President Obama’s $20 Billion Tactical Error
By Randall Holcombe • Wednesday July 28, 2010 9:17 AM PDT • 8 Comments
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.
Tags: Business, Disaster Management, Environment, Politics, Presidential Power 
Wow, excellent points. I hadn’t considered that angle before. But now I think you’re absolutely correct.
Speedmaster | Jul 28, 2010 | Reply
Did you ever think that it’s not an error? This allowed Obama to look tough and grandstand while limiting BP’s liability in a way that allows them to save face. It worked the way the wanted it to work... no error.
The state gets what they want. The state-connected corporation gets what they want. The people get screwed.
I would be very, very surprised if the person who made this decision (not actually Obama) did so in “error”. Playing dumb worked for the previous administration, why not Obama?
Frank | Jul 29, 2010 | Reply
So, the government that can barely do anything right, is in fact an evil genius...or run by evil geniuses where all these screw ups, mistakes, wasteful programs and everything else are in reality part of the grand master plan?
I’m sorry, this sounds like a case of wanting your cake and eating it too.
Steve Verdon | Aug 3, 2010 | Reply
One very important item is left out of this chain of thought, and that is this; the Obama administration gets to choose who gets compensated, and if he chooses to compensate only those who can prove to be politically expedient to his reelection, then this is not a blunder, but a brilliant political move (pay those who can help you, and screw those who cannot, and have BP pay for it all).
joe4liberty | Aug 3, 2010 | Reply
Thanks for all the comments. Joe, I certainly see the point that the administration can use the money to buy politial support, much as New Deal money was used to boost FDR’s political support. But there is a crucial difference here, in that New Deal money was clearly redistribution — a “benefit” from government, whereas the BP money is going to people who think they deserve it in compensation for the damages they suffered.
The people who get the money won’t necessarily be grateful to the administration, because they will believe they deserved it. (I expect I’d agree with the claimants in many cases.) Meanwhile, the people who believe they were undercompensated will feel mistreated by the government.
I’ll be interested to see how all this plays out. All of the comments raised good points. As my original post indicated, I’m not expecting this to work to the president’s advantage.
Randall Holcombe | Aug 3, 2010 | Reply
Correct.
Lets use a hypothetical.
Bob had a shrimp boat. Because of the spill his business hit a real rough spot. So he applies for part of that $20 billion. Even if he is fully compensated will he feel grateful for help, or will he say, “Hey, I was minding my own business when these BP guys screwed me over. I shouldn’t feel grateful, I damn well deserved that money.”? I can certainly see that being the case.
Now, if Bob feels he wasn’t totally compensated then he’ll be pissed. Especially if he still has to change his life style (i.e. not take a vacation or give up something he likes). Then he’ll be thinking, “That no good bastard didn’t give me enough....”
Might he reason his way beyond Obama to BP? Maybe. But he might also say, “Why didn’t that idiot Obama ask for more?”
I’m thinking this move was more blunder than anything else. Obama and his advisors thought it would make him look tough, now they are in the position of having to dole out the goodies, and chances are its going to piss off more people than it will please.
Steve Verdon | Aug 4, 2010 | Reply