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In 2010, the Inspector General of the US Interior Department made public a report on the federal Minerals Management Service, which regulates the oil industry and profits from leases to it.  In addition to this glaring conflict of interest, MMS has apparently not only been “cozy” with the industry it is regulating, the two have been as one.   One inspector said, “We are all the oil industry.”  In other words, the problem goes beyond bribes. Larry Williamson, the M.M.S. Lake Charles, La., district manager, told investigators, “Obviously, we’re all oil industry. We’re all from the same part of the country. Almost all of our inspectors have worked for oil companies out on these same platforms. They grew up in the same towns. Some of these people, they’ve been friends with all their life,” hunting, fishing and skeet-shooting together. As another inspector wrote in an email, gifts aren’t necessary because he wouldn’t write up his friends.  Indeed, some of the inspectors and oil company managers had known each other since childhood–which raises a question about the inspector-hiring process. It would appear that the oil companies’ managers have been actively involved in the hiring at the federal agency. “We’re all oil industry.” Acting Inspector General Mary Kendall said her greatest concern is the cozy relationships between federal inspectors and oil companies, and how easily inspectors move back and forth between industry and government. For example, the report found one worker conducted four inspections on an oil company platform while he was actively negotiating for a job with that same company. Perhaps the most damning allegation was that some inspectors allowed oil company workers to fill out the federal inspection forms in pencil, after which the inspectors would use their pens to trace the pencil-marks and then sign the forms as it it were their own work.  “We’re all oil industry.”

Unfortunately, MMS is not the only federal regulatory agency to conflate itself with its “clients.”  Like MMS, the FAA (Federal Aviation Administration) has conflicting directives: to regulate and promote air travel within the US.  Even though a law stripped the mission of its “promotional” language, a footnote in the statue says that the elimination of the language should not change how the FAA operates because it was done to change the public’s perception.  Even after that law went into effect, the FAA referred to the airlines as its “customers” or “clients,” and stressed voluntary safety measures by the regional airlines in cooperation with the agency.  Sadly, the agency did not stand up for public safety in urging Congress to make the major airlines jointly liable for negligence at their regional partner airlines. Like MMS, the FAA’s problem goes beyond its own structural conflict of interest.  In particular, the FAA is too cozy with its “clients.”  Perhaps working at the FAA is really just a prerequisite to getting a nice job with one of the airlines. Perhaps political pressure from the airlines bears down on the head of the agency from the White House.  In any case, MMS and the FAA are sufficient to suggest that there is a structural problem in the American regulatory system centered on the relationship between business and government.  Such a state of affairs points to a greater need for management of the executive branch of the US Government. Perhaps the President should give more attention to affairs of his branch and less to influencing legislation.  The Congress is not the only branch subject to the influence of industry. In a word, there is too much of a plutocracy (rule by the wealthy) in the US system of governance.

It is natural that the more powerful have their way at the expense of the less powerful. Thomas Hobbes and Friedrich Nietzsche wrote as much. But Hobbes assures us that life in the state of nature can be  ”solitary, poor, nasty, brutish, and short.” So we have instituted government, for the purpose of staving off the natural proclivities of power to run down stream.  In regulating business, we are essentially building dams to hold back some of the force of the water. Our dams are anti-entrophic, holding back the inevitable.  Even so, we deem it as worthwhile to forestall the inevitable.  It is unfortunate that so much thinking is necessary to design an effective device that merely puts off the day when the river will meet the sea.  Anything we mortals build is itself mortal, or finite in duration, yet we construct our governmental structures ultimately to stave off death at the hands of the powerful and greedy.  Hence, we create checks and balances so the powerful created by our device do not become the very problem that our device is intended to put off.

In the case of regulating business, the natural state of more wealth to dominate less wealth is the problem as inspectors are so easily coopted by the regulated. In other words, the regulated are more powerful or inticing than are the principals (and principles) of the regulators.  This is perhaps an intractable problem, as the problem itself is occasioned by our resistance to the natural downward flow of power. Perhaps, though, we can at least construct a better dam.  One idea is to make it illegal for regulators to work for the regulated (or to be offered or accept jobs with the regulated as an intermediary) for a long period of time (and getting agreements by other countries to enforce this law on their own books so American regulators can’t simply bypass this stricture by living in Paris or Munich). However, favors have a way of getting around rules, so our dam would likely still have some leaks.  Plugging holes by one regulation at a time is a recipe for regulatory recitivism. We ought to remember this in dealing with the financial crisis of 2008 (i.e., banning particular financial products after they have been implicated, when there are always new ones).

I believe that more thinking is necessary on how to keep the regulators from being dominated by the regulated. I suspect that a viable “solution” might come from thinking about human nature relative to intended and unintended incentives.  Specifically, thinking in terms of checks and balances wherein ambition is pitted against ambition may allow us to achieve a greater degree of protection for the pubic against the greed of the powerful in business. In other words, we might apply the checks and balances in the separation of powers in the US Government to the relationship between the regulators and regulated. To be sure, the regulators depend on information from the regulated, but the regulated depend on information from the regulators as well (i.e., on the regulations). The task before us is to keep these dependencies separate by natural forces rather than by mandates that go against those forces.  That is, perhaps we can use the natural dynamic of power against itself.  This is the key mechanism of American government not only within the US Government, but between that government and those of the several states as well (i.e., federalism).  Perhaps someone will be able to apply this invention to the field of regulation. Otherwise, we can expect more financial crises as occurred in September of 2008 and more oil-rig explosions such as the one in April of 2010.  The profit-interests of private firms is not the same as the public interest, and unfortunately the latter is not as strong as it is dispursed rather than concentrated. Hence the concentrated wealth can buy the representatives of the public interest and thus their agents.  It is essentially about the nature of power to flow down stream.  Hopefully, we will do a better job of directing the river without the water deciding its route.

Sources: http://liveshots.blogs.foxnews.com/2010/05/25/federal-inspectors-took-gifts-traded-porn/ ; http://www.pbs.org/wgbh/pages/frontline/flyingcheap/?utm_campaign=homepage&utm_medium=bigimage&utm_source=bigimage ; http://www.nytimes.com/2010/05/26/opinion/26dowd.html?adxnnl=1&adxnnlx=1274889642-3gTN9/LwwDxZ1pT1FF7lVw