Yesterday after meeting with top BP officials including BP Chairman Carl-Henric Svanberg, President Obama announced that BP will set aside $20 billion to cover damage claims from their Gulf of Mexico oil spill. “What this is about is accountability,” President Obama said at the White House lectern.
Of course, the opposite is true—this is about non-accountability. Those who do not want to be held accountable for their actions seek to be protected and subsidized by government. Given what we have been through in the past few years, it is astonishing that more people have not learned that basic lesson. After all, have they not watched trillions of dollars of new debt be created, at their expense, in order to subsidize and bailout reckless banks and other financial organizations?
As I have been covering in this blog, President Obama acknowledged that under the law, BP’s liability limit was legally $75 million. The implication is that the $20 billion that BP has agreed to set aside is a good deal. However, the damages from the BP spill will certainly dwarf the $20 billion set aside. Many of the effects of the spill, such as permanent damages to property values and damages to the spawning grounds of species such as the Bluefin tuna, will be difficult to measure. And of course, incalculable damages to the environment will last for generations.
Yesterday, in his opinion piece in the Wall Street Journal, University of Chicago law professor Richard Epstein diagnosed the problem exactly. He wrote: “The legal system should never allow self-interested parties to keep for themselves all the gains from dangerous activities that unilaterally impose losses on others….” The first reform, Epstein wrote, is to end the liability limit:
The first element in the mix is a no-nonsense liability system that fastens full responsibility on the parties who run dangerous operations, no excuses allowed. Accordingly, we have to be especially wary of statutory caps on tort damages, including the current law, under which, in the case of the oil industry, the “total of liability . . . with respect to each incident shall not exceed for an offshore facility except a deepwater port, the total of all removal costs plus $75,000,000.”
As I have previously covered and as Epstein points out, insurance companies are the best regulators:
A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff—so that in this case companies with weak safety profiles don’t get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate.
Within the space of about thirty seconds, Obama said yesterday, “We will continue to hold them accountable” and “BP is a strong and viable company and it is in all of our interests that it remain so.” Such goals are mutually exclusive. It is like a judge allowing a drunk driver who has committed manslaughter to continue to drive on the grounds that the drunk needs to earn a living to pay back his victims. Contrary to Obama’s claims, it is likely that BP will remain an ongoing concern only if government continues to shield it from the full consequences of their liability. The interests of those suffering damages and the interest of BP are not the same. If it takes the sale of all BP’s assets and the dissolution of BP to pay as many claims as possible, that is the tough medicine that a free market requires.