Jewish World Review Feb. 20, 2002 / 8 Adar, 5762
http://www.NewsAndOpinion.com -- WITH the rubble still smoldering from Enron's bankruptcy, Congress is attempting to score points by interrogating the company's managers. Former CEO Jeffrey Skilling faced rough going before a congressional hearing; only by invoking the Fifth Amendment did former board chairman Kenneth Lay escape similar treatment.
It is great theater. The primary lesson some would learn is that deregulation has failed, business must be closely controlled, and only government can protect the public. Yet the scandal reflects the failure of human beings, not markets. It is neither the first, nor the last time greedy, sinful human beings have defrauded their neighbors. Most impressive is not the harm resulting from Enron's collapse, but how minimal the impact.
Enron began in only 1989 and quickly became a pioneer in a changing market, brokering the sale of power as utilities lost their local monopolies. Like most businesses, its loyalty was always to profit, not principle.
Enron often worked to the public's benefit. Electrical utility monopolies probably never made sense. They certainly no longer do so.
Regulation yielded billions in inefficient building programs and politically correct investments. Consumers lacked choice. Nothing in Enron's demise diminishes the benefits from freeing energy markets. Their strength is evident from how little disruption has followed Enron's collapse.
California's electricity experience misfired because the state substituted new regulation for old regulation. While Enron was attacked as a profiteer, municipal utilities jacked up their prices far more.
But not all of the company's activities were so public-spirited. As my Cato Institute colleague Jerry Taylor pointed out, Enron backed free markets only when it found doing so to be advantageous.
For instance, it preferred that the state set prices for access to the transmission grid and operate the distribution system. Enron enjoyed taxpayer subsidies from the Export-Import Bank and Overseas Private Investment Corp. The firm supported environmental rules, such as the Kyoto Treaty, which afforded it profit opportunities.
It's no surprise Enron lavished financial support on politicians, almost $6 million in so-called soft money to the parties since 1989, in its search for economic privilege. Yet Enron seemed to get very little for its money.
Indeed, Enron's closest connection was with the Clinton administration. Lay participated in the Bush transition and Vice President Dick Cheney's energy task force, but that comes as no surprise for the industry's leading company.
When Lay called Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans to ask for help in preventing private agencies from downgrading Enron's credit rating, he got nowhere. Rep. Henry Waxman, D-Calif., (D-and Sen. Joseph Lieberman, D-Conn., both complained because the administration didn't try to save the company.
Enron's failure is economically painful, but attempting to save failing companies is more expensive. There ain't no free lunch.
Those who suffered the most from Enron's collapse are its workers. It is easy to overstate employee losses, however, since they reflect the inflated value of Enron's stock. Workers were free to sell for all but a 10-day period during which Enron was changing plan administrators, a period about which they had been repeatedly warned.
Had they been able to sell, they would have simply shifted the loss to other investors. Many employees were too heavily invested in their own firm, but that is not usual for high-value companies perceived as industry leaders. The workers would have resented any restriction on their right to invest.
Ultimately, Enron's failure came not from its power-brokering activities, but through careless debt expansion and, most important, fraudulent financial manipulation. Fraud is an attribute not of capitalism, but of human nature.
Fraud is even worse when people are relatively unaccountable. As in government. Rep. John LaFalce, D-N.Y., ranking member of the House Financial Services Committee, wants "a far more direct role (and) more direct regulation over accounting practices." But consider Congress' role in creating the savings & loan crisis.
Consider Congress' profligate lending to small businesses, farmers and rural enterprises, sparking massive taxpayer losses. Consider Social Security, a pay-as-you-go system facing actuarial disaster. Congress is going to regulate private accounting practices?
Markets are imperfect because human beings are imperfect. But that was evident before Enron's collapse. Even in its imperfection, the competitive, entrepreneurial economy is what gives us both prosperity and freedom. It is a process of discovery, investment, education and failure leading, ultimately, to success.
The remedy for market imperfections is best found in a stable legal order that enforces accountability. Commit fraud, go to jail. Break a contract, pay compensation. Such rules are part of the moral and juridical environment within which competitive capitalism must be nestled.
The Enron debacle has been costly and embarrassing. But out of such failures come future
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