18/03 Risks, Radiation and Regulation

March 18, 2011, 6:00 am
By NANCY FOLBRE

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

Early warnings about potential nuclear dangers in Japan and about Wall Street’s propensity for risk-taking without liability were both dismissed as paranoid anticipation of low-probability events. With both disasters, regulatory failures set the stage, and taxpayers will end up paying most of the social costs.

Effective risk management is central to economic efficiency. Yet major players in both crises have insisted that they should not be held accountable for risks they underestimated.

Goldman Sachs’s chief executive, Lloyd C. Blankfein, likened the financial crisis to a once-every-hundred-years storm or an earthquake.

But no natural disaster played a role there, just vast mismanagement (too bad we can’t measure that on the Richter scale). Many economists, including my fellow Economix blogger Simon Johnson, argue that deregulation weakened the very foundations of our financial system.

A major earthquake and resulting tsunami were the proximate causes of the nuclear disaster in Japan. But it was engineering failures and lax oversight that made a bad situation grotesquely worse.

The plant owners, operators and regulators who confidently insisted that the reactors were foolproof and fail-safe apparently miscalculated (as with previous accidents at Three Mile Island and Chernobyl).

In my view, many social engineers, including economists, deserve the larger blame. The widespread view that capitalism is an automatically self-regulating system has weakened the checks and balances — the feedback mechanisms and control rods — that are crucial to the long-run viability of our operating system.

The threat of social meltdown arises not from excessive growth of the state and its regulatory role but from its capture by groups able to translate market power into political power: socialism for big investors, capitalism for everyone else.

Critics of nuclear power, including the Union of Concerned Scientists, have long pointed out that the Price-Anderson Act reauthorized by Congress in August 2005 provides a huge subsidy to the industry by limiting its financial liability in the event of disaster, essentially promising the ultimate bailout at taxpayer expense.

A more detailed economic analysis is provided by Geoffrey Heal of the Columbia University School of Business and Howard Kunreuther of the Wharton School at the University of Pennsylvania in a paper, “Environment and Energy: Catastrophic Liabilities.”

Like the United States, Japan has limited the liability of its nuclear power industry, and its taxpayers are expected to bear the brunt of the long-term economic costs of the meltdown. The industry’s track record is hardly reassuring. The Tokyo Electric Power Company, owner of the Fukushima Daiichi plant, admitted in 2002 that it had falsified results of safety tests.

The national agency designed to regulate the industry has often seemed more eager to promote it, failing to inspire much confidence among environmentalists, or, more recently, from the United States Nuclear Regulatory Commission.

Effective regulation requires effective containment of disproportionately powerful economic interests that can potentially contaminate both public policy and public debate. Considerable evidence suggests that this containment has been breached.

In the last election cycle, the Nuclear Energy Institute, along with a dozen companies with significant investments in nuclear power, spent tens of millions of dollars on lobbying and campaign contributions.

In the somewhat panicky initial coverage of the Japanese crisis, the institute was not always identified in the press as a trade group, even when one of its representatives answered questions about public subsidies and public safety.

On March 15, as concerns about explosions at Fukushima Daiichi were growing, an online Wall Street Journal article cheerfully reported, “The Nuclear Energy Institute’s top nuclear scientist said Tuesday that U.S. nuclear plants are equipped to handle natural disasters and the crisis in Japan isn’t expected to affect new nuclear projects.”

This wasn’t news. It was just part of the radiation emanating from our own regulatory meltdown.