.  The question remains: How can we prevent this from happening again?  There, of course, is no easy answer.  Accidents, mistakes, and disasters can never be guarded against completely.  We can however mitigate the risk involved in those dangerous operations that are needed for the sake of humanity.  The best way to increase the safety of the oil industry is to remove the regulations that incentivize the risks involved in their industry.  Preventing drilling in safer areas, tax breaks, royalty reductions, liability limits; all these things make an already dangerous prospect that much more perilous.  We need to neither help nor hinder these companies, they must succeed or fail on their own merits.

Sources available upon request.

“Bizarre Conservative Ideas About Immigration”

Jacques Delacroix Current Events, Politics

This old posting is suddenly relevant again. Go to indented paragraph directly if you are in a hurry.

“Cybernetics in the Service of Communism”

Brandon Christensen Economics, History , , , , , ,

In October, 1961, just in time for the opening of the XXII Party Congress, a group of Soviet mathematicians, computer specialists, economists, linguists, and other scientists interested in mathematical model and computer simulation published a collection of papers called “Cybernetics in the Service of Communism”. In that collection they offered a wide variety of applications of computers to various problems in science and in the national economy.

From this video interview of MIT Lecturer (and historian) Vyacheslav Gerovitch conducted by the website Serious Science. The interview is only 15 minutes long.

The Keystone Pipeline

Jacques Delacroix Current Events, Politics , , ,

You may have heard recently that the appropriate federal agency declared  the Keystone pipeline would pose no significant dangers to the environment. I doubt this will stop the green fanatics. Nor is the probability that oil no refined and used in this country will be mostly exported to China where environmental laws are lax and not often enforced. Rationality is not their forte, as a rule.

It appears that there may be a chance to influence the decision to build or not via an on-line petition. I don’t know what is the probability of its working is but the cost seems so low it would be a pity not to try a click. Besides, enough signatures may make Mr Obama squirm a little irrespective of the decision he makes.

Go to:   buildKXLnow.com [it’s actually buildKXLnow.org – bc]

Go to: “Go to Make Your Voice Heard,” [it’s  actually the ‘Take Action Now’ tab that you’ll want to click on – bc]

A simple sign-up box will appear.

Around the Web

Brandon Christensen Current Events, Links , , , , , ,
  1. Permanent War versus Peace; Professor Angelo Codevilla elaborates
  2. Law professor at Fordham deceptively carries on the tradition of censorship-cheerleading; Ken White elaborates (Senior Editor Warren Gibson has also touched on this before)
  3. What if Mengele cured cancer? Bryan Caplan (who else?) asks the question
  4. Another law professor from Fordham, Nicholas Johnson, has a great post on The Bad Gun Dumpster
  5. Negroes and the Gun: Non-violent Winchesters and the fine art of concealed carry in the modern civil rights movement; Another, newer post by Mr Johnson elaborating upon one of the concepts in his new book

Another Belated Warm Welcome

Brandon Christensen Current Events, Economics , ,

Readers have been enjoying Rick’s contributions for a while, but I just realized I haven’t formally introduced him yet. So finally:

Rick Weber received his B.S. in economics at San Jose State University and his M.S. in economics at Suffolk University, where he is currently working on his Ph.D. He is fascinated by the beauty of spontaneous order, and constantly astounded by the inexpressible wealth bestowed on him by the division of labor.

I met Rick at an IHS summer seminar waaaaay back in 2009. He was the toast of the town back then, and I’m really stoked that he’s blogging with us here at the consortium. Scroll through his musings. You won’t be disappointed. He also kicks it with the Free Market Institute gang at Texas Tech.

A Belated Warm Welcome

Brandon Christensen Current Events, Philosophy , ,

Readers,

Allow me to introduce notewriter Matthew Strebe to the team:

Matthew Strebe is a senior undergraduate student at the University of California in Santa Cruz, double majoring in Philosophy and Classical Studies. His areas of interest include political and ethical theory from antiquity to the present, particularly concerning the pre-Socratic philosopher Heraclitus and the classical philosopher Aristotle, along with the modern philosophers Kant, Schopenhauer, Nietzsche, and Heidegger. He considers political labels unnecessarily stifling, and contrary to a spirit of open exchange and inquiry, but nonetheless will provide a few: he is a member of Young Americans for Liberty, a registered libertarian, with viewpoints that are conservative to some and liberal to others. If you really want to know what he thinks, it is best to ask.

His debut post can be found here, and his most recent post is here. Please join me in giving him a warm welcome, and – as our small community is apt to do – be sure to keep him on his toes in the ‘comments’ section.