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Globality: Harold L. Sirkin

Hal Sirkin: Lessons from the Big Spill

We still don't know exactly what happened in the big spill in the Gulf of Mexico or the extent of the damage to the region's wildlife, environment, and economy. We don't know what the cleanup will cost BP (BP) or how long it will take. We don't know how many small businesses—even those that eventually may be compensated—will perish. We know that almost 5 million barrels of oil spilled, but there's a lot we still don't know.

But it's not too soon to start learning from the big spill. There are at least three lessons:

Lesson No. 1: Smart regulation and vigorous enforcement are necessary.

In a free-market economy, one of the proper roles of government is to mitigate risk to the public. In our modern, high-speed, high-tech society, laissez faire doesn't mean anything goes. It means the market drives the economy, but government sets certain rules to protect the common good and makes sure the rules are observed.

We're not talking about government attempting to create a risk-free society. There will always be risks, necessarily and properly so. Without entrepreneurs and investors risking their funds, there is no economic growth. Without scientists pushing beyond what is known, there is no discovery. But there are limits to what society should consider acceptable. Even hard-core libertarians accept the notion, which I paraphrase, that my right to swing my fist ends at your nose.

Government's job should be to police the market in ways that reduce the likelihood that one party—deliberately or by accident—will cause others great harm. To do this, government needs to focus on big risk, not chasing fleas while the elephants run rampant. All along there was the risk of a catastrophic blowout in the Gulf. It exists at every wellhead. There should have been a plan. There should have been a backup plan. The promise of a $20 billion fund to pay for the consequences doesn't constitute a plan.

Big risks also require regulatory and response systems that are up to the task—and hands-on regulators who are active, responsible, well-funded, and know how to do their jobs without getting in the way of day-to-day progress.

In this case the regulatory system failed miserably, as it did in the years leading up to the savings and loan crisis, in New Orleans when Hurricane Katrina struck, and prior to the economic meltdown that triggered the recent Great Recession.

BP's big spill should be a wake-up call for the United States. The U.S. regulatory system needs to be fixed—and now. We need regulators who are beholden to the people of the U.S., not to those they regulate. A total overhaul is needed, and lobbyists need to be banned from the process.

Lesson No. 2: America needs to break its oil habit.

Almost every postwar President has warned that the U.S. needs to wean itself from oil, yet we have made minimal progress on that front. Presidents Carter, Reagan, George H.W. Bush, and Clinton were especially concerned, of course, about foreign oil, our purchase of which—to the current tune of some $700 billion a year, according to the American Institute for Economic Research—helps finance adversaries of the U.S.

Offshore drilling in the Gulf and elsewhere is part of America's strategy to reduce U.S. dependence on foreign oil—and will remain so for the foreseeable future. But we need to go beyond merely weaning ourselves from foreign oil and move from a largely fossil-fuel-based economy to one that includes more nuclear, wind, solar, biomass, and hydroelectric power. And such a move will be expensive. It will require huge investments across many players. Because of the up-and-down nature of pricing and the high up-front costs, the government will have to subsidize—and may have to finance—many of the needed investments.

And there's no reason to wait any longer. We are already spending hundreds of billions in stimulus money. Wouldn't this be better spent on subsidizing or investing in the infrastructure and technology that would enable America to reduce and then eliminate its dependence on oil? Moreover, the sooner we get started, the cheaper these alternatives will become. The "experience curve" has proven time and time again that costs will fall as people and companies learn how to do things better. Otherwise, we'll be dependent on foreign technology for our energy.

We should look to what China, India, and Brazil are doing. China increased its total investment in renewable energy—mostly wind and solar power—from a meager $163 million in 2002 to nearly $11.5 billion in 2009. The total is expected to hit $42 billion by 2015. India's renewable energy investments, including hydropower, are expected to reach $26.7 billion by 2015. And Brazil, which has emphasized hydro and ethanol, is expected to have some $21.6 billion invested in alternative energy.

Lesson No. 3: Actions have consequences.

It's human nature to underestimate the chances of low-probability disasters. We do this all the time—especially when we roll the dice many times and nothing bad happens.

This happens not only with individuals, but with companies—even highly profitable ones. Short-term earnings pressure causes them to cut corners or take chances. They lose sight of safety to meet short-term goals.

If nothing else, we need to learn from the big spill of 2010 that actions have consequences. Bad decisions can cause a company to lose a lot—goodwill, reputation, money—in some cases to lose it all.

The big spill should serve as an example, a reminder: If you break it, you own the consequences. Let's keep the deterrent squarely in the minds of those who cut corners. We need to make sure that companies that are profiting from the resources but are not acting as good stewards pay a hefty price for their actions to ensure that cutting corners doesn't pay. Let's make sure that managements and corporate boards understand that they will be held accountable and they will have to pay for what they break. Otherwise, we'll have many more opportunities to learn the lesson from the big spill.

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group (BCG), a professor at Northwestern University’s Kellogg School of Management, and co-author, most recently, of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012).

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