Regulatory Incentives: A Case Study

A Wall Street Journal (subscription) story caught my eye, "Oil Regulator Ceded Oversight to Drillers":

The small U.S. agency that oversees offshore drilling doesn't write or implement most safety regulations, having gradually shifted such responsibilities to the oil industry itself for more than a decade.

Instead, the Minerals Management Service—now caught up in the crisis of the Deepwater Horizon rig that for weeks has sent crude oil gushing into the Gulf of Mexico—sets broad performance goals for the industry. Oil producers and drilling companies are then free to decide for themselves how to meet those goals, industry executives and former regulators say.

 Let's break this down.  What does it mean, exactly, to say that the agency has ceded its regulatory authority?


In short, it's something called "performance based" regulation.  The agency, in this case something called the Mineral Management Service (MMS), sets performance expectations, but doesn't tell the agency HOW it must reach the performance expectations.  In theory, this should allow for less expensive regulations than the traditional "prescriptive" model (where I tell you HOW you must do something, but generally absolve you from the results if you comply).


MMS has now made clear it will be shifting away from a performance based system to a more prescriptive based one soon after last week's disaster in the Gulf.


I'm not so sure it was the model of regulation, or the fact that industry practices were adopted as the standards rather than rules written by federal regulators, that caused the problems MMS faces.  In fact, the Journal appears to have "buried the lede" (i.e. put the most important part of the story in the middle rather than up front).


Some interesting facts emerge about MMS (which is an agency within the US Department of the Interior): Enforcement of safety rules isn't MMS's "primary responsibility" although it does inspect rigs.  Instead, its to "verify how much oil is being pumped, which is key to another MMS duty, maximizing payments the government receives for oil and gas rights from energy producers."  As a result, the agency, which is funded by fees and rental receipts, faces a "conflict of interest" according to former MMS employees.


Does this make a difference in safety?  Very possibly.


Consider this: fatalities on oil rigs is four times higher in the US than in Europe.  The UK had a similar model, but recently separated its safety function from its revenue collection function.  The result has been an improved safety record.


The story goes on to detail how the MMS failed to follow-up on instances where the industry had failed to meet safety standards, etc.  In short, poor enforcement rather than poor regulations may have been at fault here.


Note: this is not the first time in recent years MMS has come under fire.  In 2008 it was cited for "a lack of ethical culture" after fairly shocking evidence of misbehavior occurred.

A minority government for Her Majesty...

The British people have spoken...now the politicians will decide what they said.  No party received a majority in the House of Commons, so now a coalition will need to be formed - something that country hasn't dealt with since the 1970s.  In the US, of course, we've had divided government with one party controlling Congress and another the White House.

Will be interesting to see how this all plays out...

Better Bills

Yesterday, we asked why might Congressional bills be so long?


Despite the massive size of the financial reform bill, it may be the content, not the length, that is problematic.  From Monday's New York Times:

As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis.

Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market, including the future of the housing finance companies Fannie Mae and Freddie Mac.

Others simply argue that it is premature to pass sweeping legislation while so much about the crisis remains unclear and so many inquiries are in progress.

 Specifically, there IS a federal Financial Crisis Inquiry Commission that is supposed to be reporting on the causes of the crisis.  Congress created it and asked it to report in December of 2010.  Without a sound understanding of such causes, it would seem that a solution would be premature, no?  So why the rush to legislate before the report you asked for is due?


One reason, unfortunately, might be found in Congressional Quarterly's (subscription required) current cover story about how Democrats are looking to re-brand their populist image and tap into the public's general anger in time to avoid major losses in the up-coming November elections:

The debate over financial services regulation, which was engaged on the Senate floor last week and is expected to dominate Congress this month, is a template for the Democrats’ new game plan for rebranding and promoting some of their longstanding initiatives.

Whether bills have been considered thoroughly, and through the regular order, is a better yardstick by which to measure than length.

The British Elections

Jacob Weisberg of Slate has a piece on tomorrow British elections.  He asks a good question: why should we care (other than just the sporting aspect of electoral politics)?  Here's his take:

Our American campaigns have become decadent spectacles of horrifying length and expense characterized by 30-second attack ads, a class of parasitic professionals, and a running media freak show.

By contrast, Britain's feel pure. They are swift (four weeks!), substantive, and not entirely driven by fundraising. Spouses are treated as human beings and allowed their own lives. The electorate is informed and engaged. The candidates are more spontaneous and accessible.

Weisberg goes on to describe his experience covering the race, which has some interesting comparisons with our own long, expensive and seemingly vacuous elections featuring a bored, inattentive and too often uninformed electorate.

Why Congressional Bills Are So Long

Historian John Steele Gordon thinks he knows:

One reason, I cynically suspect, is precisely to make them unreadable...The political elite would rather work in the dark and is confident that the Washington press corps won’t go to the trouble of actually reading a bill that’s longer than War and Peace (and a lot less entertaining). As a political public-relations man once told me, “Nobody ever went broke underestimating the work ethic of the average reporter.”

But there are two other reasons. One is that a vast bill makes it easier to sneak in clauses that go unnoticed until they are law...The second reason is Washington’s increasing fascination with global reform rather than piecemeal reform. Only touchdowns, it seems, are now allowed in the game of political football; moving the ball down the field just won’t do.  The health-care debate would have been a lot shorter and a lot less politically divisive had both sides simply agreed to enact those reforms that a substantial majority of each house agreed with — such as of insurance abuses — and then saw what else was needed. Regulating derivatives would be a piece of cake if it were not tied to “financial reform” in general.

From my own experience in writing legislation (10 years in Congress), I'd say that Gordon, who is an excellent financial historian, has it mostly wrong.  

No one ever told us to write bills longer on purpose.  I'd say of the causes he identifies, the last (a preference for global over piecemeal reform) is the soundest.  The reason have more to do with the increasing size of the congressional agenda and the diminishing floor time, meaning that you can't do several bills on one topic any longer.  Once a financial reg bill is done, Congress won't want to take it up again, so everything needs to be loaded into one package.

British Elections - Brits prepare for minority government rule

I've always been fascinated by the British political system, which is generally referred to as a parliamentary democracy.  It's highly useful to study because it represents a different style of government that works well for a nation very much like our own, which uses a presidential system, and there's lots of useful lessons in comparing the way the British approach things to our own.

One aspect of the parliamentary system is that the ruling party is determined by parliamentary elections.  The leader of the party that wins the most seats becomes Prime Minister and forms a government.  The Prime Minister does not personally stand for election nationwide, although I suspect a lot of votes for local Members of Parliament ("MPs") are cast based on who the party's leader is rather than the local MP.  In short, there's no "ticket splitting" (voting for a congressional candidate from one party and a President from the other) the way we understand it in the US.

Still, the English will go to the polls on Wednesday, and for the first time since the 1970s are likely to split votes among three parties - the Conservatives (aka the "Tories"), Labour, and the Liberals.  Labour is the incumbent party, but the least likely of the three to win the most seats.  Accordingly, we'll likely see a minority government, where the party that wins the most seats will need to work with other parties to form a working majority.

We'll be watching and trying to learn from this...should be very interesting!'

For more, British historian Simon Schama breaks it down for the readers of the New Yorker.

Note: the picture above is the Prime Minister's official residence at number 10, Downing Street, in London.