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« Implicit finger pointing | Main | Questions for Jon Hardister »

Jun 15, 2010


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David Wharton

Not to mention the complicity of government in capping the companies' liability for such disasters. Richard Epstein of the Hoover Institution wrote in today's WSJ:

The legal system should never allow self-interested parties to keep for themselves all the gains from dangerous activities that unilaterally impose losses on others—which is why the most devout defender of laissez-faire must insist, not just concede, that tough medicine is needed in these cases.

Ed Cone

Yep, removing a lot of the financial risk may make some of these decisions seem rational to the drillers.

Maybe corporate influence over government is not always benign. What a concept.

Andrew Brod

As Ed alludes, Epstein's remarks, though specifically applied to tort reform, could be applied equally to financial reform. The quote David posts is precisely the same principle as opposing the privatization of financial-sector profits but the socialization of its losses.


It's not just about removing the liability, as in the article BP has waived the limit, and the limit would have been "blown off precisely because of the two exceptions."

BP's actions were not predicated by any knowledge of liability limits to the company. They were predicated on the fact that the profits from cutting corners would be visible immediately, while the costs at worst, would show up later. It's the profits in cutting corners & ignoring risk that is the issue.

I've always imagined the honest mortgage broker who tells the family making $48k that he can only approve a $150k mortgage, while the guy in the cubicle next to him, or the building next door, will not only loan them $300k, but at a lower monthly payment! How long before the honest guy starts cutting corners? Especially when the corner cutter shows up in an expensive car, and moves into the bigger house.

If people can make money doing something, they'll do it, risks be damned. The question should not be why people underestimate risks, but why do we willfully ignore well-known risks.


I would also be skeptical of Epstein's recommendation of "Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate." AIG was an private insurer, and it did a terrible ensuring that the people it was selling default insurance on were actually paying attention to default risk.

Wouldn't Epstein's arguments also apply to medical malpractice judgment limits?

David Wharton

"Wouldn't Epstein's arguments also apply to medical malpractice judgment limits?"

In some cases I'm sure it would. But many doctors who get sued (I assume) aren't engaging in high-risk ventures for high profits. They're just practicing ordinary medicine, trying to help their patients. Doctors sometimes get sued even when they've taken all standard and reasonable precautions. So that's a difference.

Andy, I agree with your point about financial reform (insofar as I understand it). I think it should also be applied to insuring coastal real estate, but I guess Marc Basnight disagrees.

Andrew Brod

David, I'm with you on coastal real estate.

Andrew Brod

David, I also agree that medical malpractice is a very different animal. Medical accidents are quite common, and hence the risks are much more easily calculated than the risks of deep-water oil spills or economy-wrecking financial crises.

But there are big problems in med-mal, and one of the biggest is that our medical-tort system is confused as regards its primary objective. Is it to compensate people who are injured in medical accidents? Or to assign blame to those who act negligently and create medical accidents? The former doesn't assign blame to all who deserve it, but the latter doesn't compensate all who've been injured. Our system used to be more like the latter, but starting in the '60s or so, statutes and case law started moving it in the direction of the former. And so now we have a mish-mash in which unpredictability is generated more by the legal system than by the underlying risks.

David Wharton

Good column, Andy.


There is a difference between unavoidable negative outcomes and medical malpractice or even poor practices in general. If you take preventable negative outcomes as the problem analogous to the spill, following Epstein's logic, then removing caps on damages should reduce the likelihood of preventable negative outcomes. I don't think that would work in either case. I don't think caps on damages are near the best way to address med-mal, and while I support removing the cap on damages for oil spills, I don't think that's the best way to prevent another spill.

Epstein: "Tort liability does not preclude direct government safety inspection and regulation, especially in the Gulf of Mexico, where the government itself leases the drilling rights. So by all means work hard to make these better."

Whatever the post-action liability the lure of short-term gains, especially when massive, at the cost of some longer term consequence, is the bigger issue.

Jon A Firebaugh

So basically we've reduced this post of Ed's to the theory that an entity be it personal, corporate, or govermental should be held responsible for its actions. According to most of the posts here we're basically talking about delayed gratification. Should I bank my paycheck in case of a financial meltdown, or should I buy a new Ipad? Should I exceed the speed limit to gat to that party, or should I be conscious of the children in the crosswalk? Should I lock out the power on this stamping machine while the electrician repairs the servos, or should I break for lunch early?
Should I slip a provision in the budget bill stripping the insurance commissioner of his power, or should I submit the proposal to committee and allow debate on its merits. Well we know for certain that the NC legislature operates on theory of instant gratification and deferred responsibility.
Thus far the info points to a lack of attention to safety by BP. Ultimately this policy will cost them thousands if not millions times more than stepping back and reevaluting would have.

Andrew talks about Medical malpractice, as being confused as to the objectives. Ultimately. the objective should be to compensate the injured. Blame should be secondary, and dealt with by medical boards in all but the most grievous cases of negligence. One of the problems as I see it is that a desired medical outcome is not by any means guaranteed even if the practitioners follow all established protocols. Docs are sued everyday for procedures where all the protocols were followed but the outcome was unsatisfactory. That's fodder for personal injury attorneys, but bad for everyone else. An unsatisfactory result does not equal malpractice.

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