Putting the incentives in the wrong place

June 23, 2010 | By | Reply More

At Slate.com, Eliot Spitzer argues that the BP disaster and the Wall Street disaster have something in common:

The law of incentives is what links the Wall Street cataclysm and BP’s ongoing eco-disaster: In each case, we socialized risk and privatized gain, creating an asymmetry that created an incentive for private actors to accept and create too much risk in their business model, believing that at the end of the day, somebody else would bear the burden of that risk, should it metastasize into a disaster.

He mentions the astounding fact that in their current risk analysis of the too-big-to-fail banks, the Wall Street agencies assume that the federal government will come to the rescue with future bailouts.   What we have is amazing. Public risk and private gain don’t begin to pass the smell test.   We are doling out corporate welfare where it is not needed and where it is not in the best interest of the taxpayers.  And somehow, this catastrophic system passes as “the free market” among many modern-day free market fundamentalists.

Spitzer points out that there are two ways to deal with businesses that engage in dangerous activities, tort liability and regulation, and that the public will be protected only if we have at least one of these.

A regime of full tort damages and recoveries is one way to balance safety and exploration, or investment and risk, or whatever economic activity we are discussing. But there is another way: meaningful and vigorous oversight to impose safety standards that are dictated not by the market for insurance but by the judgment of serious experts in a regulatory context.


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Category: law and order, Politics, Social justice

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

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