Regulation vs. tort

by on May 24, 2010 at 7:17 am in Economics, Law | Permalink

Paul Krugman writes:

Well, here’s the thing: regulation demonstrably does work where tort law doesn’t. Consider the environmental issue: in reality, the perpetrators of oil spills never pay most of the cost; but in reality, environmental regulation has led to much cleaner air and water. (Look up the history of Los Angeles smog or the fate of Lake Erie if you don’t believe me.)

So why does regulation work? If polluters can buy off the system ex post, after a disaster, why don’t they manage to totally corrupt regulation ex ante? There’s a lot to say about that, and I’m sure there’s a literature I haven’t read. But one thing we tend to forget in this age of Reagan is the importance and virtues of a dedicated bureaucracy: when you have professional government agencies with a job to do, and treat them with respect, that job often gets done.

I'll offer a few points:

1. Here is Susan Rose-Ackerman on regulation vs tort (JSTOR).  This is a standard piece in the area, and although she does not stress public choice arguments, the upshot is not extremely far from Krugman's conclusions.  She thinks that tort can replace regulation to only a limited degree.

2. I agree with Krugman that the "tort only" position espoused by some libertarians does not work.  Yet I do not think his remarks are pointing at the best possible understanding of the question.  For instance…

3. There is in fact an agency regulating off-shore drilling and in the case under question it totally failed.  How can Lake Erie, an orthogonally related success, be cited but this very directly relevant failure not be mentioned? 

Furthermore standard accounts of this failure blame regulatory capture, and the Congressional desire for revenue for this failure, not the ideology of free market economics.  You might also blame voter sentiment, since Obama seemed to pick up some advocacy of off-shore drilling from the Republicans and arguably this happened because that position proved to be one of the few effective Republican arguments in the last election. 

4. There are plenty of problems where tort works better than regulation, most notably when behavior cannot be controlled or measured easily ex ante or where the correct decision relies on the producer's decentralized information.  This encompasses numerous areas, from medical practices to accident law to injuries resulting from the handling of guns to, most of all, many micro-components of highly regulated sectors.  Here is a legal and moral defense of tort law.

5. Off-shore drilling is closely related to these cases.  For a number of obvious reasons, it is hard for the regulator to monitor how safe an off-shore platform really is.  We thus rely a lot on ex post penalties in this area (regulatory as well as tort), not because of ideology but because the ex ante proscriptions don't have as much bite as we would like.  This reliance on the ex post penalty also means that "regulation plus tort" (never mind "regulation alone" or "tort alone") may not work so well in this area, with or without free market ideology.

6. Krugman seems to argue that regulators are more protected from the ravages of bad ideology than are judges.  Maybe yes, maybe no (see below), but such a comparative argument is unnecessary.  The most salient point for Krugman's conclusion is simply that optimality requires a bit of regulation and a bit of tort law and that to do without regulation is, in some regards, to be too lax.  He could justify his main conclusion much more simply than he does.  (That said, I still believe in less regulation than Krugman does, though I accept the logic of this argument.)

7. If we need to make the said comparison – the corruptibility of regulation vs. the corruptibility of tort law – an independent judiciary need not do worse than a respected bureaucracy and indeed the former is arguably more protected from political interference.  It's also the case that the judiciary is more likely to overturn very bad behavior from other parts of the government.  This is an advantage for judicial approaches over reguatory approaches and it is a further sign of (partial) judicial independence.

8. I worry when numerous bloggers and writers — not just Krugman — hold a primary theory of regulatory failure based on regulators who do not agree with them ideologically.  This is at odds with a big chunk of the relevant public choice literature, which stresses knowledge and incentives, yet without ruling out ideological bias as a factor.  Political science approaches to regulation offer greater scope for ideological bias as a major cause of regulatory failure, but still it is hardly the dominant theory to the exclusion of others.  In this matter we should follow the literature, and evidence, which are there for the taking.

1 Andrew May 24, 2010 at 7:41 am

Krugman is setting up a false choice, only regulation or tort. A lot of improvements come right after we (1) learned there was a problem where we didn’t know beforehand and (2) threw the kitchen sink at it. I don’t know anything about LA, I’m sure it is pristine and all due to regulation. But it certainly is the case with Lake Erie that the regulation came long after the problem was being solved, mostly by being recognized. (In fact, it’s kind of odd that one of his two examples is something I know a bit about. Are there only 2 examples?) I’m not convinced kitchen sinks are the solution to all these problems that go away just because we look back and a kitchen sink was employed.

And of course, we aren’t just concerned about whether something gets cleaned up. We are concerned about the total cost. What is the cost of the kitchen sink? And you have to include the loss of productivity due to compliance as well, as well as the opportunity cost of the projects.

We find for example that the $200M behavioral identification terrorism prevention program has had zero value. And, the program itself wasn’t in place prior to 9/11. So even a priori regulation is reactionary, as in the farmer who closes the barn door after the horses are gone.

Krugman also selects two examples that are very different from oil wells. In the case of Lake Erie, the lake did almost all the work (sedimentation). All the genius regulators figured out was that it would if people stopped dumping stuff into it.

“a 1969 Time magazine article about a fire on the Cuyahoga River, a tributary feeding the lake at Cleveland, Ohio so embarrassed officials that the United States Congress quickly passed the Clean Water Act of 1972.”

Fire on lake…1969 Article…Congress quickly…1972. Surely it was because of Republican stonewalling. Thank God we now have Walleye and no more car companies.

2 Lonely Libertarian May 24, 2010 at 7:50 am

Krugman and most progressives seem to begin with the assumption that this was a failure – not an accident.

This puts both the regulators and BP in no win positions – regardless of what they do they must first explain why they failed or live with future failure preventing regulation…

I think we live in a world where despite our best efforts things do sometimes go wrong – shit happens…

This leads to two different approaches to regulation…
Mine tries to reduce the probability of failure to low levels and assure that the appropriate steps are taken to do so,,,
Progressives want regulation to ELIMINATE the chance of failure – reduce the probability to zero – something I think is only possible by ELIMINATING the activity…

Many years ago I worked in an IT department and my boss reminded me that the only perfect security system was one that denied access to everyone – including the user. Not very practical – but secure.

So Krugman and others would actually like to ELIMINATE the risk by ELIMINATING the activity [all drilling – not just offshore] – I find it a bit disingenuous when they hide behind this sort of argument…

3 Arun May 24, 2010 at 8:03 am

The problem with Lonely Libertarian’s post is that the more we learn, the more we find that BP did not follow all reasonable precautions. E.g., even the owners of the Deepwater Horizon wanted to take more precautions, but BP said no.

4 k May 24, 2010 at 8:37 am

After Exxon-Valdez, the law established strict liability. An d stiff penalties of prison. How many spill have been since. One , a chinese tank captain opened on purpose the deposit at Frisco bay. In Europe? many. Alegrett , a minister for Chirac used the USA law as an example on how to manage spills

5 k May 24, 2010 at 8:39 am

Ackermann has a book comparing the german approach and the american approach on environmental protection and declares USA the winner

6 Andrew May 24, 2010 at 9:05 am

Bill, yes, replacing things that don’t work but pretend to, with things that sort of work, and finally with things do work at good value is what I want. With a cherry on top.

7 chris May 24, 2010 at 9:51 am

Krugman and most progressives seem to begin with the assumption that this was a failure – not an accident.

Assumption my ass. They *falsified the freaking safety tests*. This is an accident the way Russian Roulette is an accident.

There are some accidents where nobody could have done anything better. But this isn’t one of them, any more than the recent mine disaster (multiple safety violations ignored again) or Valdez or Challenger or a long list of other examples. Failure analysis is important, but “freak accident nobody could have prevented” is actually very seldom the right answer. Most accidents are preventable, but people just don’t bother because the preventive measures are inconvenient or expensive and seem wasteful if there hasn’t been an accident recently. (This is irrational as hell, but very human.)

Anyway, to return to Tyler’s point, anti-government ideology and incompetence go hand in hand. If you believe that regulators can’t improve public safety (or stop anticompetitive behavior, or uncover fraud, etc.) and just get in the way, why bother to try to find competent regulators rather than appointing your political cronies? Let alone adequately funding their departments to carry out their missions: if they can’t do so anyway because they’re cursed with the (self-fulfilling) incompetence of government, might as well save those taxpayer dollars.

It’s only if you believe that their job matters that you would have an incentive to try to find someone who will do it well, and make sure that they have the information and other tools to do their job well.

For more on this point, see _The Wrecking Crew_.

8 William May 24, 2010 at 10:13 am

I love the invalid logical conclusions in this topic. Regulation failed here, therefore regulation doesn’t work and has never prevented anything. Some high quality thinking here.

9 JoddeHaa May 24, 2010 at 10:51 am

The problem with tort is that it presupposes that actors are rational and can assess risk. I think the recent/ongoing financial crisis disproved that theory. Therefore: regulation.

10 Nathan May 24, 2010 at 11:08 am

“The problem with tort is that it presupposes that actors are rational and can assess risk. I think the recent/ongoing financial crisis disproved that theory. Therefore: regulation.”

Assuming said regulation is not done by humans (who we know aren’t rational and can’t assess risk), this sounds like a fine solution.

11 Popeye May 24, 2010 at 11:25 am

It’s amazing that there are so many believers in free markets, given that they’ve never been tried.

12 Andrew May 24, 2010 at 11:37 am

Let’s get one thing straight. If you are going to get bailed out, it IS rational to take big upside risks (if that is actually what happened, I’m still not convinced management realized they were taking big risks). Regardless, what is clear is that nothing has been proven about rationality with the bank bailouts. In fact it has been reinforced. THAT is in fact the problem. Heads they win, tails we lose. But the government chose to link taxpayers in order to “save the economy.” But many of us didn’t ask for that favor, and even more of us didn’t ask for the implied bailouts beforehand or the dysregulation of taxpayer money.

You can take a bunch of my money and give it to another guy and let him do whatever he wants with it. However, I’m not going to let you call that “de-regulation.”

13 Rahul May 24, 2010 at 12:14 pm

How does tort law handle a scenario where a tortfeasor can inflict a damage that is larger than his ability to pay? I think we are lucky that a company as large as BP caused the leak so we can squeeze a lot out from them before they declare bankruptcy. But what if a smaller driller was liable?

I think that’s the sort of situation where regulation is necessary. The potential damage a company can do needs to be limited to its ability to pay off (directly or via a insurer)

14 mdb May 24, 2010 at 1:16 pm

A few of observations. First, if you were to ask anyone living close to a coal fired power plant or some other environment degrading industry, what works better regulation or law suits – I am pretty sure they would say lawsuits – if the lawsuits don’t get thrown out since the polluter is following the regulations. Environmental regulations are permits to pollute at certain levels. Second, like all regulations – if they regulate a certain chemical – polluters will switch to another chemical till that is regulated – it is just a cat and mouse game with a big fat slow cat. Third, look at environmental regulations and many of the top polluters that fall under a regulation have lobbied congress for exemptions. They are merely instruments to extract campaign donations.

Also, environmental regulation is one area where you can find many successful uses of tort law, where government regulators failed. Heck there are even several movies about it.

A little personal experience: About 15 years ago I was offered a job with a company that handled hazardous waste disposal at the Newport RI naval base. The position basically entailed determining the cost to dispose of the waste legally and comparing it to the fine that would be paid if the waste was dumped in the bay. After the analysis the cheaper alternative would be chosen. I did not take the job, but no doubt someone did, and waste was dumped. The government (mostly through the DoD) is the largest polluter in the country. I wonder why anyone would trust them.

15 q May 24, 2010 at 1:59 pm

Matt Matson wins the thread. The tort system isn’t designed to handle diffuse harm, unless causation is clearly evident (e.g. securities class actions or products liability class actions). Krugman is being a buffoonish hack by implicitly dismissing tort law as a whole. Tort law generally works.

If there are “torts” where the cost is usually much higher than the perpetrator’s ability to pay, the usual solution is to throw them in jail.

16 Lonely Libertarian May 24, 2010 at 2:11 pm

Rahul – and perhaps others begin it seems with the assumption that BP “caused” this event…

This takes us to a place where every event is “caused” and we can [and must!] always find the perpetrator.

This just seems silly – what BP did in this case would – except for a mechanical failure – have had no predictable inevitable negative outcome. Drilling in 5000 feet of water is risky – and as I said before – shit happens. The BOP failed – before the event there was – and always is – a non zero probability of failure, but also a significant – but less than 100% probability of success.

Had it worked as it should have we would not have a had a spill…

It is important to note also that the BOP [Blow Out Preventer] is essentially an insurance device – it is only needed – and used when something bad – a “blowout” has occurred – so the spill happens because of two failures – the initial “blowout” [a failure of the cementing procedure from what I have read] AND a failure of the BOP – again most of the time the first event never occurs – so the second event needed to lead to the spill never has a chance to occur.

BP is going to have to pay for this outcome – part of the risk it assumes in being in this business – not the inevitable result as some seem to believe of their evil nature…

Tort seems to me to be an efficient means of assuring the do so – as for Matt’s desire for some kind of increased deterrence seems to be rooted in a belief in the inherent evil POV…

17 Rahul May 24, 2010 at 3:43 pm

@Lonely Libertarian:

“Rahul – and perhaps others begin it seems with the assumption that BP “caused” this event…”

Not at all. BP didn’t “cause” it but isn’t that what “strict” liability is about?

18 Lonely Libertarian May 24, 2010 at 4:01 pm

Sorry if I over reacted – but words do matter – and you used caused in a way that implied – I thought – wrongdoing…

Apologies if I misunderstood…

And to be clear I have NO problem with strict liability – as i have no problem with energy companies facilitating our lifestyle and earning a profit for doing so.

Rants against big oil and boycotts of BP are silly – we need them to find and produce the energy we need.

19 M1EK May 24, 2010 at 4:44 pm

The tort-lovers are disingenuous – there is no way that everybody damaged can prove it, be found, and be repaid. How are you going to find everybody who had to give up a couple of family trips to the beach per year for the next five years, let’s say, figure out how much that’s worth, and then pay them?

20 Duracomm May 24, 2010 at 5:13 pm

Chris said,

Assumption my ass. They *falsified the freaking safety tests*. This is an accident the way Russian Roulette is an accident.

A link that documented what the safety test was and how it was falsified would be helpful.

21 Thomas Sewell May 24, 2010 at 8:23 pm

Regulation (if effective and not just captured by the regulatees) punishes before anything bad has happened. In a best case scenario of perfect prediction of what regulations are needed, that still creates an economic drag based on the possibility of something bad instead of the reality.

Tort punishes for bad results and leaves the prediction and prevention up to those with the most knowledge of their actions. Who will do a better job reining a company in, an outside regulator or a company’s own legal department that is afraid of being sued?

Yes, tort can also be configured improperly, in terms of exemptions and in not taking enough possibilities into account. I don’t think that’s a reason to throw it out.

A third method that hasn’t been discussed above is ownership. Many of these types of issues involving externalities could be solved even better by creating ownership of the results. Sell to a company the rights to manage an appropriately sized section of ocean and their rules for oil drilling will reflect lots of externalities and not provide for a company like BP using relatively inexpensive lobbying and “green” tv commercial tactics to underpay for the costs and risks of their actions to that section of ocean.

22 Mesa May 24, 2010 at 9:56 pm

I suspect the laws shielding the personal wealth of executives in the case of corporate bankruptcies may have something to do with the lack of success of pure tort reliance. It means for these executive that writing puts and collecting the premiums works.

It seems unlikely that anywhere near intelligent regulation can be achieved by non-participants in complex undertakings. This leads to industry groups placing colleagues in the regulatory bodies – a well known phenomenon.

23 Bock May 24, 2010 at 11:50 pm

as someone in the industry, i concur with mulp mostly, except for the idea that spending millions per day to fix a BOP on an OIL FIND was a big
deal. deepwater drillers frequenly spen hundreds of millions on dusters. likely the blame lies on the company man acting like a cowboy. what needs to change procedurally is the power to make these real time calls needs to go higher up the food chain so that one rogue engineer cant make these lind of calls. currently, the same disaster could have equally been caused by any other major oil company if a single person made the cowboy call.

the analogy is a bank losing billions due to one rogue trader. the prob of course is in giving one trader to much power. BP has very careful procedures about such matters, but if just one dude can ignore them and fuck things up: there’s your problem.

24 r4 ds May 25, 2010 at 7:22 am

I had read thsi whole article and find it very informative. The title is somewhat impressive. Great to read about this. Government is doing it’s duty but it not depend on only one man but it is totally depends on people that how they behave.

25 Lonely Libertarian May 25, 2010 at 2:42 pm

Mulp, Bock and by association Chris seem to know of specific wrongful acts – acts that would be seen by all of us as wrong – the misguided effort of one lone “cowboy” to either be a hero or save a ton of money. All that I have read about this event does not in my opinion support such a POV.

I agree that knowing WHAT WE KNOW NOW a reasonable person MIGHT have made different choices – but I get really tired of people who conclude their was some kind of evil at work without any evidence of anything other than bad judgement or bad choices – we need to hold BP accountable – the accident happened on their watch and they should pay all costs associated with the clean up.

My only point in this discussion was I don’t see dealing with this requiring a regulatory solution – tort law will do the job. Courts can – and probably will take BP to the point of bankruptcy – and beyond if that is what is required to compensate and clean up. let m put this in caps – I AM FINE WITH THAT – it is in my opinion both fair and reasonable.

I will even go a step further – if we learn that I am wrong and that individuals acted criminally they should be punished – something the legal system can and should do…

What I sense from many posters is that they really don’t want to deal with this via regulation except in the sense that if they make the regulation onerous enough they can stop offshore drilling – their real objective.

26 gucci bags June 24, 2010 at 11:46 pm

I will even go a step further

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