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On May 11, 2010,  U.S. Dept. of the Interior Secretary Ken Salazar announced that he would separate the public safety and environmental enforcement side of the Minerals Management Services (M.M.S.) agency from its leasing and revenue collection function. While this move eliminateed the structural conflict of interest in the agency, it might not do enough to protect the regulatory function of the agency’s public safety and environmental enforcement roles.  The regulator can all too easily be coopted, or captured, by the firms it is regulating.

According to The New York Times, M.M.S. agency has routinely overruled its staff biologists and engineers who raised concerns about the safety and the environmental impact of certain drilling proposals in the gulf and in Alaska, according to a half-dozen current and former agency scientists. Those scientists said they were also regularly pressured by agency officials to change the findings of their internal studies if they predicted that an accident was likely to occur or if wildlife might be harmed.  “M.M.S. has given up any pretense of regulating the offshore oil industry,” said Kierán Suckling, director of the Center for Biological Diversity, an environmental advocacy group in Tucson, which filed notice of intent to sue the agency over its noncompliance with federal law concerning endangered species. “The agency seems to think its mission is to help the oil industry evade environmental laws.” One scientist who has worked for M.M.S. for more than a decade, said, “You simply are not allowed to conclude that the drilling will have an impact. If you find the risks of a spill are high or you conclude that a certain species will be affected, your report gets disappeared in a desk drawer and they find another scientist to redo it or they rewrite it for you.” For one thing, the regulators rely on information from the firms–data that is hardly provided in an objective fashion.  But such reliance pales in comparison with the political muscle of the oil companies–their campaign contributions being just the tip of the iceberg.  Moreover, large concentrations of capital are inherently a threat to a viable republic.

It should be no surprise that the government would welcome the cooperation from the companies involved in the accident in the Gulf; it reduced the pressure on the officials to go after the companies (and hence risk alienating their future contributions).  According to The New York Times, “Under federal law, even in the case of a major accident, the company responsible for the oil well acts in concert with government in cleanup activities and can help put out information about the response effort.”  Shortly after the spill, government agencies and BP set up a joint information center and a Web site detailing remediation efforts. BP started to promote its attempts to “stop the bleeding” (i.e., cut off the leaking oil in the Gulf).  With a restored image, the company could resume lobbying for less regulation, even though the accident demonstrates insufficient enforcement.

Source: http://www.nytimes.com/2010/05/12/us/12interior.html?ref=us ; http://www.nytimes.com/2010/05/14/us/14agency.html?hp

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

In the U.S. Constitutional Convention, James Madison in particular stressed the nepharious quality of faction in relation to the public good. He argued that if a republic is extended in scope sufficently that there are more factions, none of them would be able to dominate and the public good would emerge. In a republic in which there are only a few major parties, the people's perspectives can become delimited by the parties' paradigms in an either-or dual macro-framework. That is to say, societal blind-spots can exist. To the extent that both BP and the relevant U.S. Government regulatory agency, MMS, were both culpable in the Deep Water Horizon rig explosion in 2010, both the Republican defense of business and the Democratic defense of government fall short. Even so, these respective defenses went on undaunted in the wake of the disaster and in the next year. To be sure, old paradigms die hard.

Albeit an oversimplification, it can be said that the Democratic party in the United States stresses the power of business as the problem, whereas the Republican party there views the problem as being government.  In campaigning for President in 1980, Ronald Reagan bluntly said that government was indeed the problem.  Deregulation ensued and industry self-regulation was like a fad. The idea was that the checks and balances in goverment that protect the liberties of the citizens could be applied at the industry level such firms would provide a check on eachother automatically. Lost in the buzz was the extent to which an industry would be willing to sacrifice its own long-term viability in order to protect even the bad among its own.

In 2010, the Republican paradigm whereas business is good and government is bad resulted in some Republican office holders defending a piriah (BP) and continuing to urge deregulation in order to excoreate against the US Government and frustrate the Obama Administration.  The ranking Republican on the US House Energy and Commerce committee apologized to BP’s CEO for the “shakedown” by Obama in extracting a $20 billion fund for the claims in the Gulf region. Meanwhile, Democrats were hard-pressed to admit that a goverment regulatory agency, namely MMS, could be so inept and corrupt.  It was not so much a matter of more regulations being needed; rather, the problem was government regulation itself.

Democrats could point to the encroaching nature of big business over the regulators, but absent a shakedown in the size of the biggest companies, the wherewithal of the regulators not to “partner up” with the regulatees may be an intractable problem in government regulation.  The traditional argument in capture theory that regulators depend on their respective industries for information doesn’t even break a sweat in what is needed to explain the extent of the power of big business over government regulatory agencies.  The imbalance of power is systemic: government officials being too feckless and corrupt. and big business being too powerful for the good of the republic.  In their letters, Jefferson and Adams agree on the need for a natural aristocracy of virtue and talent, rather than the artifical sort of wealth and birth.  Absent a natural aristocracy, systems whether business or government, cannot but be ineffective and corrupt.

In 2010, BP’s sordid safety record and its explosion in the Gulf of Mexico challenged the paradigms of both parties.  In actuality, business and goverment, as well as business and government, contain problems that exceed and transcend a particular paradigm. In treating the two party paradigms as a dichotomy, we miss the interaction effect that exists among the respective sectors’ problems.  It might be that the founders were correct in their suspicion of factionalism, as it does indeed detract from the common good.  Where a paradigm keeps one from acknowledging problems that are in the radar of an “opposing” paradigm, a person is not apt to serve the public interest.  In other words, both paradigms are limited.  The BP-MMS interaction and the subsequent explosion and responses exposed the delimited nature of the partisan paradigms.