President Obama’s $20 Billion Tactical Error

When President Obama demanded that BP turn over $20 billion to the federal government to compensate those harmed by the oil spill, some people called the president’s demand extortion, but BP quickly agreed, and it should have.  Everything about that arrangement is beneficial to BP, and ultimately a liability for President Obama.

BP knew their liability for damages would be at least $20 billion, so it will cost BP nothing to turn that money over to Obama’s team to administer the payouts, rather than being responsible for doing it itself.  The $20 billion will go into an escrow account that will be overseen by Kenneth Feinberg, who will decide who will be compensated, and how much.  Any disputes about compensation will now be disputes between the claimants and the Obama administration, rather than between the claimants and BP, as would have been the case without the escrow account.

Compensation for damages is a no-win situation, from a public relations and political perspective.  In my local paper there was an article today about a man who buys seafood in Apalachicola, drives it to Jacksonville, and sells it on the street, making about $2500 a week.  No oil has come near Apalachicola, but he says his business fell off because people don’t want to buy seafood from the gulf, so he’s quit that business.  Is he entitled to compensation?

There was another article about a beach volleyball tournament scheduled for the Fall in St. Petersburg that was canceled because the organizers were concerned that the beach could be oiled.  No oil has come near St. Petersburg.  Are the businesses that suffered those cancellations entitled to compensation?

Another article discussed the fall in sales tax revenues in tourist cities on the gulf.  How much should they be compensated?

The point is, lots of people are going to claim financial harm, and lots of them are not going to be compensated as much as they think they deserve.  It’s human nature to think you deserve more than you’re getting, especially when you believe someone has harmed you.

Without President Obama’s $20 billion escrow account, those people would be angry at BP for undercompensating them.  But the Obama administration has more than taken responsibility for the compensation—they’ve demanded that BP turn that responsibility over to them.  So, people will see that BP paid the money President Obama demanded, and it’s the Obama administration that isn’t giving them the compensation they deserve.

From a political point of view, it seems crazy that President Obama  has agreed—no, demanded—to turn an adversarial relationship between gulf coast residents and BP into an adversarial relationship between gulf coast residents and the president’s administration.

One might argue that regardless of its political merits what President Obama did was in the public interest.  But that is a difficult argument to make.  There are well-established legal procedures for determining the liability for damages, and that has always been the province of the judicial branch of government.  It’s hard to see the argument that it is in the public interest to transfer judicial functions of government to the executive branch.

This appears to be a tactical error made by the president.  Trying to look tough in a difficult situation, President Obama assumed for himself a responsibility that should have been BP’s.  In the process, he has put his administration in the line of fire, and shielded BP.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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