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Posts Tagged ‘Regulation’

A while back I wrote about Toyota and the question of whether the free-market may have failed in regulating itself by the presence of the safety failures that occurred in their cars and trucks.  And now we are facing back-to-back tragedies with the mine explosion in Virginia, and now the BP oil-drilling rig explosion in the gulf.  Both companies had numerous fines and citations to their record (but, ironically BP was up for two government safety awards meant to be held this month).  So what is the deal here?  Has regulation failed?  Capitalism?  Does it all boil down to greedy CEO’s?

I would say a little bit of it all… plus other intangibles.

Did regulation fail?  I’m thinking, yes.  How exactly is it that a company receives 500 citations and fines a year and is continuing operations?  Look at the mine example:

Among the hazards are infractions related to air quality; development of a mine ventilation plan; equipment testing; and accumulation of combustible materials, such as coal dust, according to U.S. Mine Safety and Health Administration records.

As production at the mine has increased, so, too, have the violations.

In 2008, the mine produced 363,923 tons of coal and received 197 citations. Last year, it produced 1.2 million tons of coal and racked up 515 violations, the highest amount of violations in the past decade. The proposed fines for those violations amount to nearly $900,000.

I understand that companies are able to appeal certain decisions, and continue operating while working on citations.  But perhaps there should be a limit to that – say your first 20 violations?  I’m not completely versed in this world, so perhaps these are tickey-tack violations that should not disrupt the flow of operations… but they sound pretty big to me.  I’m curious if there is a combination between owners bent on profit, regulators enjoying revenue from fines opposed to work-stoppages, and some serious connections to lobbying efforts in DC to keep things running smooth.

BP meanwhile is an interesting study.  The CEO of BP had apparently done great work in the name of increasing their safety record and costs.  And the oil rig belonged to a contractor, not BP, though the British giant certainly is the overall boss here.  But this case includes not only loss of life, but an extreme environmental catastrophe with a deep-water gusher spewing out thousands of barrels of oil a day into the gulf – with no convenient way to stop it.  So, again… who or what deserves the blame?  Again, I will have to say I don’t know.  But I’m inclined to think it is dysfunction between government and business.

It’s not business completely, because there are lots of companies out there that have sterling reputations for safety and low accidents – so why should these bad examples eliminate the good ones’ self-regulating behavior?  It’s not government completely… they are finding the issues many times.  As I was talking to my brother this weekend I was discussing how libertarian’s are not anti-regulation, or law.  That’s anarchy – rule of law is entirely necessary even in a limited-government view.  My problem with regulation is more typically reserved for personal liberties (such as the ability to smoke, or ride a motorcycle without a helmet) that over time serve to create a nanny-state that creates even greater dependence on government and absolution on personal accountability.  The ability of a government to safeguard our coastline from anybody drilling willy-nilly is not something I oppose.

I think the overall failure could in the area of follow-through.  If your punishment for an infraction is a fine not a fix, then expect people to often just pay the fine.  If your punishment is an order to fix something within a year… expect it to take a year.  I don’t think we need new regulations per se, just better and stricter enforcement of the ones we have – a similar argument to that of our immigration laws.  Bernie Madoff was flagged for his investment scheme – but without follow up.  Massey Mines was flagged but allowed to continue operations.  Deepwater Horizons (the leased rig at the center of BP’s problem) had a history of issues… but was not considered above average by any means, and hadn’t had a reported issue since 2005.  I would say that is pretty successful, but when dealing with oil and environment perhaps even one issue can be one too many.

This is a more fully nuanced discussion than we can have here… but the fact remains, these are tragic events and we should rue them happening.  Where the problem and solutions lie I think is not entirely in one camp, but a failure of many… as is the case quite often.    But be sure, that despite where the fault completely lies… the financial cost of all this will be borne by Massey and BP, not by the United States government or any regulating body.  Which in my mind causes me to think the companies needed to do better to stave off these accidents, and that their share of the fault is higher than any other entity I could drum up.

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Oskari Juurikkala of The Acton Institute has an interesting column on whether increased regulation in financial markets increases or decreases the virtuous behavior of market participants.  I’ve reposted a good chunk of it here:

 

In his book Not Just for the Money, economist Bruno Frey sheds some light on the question. Invoking research in motivational psychology, he argues that external compensation or punishment does not always produce the desired results. Human persons are more complex actors than traditional homo economicus models suggest.
Frey writes: ”Intrinsic motivation is of great importance for all economic activities. It is inconceivable that people are motivated solely or even mainly by external incentives.” There is more: according to Frey, the use of monetary incentives and threats of punishment crowds out intrinsic motivation under identifiable and relevant conditions.
For example, giving monetary compensation to a child for doing household chores is likely to result in decreasing contributions made without compensation. Or if, at the end of having dinner at a friend’s place, you insist on paying for the dinner, you may destroy your friendship. Similarly, given that some university professors work harder than others, imposing strict working hour regulations will probably provoke those better workers to reduce their effort and dedication.
Frey talks about the hidden cost of reward or regulation. When an external intervention is perceived as controlling and not respecting the rightful autonomy and reasonableness of the person, extrinsic motivation tends to crowd out intrinsic motivation. When people feel that they are being forced to act in a certain way, their behavior becomes more extrinsically guided.
Incentives are not always harmful, of course. External interventions may enhance intrinsic motivation when they are perceived as supportive. When the father gives a present to his daughter who has been helpful in the house, he may reinforce her willingness to help, as the gift is a token of affection and gratitude rather than a payment conditional on specific performance.
When you go to a restaurant and leave a generous tip, the diner-waiter relationship is strengthened. Hard-working professors will work even harder if their dedication and effort is rewarded with, say, being elected to form an official delegation to an important conference in an attractive city.
According to Aristotle, a good ruler is much like an educator. A skilful educator does not focus on external conduct alone, but seeks to instill a sense of the good so as to encourage virtue chosen freely. Putting too much weight on external incentives – sticks and carrots – has hidden dangers that often reveal themselves later. Vice is the common fruit of the manipulator and the tyrant.
Is lighter regulation the solution to present and future economic crises? It depends. Let it first be noted that some over-the-counter financial derivatives are practically unregulated at the moment, so there is nowhere to cut regulation. It might be more appropriate to cover such clear gaps in existing rules in a principled manner so as not to lead people to the temptation of recklessness.
But a few clear and fast rules are often better than numerous rules that are hard to understand – especially if they are poorly enforced. The latter is arguably the state of the art in financial markets regulation.
When designing rules for a game, one must take into account the moral character of the players. But there needs to be adequate variation: general laws designed for crooks will not produce any saints.
Soft measures are sometimes more productive in the long term. Strict regulations imposed by law tend to damage the intrinsic motivation of better managers; in contrast, their motivation can be enhanced by explicitly acknowledging the value of those who maintain sound policies. The support principle could be applied in numerous ways in economic and regulatory policy.

In his book Not Just for the Money, economist Bruno Frey sheds some light on the question. Invoking research in motivational psychology, he argues that external compensation or punishment does not always produce the desired results. Human persons are more complex actors than traditional homo economicus models suggest.

Frey writes: ”Intrinsic motivation is of great importance for all economic activities. It is inconceivable that people are motivated solely or even mainly by external incentives.” There is more: according to Frey, the use of monetary incentives and threats of punishment crowds out intrinsic motivation under identifiable and relevant conditions.

For example, giving monetary compensation to a child for doing household chores is likely to result in decreasing contributions made without compensation. Or if, at the end of having dinner at a friend’s place, you insist on paying for the dinner, you may destroy your friendship. Similarly, given that some university professors work harder than others, imposing strict working hour regulations will probably provoke those better workers to reduce their effort and dedication.

Frey talks about the hidden cost of reward or regulation. When an external intervention is perceived as controlling and not respecting the rightful autonomy and reasonableness of the person, extrinsic motivation tends to crowd out intrinsic motivation. When people feel that they are being forced to act in a certain way, their behavior becomes more extrinsically guided.

Incentives are not always harmful, of course. External interventions may enhance intrinsic motivation when they are perceived as supportive. When the father gives a present to his daughter who has been helpful in the house, he may reinforce her willingness to help, as the gift is a token of affection and gratitude rather than a payment conditional on specific performance.

When you go to a restaurant and leave a generous tip, the diner-waiter relationship is strengthened. Hard-working professors will work even harder if their dedication and effort is rewarded with, say, being elected to form an official delegation to an important conference in an attractive city.

According to Aristotle, a good ruler is much like an educator. A skilful educator does not focus on external conduct alone, but seeks to instill a sense of the good so as to encourage virtue chosen freely. Putting too much weight on external incentives – sticks and carrots – has hidden dangers that often reveal themselves later. Vice is the common fruit of the manipulator and the tyrant.

Is lighter regulation the solution to present and future economic crises? It depends. Let it first be noted that some over-the-counter financial derivatives are practically unregulated at the moment, so there is nowhere to cut regulation. It might be more appropriate to cover such clear gaps in existing rules in a principled manner so as not to lead people to the temptation of recklessness.

But a few clear and fast rules are often better than numerous rules that are hard to understand – especially if they are poorly enforced. The latter is arguably the state of the art in financial markets regulation.

When designing rules for a game, one must take into account the moral character of the players. But there needs to be adequate variation: general laws designed for crooks will not produce any saints.

Soft measures are sometimes more productive in the long term. Strict regulations imposed by law tend to damage the intrinsic motivation of better managers; in contrast, their motivation can be enhanced by explicitly acknowledging the value of those who maintain sound policies. The support principle could be applied in numerous ways in economic and regulatory policy.

This sounds reasonable to me, but I also realize that my bias towards laissez faire economics may cause me to enjoy hearing what I want to hear.  But trying to put that aside, a reason it does sound reasonable is when I compare it to a Christian faith.  Christians talk of legalism and how setting rules or checklists to try and live a Christ-like life is most often (or always) defeating, since the spirit of the law is obviously not resonating, it is simply the letter of the law that is being followed and no transforming of the heart is taking place.  I believe it is when we get to the core of our own reasoning for making a moral decision that we will be more consistent and more likely to make that moral decision again and again.

Obviously there is the matter of the Holy Spirit and its role in our lives that cannot be applied to a financial managers decision-making.  But equally obvious is the fact that people who do not believe in the Holy Spirit or God or what have you, can and do make morally responsible decisions all day long.  And if that is true, then perhaps as Juurikkala proposes it would encourage even better decisions when less regulation is enacted. 

Is this is an appropriate comparison?

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