Sunday, May 5, 2013

The Biggest Story of the Year

Getting to this a little late, but I think the fertilizer plant explosion in Texas is probably the biggest story likely to happen this year. It points at a number of deep, structural problems in the United States and, more generally, in our conception of capitalism. The basic problem is that our institutions allow individuals to privatize potential gains regardless of the total social cost. There is no way that the amount of gain from this plant even approached the amount of losses that it has now inflicted. That it only has $1 million in liability insurance only adds marginally to the damage, though the lack of outrage has added greatly to the insult.

The tragedy, and what a proper news media would be exploring in depth, is how rampant this is. How small was the marginal benefit of increased home construction due to lax lending problems relative to the damage? How many millions of dollars of output are lost when people die of an e-coli outbreak for how tiny a marginal benefit to a marginal food producer (I'm intentionally ignoring the human cost so as to not mix economic and moral systems, the cost is clearly grossly disproportionate even if we think of a little girl as nothing but an economic agent)? Drugs that do little for patients but that increase risks result in huge damages. Pollution results in massively disproportionate losses, look at the evidence of the lead-crime link, and at the tail end may threaten human life on Earth.*

But since a business never accumulates assets sufficient to cover the damage no private can possibly way the incentives properly, their individual benefit is high but their liability is far less than the real losses. Add in to this the reality of economic power and the ability of agents to use assets collected now to protect themselves from future liability and we have a system that can never reach a productive equilibrium.

Further, it exposes the parasitical form of capitalism and policy that is coming to characterize the red states in the US. Texas can attract business with the low cost of doing business, but it does this by slashing protections resulting in the losses of hundreds of millions of dollars in this one case alone. Add to this the loss of life and health from these injuries and those costs are doubtlessly higher. Yet, as long as this model is permitted to exist, how could a business wishing to be responsible by increasing liability coverage and imposing greater safety protections pass these costs on to potential customers that are not impacted by the potential losses covered by these higher costs? The low cost Texas supplier would always have a cost of goods and a potential customer would have no way of seeing the differences between the responsible and the reckless business.

Luckily we can appeal to government, but as our regulatory agents get gutted this protection becomes ever slimmer. And as this occurs the ability of agents to advocate for further cuts to the agencies that impose precautionary expenses, like mandatory liability or tax enforcement, is further eroded. This is the story of the year, yet we are hearing far more about the Boston bombings and other relatively trivial stories. Since this is one of the few stories that we really do have the power to do something about, where public action and pressure really could create change, the failure of the media, and the public, to pick up on this and expose these problems is a really damning indictment on our generation. It was workplace issues, and public hazards, that touched off the Progressive era and all the great things that generation achieved. If we fail to use this as a rallying cry we prove ourselves less than our ancestors.

[Had little time to write this and will probably try to clean it up later]

*I regard this on the far tail end, not an imminent danger, but it's madness to fully privatize the gains from this while doing so little to protect ourselves from a downside that could reduce all sums to 0.


  1. I'm a regular reader of GreenMarkets, an industry trade journal for the fertilizer markets. The funny thing about this whole incident is in part that Texas regulations have required safety compliance in fertilizer plants that would in all likelihood have prevented the massive damage from this accident. These have been in place ever since the Texas City fertilizer explosion back in the 1940s. However, there were a couple of failure points. The plant was charged to self-report AN storage, but never did; random spot checks of fertilizer plants were up to a decade apart for a given plant; active safety procedures and HSE practices were mandatory but ever-so-lightly enforced. Doubtless the Chemical Safety Board investigators just dispatched will find more.

    I guess what I'm trying to highlight here, and doubtless in other instances, is that our institutions are not in danger of being overrun by moral hazard. Instead, they largely exist but are being slowly hollowed out. I'm not sure I blame red state-style governance for this.

    1. I probably harped on it a bit strongly, and I do think this post needs to be expanded and rewritten, but I think the problem with the red state model primarily has to do with an assumption of individual risk, even where the individual can't properly determine their risk, and the lack of expenditure on government to enforce regulations. I see the assumption of individual risk both in the lack of liability protections and in the lack of zoning and the lack of government expenditure in the hollowing out you'd mention.

      I would expand a bit in that while I had assumed there were enough regulations to prevent a blast if strictly enforced (I know nothing about fertilizer plants but would have assumed at least something at the Federal level, if not at the state), I doubted these were strictly enforced or sufficiently redundant for the danger. While I'm extrapolating from individuals I've met, which may not apply at the state level, my experience has been where regulations are generally weak and sporadically enforced a contempt of even the minimal necessary regulations develop as well. So even if regulations were in place that would prevent a disaster of this scale, the general laissez-faire attitude towards workplace safety and more day to day regulation would likely end up extending to the regulations that prevent plant explosions as well.

    2. Also need to add, I do agree that hollowing out is not just happening in red states, it's happening across the US as government spending is cut. I also don't think the red state model caused the blast, though it allowed for irresponsible zoning and an inadequate liability policy (which may have contributed to the lax compliance with regulations, a large insurance policy may have led to some private oversight by the insurer).

    3. Well, to be perfectly honest, the reason the explosion should not have happened was that good engineering practice dictates that you don't store ammonium nitrate in ton quantities. I was, prior to this accident, in fact under the impression that in this country, basically no one markets ammonium nitrate fertilizer as a solid any more. It was supposed to have transitioned entirely to liquid dissolved urea ammonium nitrates.

      I don't know about the level of state regulation vs Federal, but I do know that Texas' ongoing spat with the Feds might have contributed to things. The TCEQ and EPA don't get along thanks to the Republican state government (that one I am comfortable blaming on one party) and the dispute has spilled into a lot of other Federal agencies, like OSHA.