Friday, December 31, 2010

The Failure of the Free Market

The Deepwater Horizon oil spill in the Gulf of Mexico has long been gone from the front pages. It isn't mentioned in the crawl at the bottom of the television screen during whatever monotonous cable news programming you watch. Given our collective attention spans, this is by no means a surprising outcome. Even the Obama administration has moved on, set to resume drilling in the Gulf of Mexico in short order. But there is one outcome of the Deepwater Horizon spill that bears remembering that I do not think I've heard put precisely into words, namely that the free market failed all of us in the Gulf.

Now many will say that the former Minerals Management Service (MMS) at the Department of Interior had regulatory responsibility over BP's Gulf exploration program. This in theory is accurate, but as has been proven time and again, MMS was at best an absentee landowner, and at worst a willing conspirator with the oil companies. In Alaska, the former Director of the MMS had to issue a formal apology for ordering a cake for an office party adorned with the catchphrase Drill Baby Drill. Needless to say, effective oversight wasn't a priority for MMS in Alaska, in the Gulf, or anyplace else.

In the Gulf, after the Horizon spill, we learned that BP's oil spill response plan was a house of cards, prioritizing of all things the protection of the Gulf walrus population. If MMS was doing it's job they could have pointed out that a plan to protect a species that does not occur within a thousand miles of the Gulf of Mexico isn't bound to meet with much success. And while each individual oil company is required by law to submit an oil spill response plan to MMS for approval, it has now become clear that the plans were all the same baloney, only the corporate logos had been changed. Alas, the Gulf walrus, much like the unicorn and the abominable snowman, has nothing to fear.

So the Gulf of Mexico was turned into a libertarian play ground. A perfect workshop for testing one of the main tenets of free market economic theory, namely that the corporate disincentive for making mistakes negates the need for government oversight and that word that keeps Libertarians up at night: regulation. The logic being that mistakes cost money, and that is incentive enough to avoid them.

But the Gulf spill proves that the pull of profit is a much stronger force than avoiding costly mistakes. Profits are easily quantifiable, and they are the indisputable yardstick for corporate success; on the other hand, an avoided mistake is something almost theoretical, and certainly intangible, a deadly combination for the profit driven corporate decision making model.

BP was left by the federal Minerals Management Service to police itself in the Gulf of Mexico. Free market advocates would have us believe that this was an ideal situation, that the assumed costs of a spill like Deepwater Horizon would assure that the unregulated corporations would do everything they could to avoid a disasterous oil spill. But the the free market model failed us in the Gulf. Corners were cut, laws were ignored, mistakes were made, all in the name of profit. Mistakes were little more than an accepted risk.

Every free market anti-regulator that you can shake a stick at will spout endlessly about the high cost of government regulation, like horses adorned with blinders, they fail to see the high cost of no regulation. Now, BP, the Gulf fishing and tourism industries, and human and environmental health are left to pay the piper. The free market failed the Gulf of Mexico, and proved once again that an ounce of prevention is worth a pound of the cure.

Tuesday, December 21, 2010

Today's Generosity: Tomorrow's Unfunded Mandate

Not too long ago, the American people were asked to bail out a bevy of large financial institutions whose names we all recognize. Shortly after that, our wallets were raided once again, this time in the name of large American automotive manufacturers General Motors and Chrysler. We were told by talking heads that these giants of the global economy were simply too big to fail, and that if they did fail, large scale economic ruin would surely follow. Many people now think the 'too big to fail' moniker was spurious; that there is no business deserving an eternal guarantee of solvency pledged on the back of American taxpayers.
These days, another heir to the too big to fail throne has appeared, with a much more legitimate claim to that dubious honor. It has become clear that state and local governments across the country are dangerously in the red. We have become accustomed to hearing elected officials bemoan tight government budgets, all the while increasing government expenditures with a devil may care attitude. These budgets, however, aren't just tight; they are downright frightening. The very financial future of state and local jurisdictions is in serious doubt, and business as usual is a surefire recipe for fiscal failure.
One of the major culprits for this impending financial disaster is the extravagant benefit packages offered to many public sector employees, such as teachers and agency bureaucrats. The company-funded pension system is well nigh extinct in the private sector. Companies long ago determined that funding pensions was far too costly over the long run, and instead opted for making much smaller contributions to retirement investment accounts such as a 401k or a 403b, that are mostly employee funded. The critical hang up of pension systems if of course that companies remain responsible for pension payments long after, sometimes decades after, that employee was last engaged in gainful work on behalf of the company.
Many American manufacturers, such as Bethlehem Steel, and the aforementioned GM and Chrysler, were led nearly to financial ruin thanks in large part to benefits package that seemed like a good idea at the time, but that proved utterly unsustinable over the long term.
It is safe to say that the retirement paradigm has shifted. Individuals now bear the responsibility for saving enough money for their own retirement. The options for acheiving this are seemingly endless. While you can certainly bemoan the fact that pension benefits have evaporated, you better be saving for retirement while you whine; it's just a fact of life.
A fact of life for everyone except public sector employees, it seems. The state of Maryland currently has $33 billion in unfunded liabilities related to it's pension system for state employees. To put that in perspective, the entire operating budget for the state in 2011 totals $32.1 billion.
Unlike businesses, those who hold the purse strings of taxpayer funds don't have to worry about profitable bottom lines or even fret much about accountability, because while today's generosity is tomorrow's unfunded mandate, the challenges of the future will fall to someone else. And generally speaking, a local government jurisdiction probably isn't going to go out of business or go bankrupt; but as the bills for these extravagant pension plans come due, the likelihood of that unthinkable scenario, namely massive government defaults, increases dramatically.
Now in Maryland, there is a movement afoot to transfer responsibility for these pension benefits to local county school boards; a wildly irresponsible passing of the fiscal buck. If this were to happen in already cash strapped Queen Anne's County, it would more than likely put the county out of business.
Public employee unions like AFSCME, SEIU, and the NEA have made these benefit packages an untouchable 'third rail' issue for elected officials. This simply cannot continue to be the case, politicians must stand up to public sector employee unions and take back control of state budgets.