Don't Nationalize BP

Big Government is no cure for the failure of Big Oil

Life is complicated. But not for the statist leftarati watching the BP oil disaster. For them, it offers yet another opportunity to reaffirm a binary lesson in an old morality play: "government good; private corporations bad."

Soon after the Gulf gusher started spewing its toxic muck, an activist group named "Seize BP" sprang into action, holding rallies all across the country in outfits depicting injured pelicans demanding—you guessed it!—seizure of BP's assets. Nor is this call limited to a fringe group. Chris "Hardball" Matthews recently hectored: "Why doesn't the president go in there, nationalize the industry and get the job done?" Salon magazine's Joe Conason, likewise, advocates taking a leaf from Norway's page and nationalizing the whole industry to constrain a "dangerous economic sector." Former labor secretary-turned-Berkley-professor Robert Reich insists that if the government can take over AIG and General Motors, then why not BP's North America branch? And Rosie O' Donnell has opined… oh nevermind, who cares!

The harsh truth is that neither the government nor the company can make the victims of the spill whole again. But the absolute worst thing one could do to them is consign them to the tender mercies of a government-controlled BP.

Reich, who has made the most cogent case for nationalization, argues that the company's first responsibility is to its investors, not the victims of the spill. Hence it faces a fundamental conflict of interest in which it has every incentive to delay and diminish compensation. (Theoretically, BP's stockholders could sue the company if it made what they regarded as an overly generous settlement to avoid the political heat.) And, in the Reichian parable, the only solution to this market failure is massive government intervention.

If only. The reality is that such intervention rarely—if ever—has a happy ending, regardless of where and when it's applied.

Consider the Bhopal gas tragedy in India, the worst industrial accident in history that marked its 25th anniversary last year. For arguments similar to the ones that Reich & Co. are deploying, the Indian government took it upon itself to deal with Union Carbide—the company responsible for releasing methyl isocyanate into a densely populated town, killing up to 20,000 and injuring about half a million. The government went so far as to bar the victims from filing private lawsuits on grounds that it was better positioned than them to extract a muscular settlement from the company.

What did it get? A measly $470 million—partly because it vastly understated fatalities in order to minimize its own negligence. Bhopal victims on average got $580 each, and that too after begging and bribing officials who continue to sit on about half of the money.

If you think that this happens only in India where the government is dysfunctional and corrupt, consider the tobacco settlement in America where state attorneys general decided to sue tobacco companies after a series of private lawsuits filed by smokers proved unsuccessful. The treatment costs of smokers imposed a strain on Medicaid budgets, they claimed, that the companies ought to pay back. Never mind that study after study has shown that smokers die young and cost states less than nonsmokers.

Tobacco companies agreed to cough up more than a quarter-trillion dollars under the 1998 Master Settlement Agreement. But what was supposed to pay for anti-smoking campaigns and defray smoking-related health care costs has turned into a giant slush fund for whatever states desire. According to a 2007 General Accounting Office study, states use about 30 percent of the money for intended health purposes. The rest goes toward plugging budgetary holes, infrastructure spending, servicing debt, you name it. And what did the smokers, arguably the only genuinely injured party, get? The same old crappy Medicaid benefits and vastly higher cigarette prices!

Indeed, the big danger if Uncle Sam takes over BP is that politics—not injury—will dictate who gets what. In the case of the auto bailout, to take Reich's own example, car dealers fiercely petitioned their congressmen to escape the ax, even if this meant more red ink for their parent company. If BP is nationalized, it is inevitable that politically connected lobbies—farmers, unionized industries, greens—will end up getting a larger share of the spoils than the genuinely aggrieved individuals who don't have friends in high places.

But the biggest danger of a government takeover is this: If BP offers victims an unsatisfactory settlement, they can sue. Not so if the government is running the company and determining compensation. The doctrine of sovereign immunity will likely shield it from lawsuits—and, if not, I would bet my annual supply of Perrier, it will pass a law doing so, as happened in India.

So are there any good options for BP's victims? Unfortunately, no.

Economic damages for the victims of Exxon Valdez on average worked out to less than $29,000 per head—and that's before they paid off their lawyers—not nearly enough to restore their destroyed livelihoods. As to the punitive damages, it took them two more decades to finally get a fifth of what they were originally awarded, thanks to extended litigation by the company's well-heeled lawyers. About 20 percent of the claimants were already dead by then.

But worse from the standpoint of BP's victims, the Supreme Court in the Exxon case ruled that punitive damages in industrial catastrophes cannot exceed economic damages. The court invited Congress to revise that provision, which it has failed to do. Doing so now in order to retroactively raise BP's liability will mean running afoul of the Constitution, not to mention the rule of law. In short, oil spill victims will now pay not just for BP's negligence—but the government's as well.

Their best bet, notes Jonathan Adler, professor of law at Case Western Reserve University, might actually be through the $20 billion escrow fund that the Obama administration has persuaded the company to create—notwithstanding Texas Republican Rep. Joe Barton's little apology to BP. BP's liabilities are likely to far exceed that amount, which is why it is going along with it in the first place. A properly constituted fund in which the government acts as a referee—and not as a negotiating party as would be the case under nationalization—might be better than the alternatives for both sides. BP could quickly process claims by offering victims pre-packaged deals. If they don't like what BP puts on the table, they could walk away and sue.

But BP would have an incentive to offer them something half-way decent to avoid litigation and bad publicity. And the prospect of immediate payment that saves time, litigation costs and hassle would give victims an incentive to accept. "They won't get perfect justice," notes Adler, "but they'll get something approximating rough justice."

The reality is that the spill's victims have been dealt a bad hand in a game that they didn't choose to play. But anyone who thinks that the government can be their knight in shining armor ought to be sentenced to six months of community service cleaning up the Gulf. There are no good guys in this drama.

Shikha Dalmia is a senior analyst at Reason Foundation and a biweekly columnist at Forbes. Robert Soave of the University of Michigan provided valuable research assistance. This column originally appeared at Forbes.