by Mark Luedtke
They say tragedies come in threes. We recently witnessed the tragedy of the near collapse of our financial system, the collapse of a coal mine in West Virginia and the collapse of an oil well in the Gulf of Mexico. People died in all these collapses. The easy thing to do is to look at these as three isolated incidents and call on government to tighten regulations on these industries, and that's exactly what's happening. But it's the wrong thing to do.
Government made Goldman-Sachs into its scapegoat for the financial collapse with the SEC filing a lawsuit against the company that even Bill Clinton says has no merit. A Senate subcommittee dragged Goldman executives in front of cameras and publicly flogged them. Claiming the financial sector, which is regulated by the SEC, the Federal Housing Finance Agency, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Reserve, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision, is under-regulated, Senator Chris Dodd, retiring under fire for corruption, is pushing a 1,400 page bill of oppressive regulations for financial businesses. As always, nobody in Congress has read the whole bill - our politicians in Washington can't be bothered with such trivial wastes of time - yet Democrats are pushing for a vote. Republicans already caved and allowed this bill to come to the Senate floor for debate, so we know some version of it will become law. But the dirty little secret nobody talks about is that Goldman-Sachs supports Dodd's bill.
In the wake of the April 2010 Massey Energy mine collapse in West Virginia, a review discovered government agents weren't enforcing regulations. 25 people died. A Senate review discovered that mine regulations were riddled with loopholes. Regulators proposed new oil rig safety regulations in wake of BP's Gulf of Mexico oil platform collapse in April 2010. 11 people died. Now an oil spill threatens the Gulf coast. Every time a tragedy happens, regulators propose new regulations even though regulations failed to prevent the tragedy in the first place.
But all these tragedies have one thing in common: they're all the result of companies taking dangerous risks. Before we jump to the conclusion that more regulation is the answer, maybe we should ask and answer a few simple questions in order to discover the root cause of these tragedies.
1) Why do companies take dangerous risks that all too often end in tragedy? Because the consequences of failure are too low compared to the reward for success. If a single failure meant bankruptcy or at least threatened to bankrupt the company, companies would not take these risks.
2) Why don't companies face bankruptcy when one of these failures occur? Because they don't face robust competition. A competitive marketplace would force companies to operate at razor-thin margins, and a tragic failure like any of the three mentioned above would likely force a company into bankruptcy where its assets and profitable operations would be gobbled up by other companies and the rest liquidated. In such an environment, companies would not take the kinds of risks that lead to tragedies.
3) Why don't companies face robust competition? Because government regulations protect the biggest corporations from robust competition.
Government regulations add to the costs of doing business. Because of economies of scale, the companies that can best absorb the additional costs of regulation are the biggest companies. Additional regulations drive smaller and marginal producers out of the marketplace, reducing competition. As government piles on more and more regulations, more companies are forced out of the marketplace until only a few gigantic corporations remain. That's why heavily regulated industries like finance, coal mining and oil production are dominated by a few gigantic companies.
One consequence of this restricted competition is higher prices and lower quality products which enrich the corporations at the expense of consumers. Because these companies face little competition and their options for competition between themselves are limited by government regulations, they can sell lower quality products at a higher price. Another consequence is regulatory capture in which these giant corporations, through campaign donations, end up controlling the regulatory agencies that are supposed to oversee them to benefit themselves at the expense of what little competition remains, enabling them to grow even bigger. That's why the biggest corporations always support more regulations. We've seen that in all three examples above. This is the mechanism that produces corporations that politicians tell us are too big to fail.
Government regulations enable corporations to earn exaggerated profits and develop deep pockets to the point where they can take deadly risks with people's lives knowing the reward will outweigh the costs of occasional failure. Because government protects them from competition and failure, corporations develop a culture of arrogance that leads to increased, dangerous risk. These tragedies are caused by the very regulations that are supposed to prevent them. The solution is simple. To insure a safe work environment for workers in all industries, we should abolish the government regulations and empower a free marketplace with robust competition.
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