White House Chronicle

News Analysis With a Sense of Humor

Regulation Can Be a Huge Goad to Innovation and Creativity

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There is a paradox of regulation clearly not known in the Trump White House. It is this: Regulation can stimulate creativity and move forward innovation.

This has been especially true of energy. Ergo, President Donald Trump’s latest move to lessen the effect of regulation on energy companies may have a converse and debilitating impact.

Consider these three examples:

When Congress required tankers to have double hulls, after the Exxon Valdez oil spill in Alaska’s Prince William Sound in 1989, the oil companies and their lobbyists wailed that it would push up the price of gas at the pump.

Happily, the government held tough and soon oil spills in from tanker punctures were almost eliminated.

The cost? Fractions of a penny per gallon, so small they cannot be easily found.

Victory to regulation, the environment and common sense. In due course, the oil companies took out advertisements to boast of their environmental sensitivity by double-hulling their tankers.

When the Environmental Protection Agency mandated a 75-percent reduction in hydrocarbon and nitrogen oxide emissions from two-stroke marine engines in 1996, with a 10-year compliance period, the boat manufacturers issued dire predictions of a slump in recreational boating and a huge loss of associated jobs.

In fact, two things happened: Two-stroke marine engines were saved with electronic fuel-injection, and four-stroke marine engines started to take over the market — the same four-stroke engines the manufacturers had said would be prohibitively expensive and too heavy for small boats.

Today, most new small boats have four-stroke engines. They are quieter, more fuel efficient, less polluting and have added to the joy of boating. The weight and economic penalty, predicted by the anti-regulation boat manufacturers, turned out to be of no account. The problems were engineered out. That is what engineers do when they are unleashed: They design to meet the standards.

Similarly fleet-average standards, so hated by the automobile industry, have led to better cars, greater efficiencies, a reduction in air pollution and oil imports. They also pushed the industry to look beyond the internal combustion engine to such developments hybrids and all-electric vehicles and new concepts, like hydrogen and compressed natural gas vehicles.

A high bar produces higher jumpers. Water restrictions have produced more efficient toilets, electric appliance ratings have reduced the consumption of electricity. Regulation is sometimes incentive by another name.

Well-thought-out regulation is constructive, mindless regulation deleterious — as when the purpose is political rather than practical. Restrictions on stem cell research and the unnecessary amount of ethanol added to gasoline come to mind.

In his energy executive order, repealing many of the Obama administration’s clean energy regulations, Trump has done no one any favors: Less challenge, less innovation, less protection of the environment, and less global leadership is a cruel gift.

Take coal mining. Trump wants to save coal mining jobs, but his executive order will cause coal production to increase, further glutting the market. There are ways of burning coal more cleanly and if the president wants to help the coal industry, he should be supporting these. He also might want to look at the disposition of coal ash and its possible uses, not bankrupt what is left of the coal industry by false generosity.

Trump’s energy executive order might have had virtue 40-plus years ago. Back in the bleak days of the 1973 Arab oil embargo, and the future shock it induced, coal was our only plentiful energy source. I was one of the authors of a study, prepared for President Richard Nixon, that highlighted coal. Hence a passion that lasted through the Carter administration to gasify coal, liquefy it and back out oil with it whenever possible.

However the national genius produced a flood of innovation, leading today’s abundance of oil and gas.

For InsideSources

The Return of The Regulators

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Brace for the return of The Regulators.

Many Democrats and a few Republicans believe that the nation would have been saved many disasters — from the shenanigans of Enron, the financial crimes of Bernie Madoff and the subprime mortgage crisis to the explosion at Massey’s Upper Big Branch coal mine in West Virginia and the BP oil spill in the Gulf of Mexico — if there had been more regulation, or more effective regulation.

A regulation may be passed, but its intent will be evaded unless it accords with the dynamics of the situation. The punishment has to fit the possible crime; otherwise an army of federal nitpickers will be unleashed on the commerce of the nation. The cost of doing business will go up and innovation will be stifled.

Worse, an industry of evasion will be created. The IRS de facto regulates much of the economy and our lives. It also has fathered a compliance/evasion industry that stretches from storefront tax preparers to corporations moving their headquarters to Bermuda and Panama.

When it comes to technical regulation, the result can be inhibiting of effort, stifling of innovation, and can be an excuse to do things in bad old ways because the regulator has blessed those ways. The problem with regulation is that pleasing the regulator becomes a goal in itself, if the regulator is strong and independent. If the regulator is weak, he will be rolled by the regulated, as happened with the U.S. Minerals Management Service.

It has been an act of faith for decades that federal agencies that promote an industry are unqualified to regulate it. The policeman and the criminal are the same person, the argument goes.

But this is worth reexamination.

The Federal Aviation Administration, for example, promotes flying and regulates it. Given that flying is inherently dangerous and yet very safe, it can be concluded that the air traffic control part of the FAA works incredibly well. The supervision of maintenance is more questionable.

Air traffic control deserves a second look. There are dynamics at work which are absent in the government’s control of other endeavors.

A call goes out from an FAA terminal controller like this: Sierra Two-Ninety-Three heavy; turn left, heading two-seven-zero; climb and maintain flight level twenty-two; expect higher in ten minutes.

A great airliner turns west and starts climbing. No questions. No argument.

The flight controller is often someone without a college degree or, nowadays, even a private pilot’s license. The airline captain has college degree, a better pay scale, more social standing and final responsibility for the safety of hundreds of passengers on board the aircraft. Yet the controller and the pilot, while the plane is in the controller’s airspace, dance a sacred tango.

The company would like the pilot to get as direct a routing as air traffic control will allow, and he may request route modification in flight. But economics are mercifully at bay in front of the radar screen and in the cockpit.

So are personalities. Air traffic controllers do not hang out with pilots. It is a perfect intimacy between strangers. One might add that there are no lawyers or consultants in the transaction; just simple purpose, an immaculate coupling.

On an oil rig or down a mine, the dynamic is very different. The regulator is captive to the expertise and veracity of the operator. The workers may resent the interference of an inspector. After all if you have done something safely many times, even if you have cut corners, why not do it again? It will please the chain of command and, on a rig, may hasten your return to shore. People who live in dangerous environments are inured to them.

The first step in safety regulation must be to introduce an ethic of safety as goal. That is easily done in aviation, where the danger is clear and present. When the danger is present but less clear, crafting a safety dynamic is hard. On the other hand, mandating viable cleanup plans should be easy and enforceable.

When it comes to financial regulation, only the statute equivalent of bricks- and-mortar regulation works — laws like the Public Utilities Holding Company Act of 1935 and the Glass-Steagall Act of 1933. You cannot ask regulators to regulate risk among people whose business is taking risk. Just mark off their sandbox.

The present hysteria for more regulation is a blueprint for strangulation. Get the dynamics right, before you unleash the bureaucrats. –For the Hearst-New York Times Syndicate

 

The ’60s Return

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The decade of the 1960s stood orthodoxy on its head. It was a time when alternative everything got a hearing. Expertise came into doubt; the phrase “some decisions are too important to be left to the experts” was heard everywhere.

The seer of the day was Ralph Nader. Government was only trusted as a regulator. So it regulated: the environment, the schools, the workplace, the airline industry, the communications industry, and new industries like nuclear power. Anything that had escaped regulation in the 1930s got swept up in new regulations. And those 1930s regulations for banks and utilities were applauded.

Well, this decade is beginning to emulate the anti-establishment passion of 50 years ago. In particular, a despised government is being asked to regulate.

Make no mistake, regulation is in the air. Even Republican free-marketeers are blaming a lack of regulatory oversight for the environmental disaster in the Gulf of Mexico and the collapse of mortgage finance giants Fannie Mae and Freddie Mac.

We are headed back to the future because some, though not all, of the underlying drivers of the 1960s are in place today,

The core of our crises today is as it was then: a sense of betrayal by our institutions. In banking, the environment and foreign policy, the left and the right feel they have been let down. They may be deeply divided on the degree of regulation that is needed, but the sense that key areas of our national life are broken is pervasive.

Besides the lost jobs, diminished 401(k) savings, recriminations over troop levels and tactics in two wars, and mounting national debt, there is now the catastrophic oil spill in the Gulf — a crowning failure, if you will. Taken together they wipe out confidence and bring opprobrium on big institutions.

Big is bad. Big is out. Big cannot be trusted. Big has no civic conscience, whether it is banks paying themselves too well in a time of shortage or oil companies failing to take care when punching holes in the ocean floor. Big screws up big time.

The collateral damage is that, like the 1960s, no one is going to believe the experts on almost anything. People are not going to believe that giant airliners are needed, nor that biotechnology is good for the food chain.

The 1960s brought on an age of studies which, like polling, have become a news staple. These studies pour out of universities, think tanks, government departments and consultancies. Mostly they serve the people who fund them, so they get a brief life in the 24-hour news cycle and then leave us confused.

Are mammograms good or bad? Is there too much heart surgery? Does television affect deductive reasoning? Is weight training better than aerobic exercise? Will red wine and oatmeal cookies keep you going for 100 years?

Despite the contradictions implicit in expertise, we were just getting used to taking experts seriously again. We believed that bankers were oh-so-clever that they deserved oh-so-much money for what they did. Now we know they were just oh-so-greedy.

We believed that Toyota made the best and safest range of cars in the world, and that those Japanese quality-assurance types had it all over everyone else. Ooops! Got that one wrong.

And we believed that the clever people in the government knew how to conquer Iraq and turn it into the democratic beacon for the region. Not quite.

The problem with this institutional failure is the damage it will do in the future. Who is going to believe that the next drug or vaccine is safe? We won’t believe the experts and their studies. Ditto new nuclear power plants (which I favor), bridges, roads, high-speed trains and innovative skyscrapers.

The late Sen. Daniel Patrick Moynihan, D-N.Y., lamented the decision-making freeze that prevented the creation of Westway, an elaborate and revolutionary highway and development project along Manhattan’s derelict Far West Side. In losing our faith in expertise, as we did in the 1960s, we lost our ability to take decisions.

Now it’s happening again. Thank you BP, AIG and Citibank. –For the Hearst-New York Times Syndicate

 

Who’s Afraid of Regulation? Not Warren Buffett

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So Warren Buffett has bought himself a railroad: Burlington Northern Santa Fe, to be exact. Crafty fellow.

Buffett famously invests in easy-to-understand large companies with a strong competitive advantage that generate cash and above-average return on capital. He has not been dazzled by the computer age. Computers, though, have had a dazzlingly disruptive effect on one of his investments: The Washington Post Company, for which Buffett serves as a director.

By his own account, Buffett finds newspapering scads of fun, connecting with journalists. Because The Post Co. bought Kaplan, Inc., the educational services outfit, Buffett and other Post investors have been spared some of the pain that falling advertising and circulation have inflicted across the industry.

Even as he was enjoying newspapering, Buffett appears to have had his eye on more solid industries. In 2000, he paid $1.7 billion to acquire an 85-percent stake in utility MidAmerican Energy Holdings Company, and later acquired the rest. Now he is paying $26.3 billion to acquire all of Texas-based Burlington Northern Santa Fe.

It would appear that in these investments, these dull industrial cornerstones, Buffett has chosen government oversight over technological vulnerability.

Both utilities and railroads are government regulated and subject to the vagaries of public policy. But they are both necessary, and therein lies Buffett’s comfort factor. Electric utilities are not known for their gyrations, nor are railroads. Indeed, both have been largely shunned by hedge funds because they lack volatility.

Buffett, it would seem, is not balked by government or its impact, through regulation, on whole classes of businesses. Electricity companies are heavily regulated at the state and federal level–and in other ways, including pollution control, fuel mix and return on equity. Similarly railroad safety, service and return on equity are dictated by regulators.

Since the heady days of deregulation in the 1980s and 1990s, despite the conservative dialectic, the electric utility industry, in particular, has discovered regulation by the government to be both a burden and a godsend. Government stifles but it also succors.

Wall Street is conflicted about regulation. While it loves the security regulation brings to electric utilities, gas distribution companies and railroads, which makes their debt an attractive investment, it fears the extension of the government’s embrace to other industries and to itself. Wall Street would love, for example, to see the airlines back under the government’s wing–as would the carriers themselves.

While the political class is consumed with the machinations of Congress, and the activism of President Barack Obama, Buffett is tacitly declaring his apprehension about disrupting technologies: computers and their progeny, like the Internet and wireless communications. Buffet is voting for investments that cannot be moved to China and cannot, by today’s reckoning, be rendered obsolete by technology.

Washington is awash with analysts, pundits, reporters and strategists aggregating and disaggregating, dicing and slicing the smallest morsel of political change. Yet, since the end of World War II, technology has had as much claim on change as politics. The three great political events of this time have been China’s conclusion that communism and capitalism can abide together; India’s final realization that protectionism was holding it back; and the collapse of the Soviet Union. Did the end of the British Empire matter? Not really.

By stealth, technology has been changing the world, wiping out whole areas of endeavor and creating new ones. Thanks to the green revolution between 1950 and 1984, the world has been better fed. Thanks to the microprocessor, we have been gadgetized–from the way we enjoy music to the ease with which we stay in touch by telephone. Thanks to the jet engine, the world has been opened to all who can afford to fly. And thanks to new technologies, medicine posts successes daily.

But it is the computer that has changed everything, for good and otherwise. It is the computer that has robbed us of our privacy, but has put the great libraries of the world at our fingertips. It has made writers of us all, even while undermining traditional journalism.

So while we are parsing electoral tidbits, technology is the real shaping force loose in the world.

If you cannot embrace it, try and get to some safe, predictable high ground, like Buffett. He is known as the Oracle of Omaha for good reason. –For the Hearst-New York Times syndicate