Roya Wolverson: Before BP ... The History of Allowing Industries to Police Themselves

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[Roya Wolverson is a staff writer on economics at the Council on Foreign Relations' in New York.]

In Obama’s June 15th Oval Office speech on the oil spill, he railed against a “failed philosophy that views all regulation with hostility—a philosophy that says corporations should be allowed to play by their own rules and police themselves.”

Obama was getting at a real problem. As economic historian Edward Balleisen points out, the trend over the past half century has not been less regulation per se, but a greater acceptance of “self-regulation,” whereby industry funds government oversight, and government outsources oversight to industry. And dozens of government agencies have followed this script: the Institute of Nuclear Power Operators, the Environmental Protection Agency, and the Food and Drug Administration, to name a few.

The pitfalls of self-regulation are clear. BP, which the government left to devise its own safety measures for deep-water drilling, chose maximizing profits over minimizing risk. In financial regulation, the industry-funded Financial Industry Regulatory Authority—whose board is rife with banking titans—ignored the shifty dealings of Wall Street mainstay Bernie Madoff. By the same token, self-policing credit-rating agencies had little incentive to question the faulty debt ratings of their high-rolling clients.

But after decades of dwindling regulatory coffers, public-sector brain drain, and laissez-faire thinking, moving away from self-regulation is a herculean task. The administration has neither the equipment nor the know-how to stop BP's gushing well. On financial reform, Senate Banking Committee chair Christopher Dodd, who wrote the Senate's financial reform bill, has balked at proposals to put government in charge of credit raters, arguing it lacks the technical savvy "to be choosing rating agencies based on arbitrary choice." Sadly, unfettered self-regulation has too often remained the answer, even if it is not the right one.

Self-regulation has some noble roots. Business consortiums began corralling companies to share information and adopt common standards in the eighteenth and nineteenth centuries, when the rapid pace of industrialization left businesses and consumers struggling to navigate the flood of new companies and products on the market. Fostering reliability in business boosted market confidence, which in turn boosted industry sales. In 1894, the Underwriters Laboratory—which established safety standards for electricity providers and fire fighters—took the idea a step further, introducing self-policing as a way to keep plants and factories out of harm's way.

The approach worked well when government agencies kept self-regulators in check. In his book Hostages of Each Other, political scientist Joseph Rees recounts how the government reined in nuclear regulation after the 1979 nuclear disaster at Three Mile Island. The government‘s Nuclear Power Commission tasked the industry group, the Institute of Nuclear Power Operators, with standardizing plant safety. But it also flooded its staff with engineers and operators from the Navy’s nuclear fleet, who paired a sense of civic duty with technical expertise. Over the next decade, the average rate of emergency nuclear plant shutdowns dropped by nearly 80 percent.

But in other industries, a façade of regulation allowed self-policing to stray...

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