Failed States

The Gulf oil spill, we now understand, is not a natural disaster but a result of the interaction of two completely failed organizations: the Interior Department's Minerals Management Service and the oil company that now calls itself BP (nee British Petroleum). The sight of BP Chief Executive Tony Hayward at a yacht race on the Isle of Wight, days after indifferently telling Congress that he had barely known of the existence of the "nightmare well" known as Deepwater Horizon, is a lasting image.  As Joseph Nocera established in detail in The New York Times on Saturday, even now, there's something deeply sick about the culture of that company. Similarly, the MMS was a cesspool of drug use, sexual harassment, and personal, financial, and sexual interminglings between the regulators and the regulated.

In a powerful speech Friday, Sen. Sheldon Whitehouse of Rhode Island offered that rarest of things in Washington, a completely new idea: After reviewing the disgraceful recent history of the Minerals Management Service, and the well-recognized phenomenon of "regulatory capture" -- where government agencies become pawns of the industries they are supposed to regulate -- he suggested that the attorney general be given the authority to take temporary control of any government agency that has lost sight of its mission. The attorney general would be able to hire and fire, rescind or replace existing contracts, set up a plan to make sure the agency was no longer subject to "undue corporate influence," and then would step back. It's a kind of receivership, similar to what some states have done with failed school systems or public agencies.

Whitehouse is obviously onto something. But there are three shortcomings to his proposal: First, he's speaking from within something of a failed institution itself, the U.S. Senate. (Is there any doubt that senators including oil-state Democrats like Mary Landrieu of Louisiana would have blocked an attempt by Attorney General Eric Holder to take control of the MMS before the spill?) Second, the attorney general's office has rarely been in hands that one would trust with such power -- from John Mitchell under President Richard Nixon to Alberto Gonzales just three years ago, the office (though usually not the whole Department of Justice) has on more than a few occasions become captive itself, usually to the president's political needs. And third, the cause of failed and corrupted institutions is not limited to regulatory capture, nor is the phenomenon limited to the public sector.

The last decade has been defined by the challenge of reacting to institutional failures. In the early 2000s, we worried about failed states, like Somalia and Afghanistan; now it's failed companies, failed public agencies, and failed governing systems that pose the greatest dangers. Bear Stearns, General Motors, American International Group, Fannie Mae, the city of Detroit, perhaps the state of California, countless schools and state agencies, and most recently even Arlington National Cemetery -- there is a reason "bailout" has become the defining word of the era. And while incidents like Hayward's trip to the yacht race might seem like ham-handed PR, such self-indulgence often signals institutional collapse -- consider, for example, that the leaders of Bear Stearns were participating in bridge tournaments, with their cell phones shut off, at several key moments in the firm's collapse.

The common explanations for these breakdowns contradict one another: When it comes to public agencies, like schools or the MMS, conservatives explain it as a lack of market incentives -- unlike employees of private-sector firms, teachers and bureaucrats get paid whether they do a good job or not, their customers have few alternatives, and so they have no incentive to do a good job. This assumes that private-sector institutions know their interests and pursue them relentlessly, while the public sector is adrift and malleable. But how then do we explain when private companies behave in ways that completely violate their own interest, even if their only incentive is greed? In theory, as has been said often, no one has more incentive to stop the oil spill than BP. But then, BP also had ample incentive to prevent it in the first place. And the company surely has every incentive not to act indifferent or deceitful -- yet it has done both.

Liberals explain private-sector meltdowns as simple functions of greed. Which is true -- the profit motive in BP's case, or Bear Stearns', functioned as an incentive to cut every possible cost, while raking in the profits from oil leases or hoping that they could get out of risky mortgage-backed securities before the market turned. But greed is not a sufficient explanation. According to Nocera, after earlier accidents, in contrast to BP, Exxon-Mobil re-engineered all of its drilling and refining processes to emphasize safety, and he reports that the consensus in the oil industry was that BP was a disaster waiting to happen, much like Bear Stearns. But Exxon-Mobil, or Wall Street survivors like JPMorgan Chase (the sponsor of Hayward's yacht race), are hardly less greedy beasts than their failed or failing counterparts.

Size probably has a lot to do with it -- in companies like BP, Bear Stearns, or Citigroup, management (much more so than the much-derided public employees) often collect their enormous salaries and bonuses without ever engaging with the riskiest and most complicated ventures in which their companies are involved. They may work hard when not at the yacht races, but they couldn't possibly work hard enough to actually keep up with the complexity their companies have created -- whether it is daring Mother Nature with an unprecedented, cost-cutting approach to deep-sea oil drilling or chancing the markets with mortgage-backed securities of unknowable risk.

But size isn't quite sufficient explanation either. There's not much more that can be said except that some organizations go south and others don't. What to do? Receivership, as in the White House proposal for temporary control by the attorney general, is one after-the-fact option. Another might be a new conception of anti-trust law, one that prevents any company from becoming so big that it's failure would be systemically disastrous. A third, and related, might be to apply the kinds of solutions that have sometimes helped to fix failed schools -- charter schools and school choice -- to the private sector as well and ensure that no company is insulated from competition.

But none of these answers are obvious or sufficient. The project of preventing institutions from failing with tragic consequences as in the Gulf, or simply great expense, is the great challenge of policy in the forthcoming decade. Sen. Whitehouse's solution is just the start.

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