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Jewish World Review Feb. 20, 2002 / 8 Adar, 5762

Doug Bandow

Doug Bandow
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Consumer Reports

The grand Enron morality play -- 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 gains.

JWR contributor Doug Bandow is a senior fellow at the Cato Institute. Comment by clicking here.


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02/05/02: Succumbing to the terrorist temptation
01/29/02: Democrats for what?
01/22/02: The Iraqi question
01/14/02: Profiling frequent flyers
01/08/02: Trade, not aid
01/02/02: Treason by any other name
12/26/01: Preserving freedom in an unfree world
12/17/01: Dealing with terrorism's aftermath
12/10/01: Emerging friendships?
12/04/01: Uncle Sam: Insurer of last resort
11/28/01: Expanding the circle of trade
11/20/01: Free to be stupid
11/13/01: The meaning of compassion
11/07/01: Patriotic scoundrels
10/30/01: The coming postal raid
10/16/01: First, do no harm
10/12/01: Good news from a suffering land
10/04/01: Defending whom?
09/25/01: The wrong solution to the wrong problem
09/21/01: The price of terrorism
08/28/01: Uncle Sam's retirement scam
08/21/01: Canberra's quaint naivete
08/14/01: Uncle Sam's false fuel economy
08/08/01: The Clinton administration in drag
07/31/01: The high cost of government
07/24/01: Kill the campaign reform illusion
07/17/01: Do as I say, not as I do
07/11/01: Lawyers at play
07/05/01: Western blundering, Macedonian disaster
06/26/01: How best to honor Bill Clinton?
06/19/01: A maturing Europe?
06/15/01: Tell Beijing to mind its own business
06/06/01: Ukraine's boiling cauldron
05/31/01: Protecting privacy from Uncle Sam
05/22/01: America's Balkan quagmire
05/09/01: The Taiwanese flash point
05/01/01: Globalization serves the world's poor
04/24/01: Who's cheating whom?
04/10/01: The NCAA scam
04/03/01: Balkan stupidities
03/27/01: McCain doesn't want a 'risk for our country'
03/20/01: Dubious Korean alliances
03/06/01: Coercive patriotism
02/27/01: Bombing without end
02/20/01: A dose of misplaced outrage
02/13/01: Psst: Tax cuts for taxpayers. Pass-it-on
02/06/01: Bridging the unbridgeable gap
01/23/01: Left-wing demagoguery
01/16/01: The drug war problem
01/10/01: Politics and trade
01/03/01: Hope for liberty?
12/27/00: The debris of war
12/19/00: What's the rule of law for?
12/15/00: Ending silicone breast implant saga
12/05/00: Election may yield victor, but there are no winners
11/21/00: A Bush presidential mandate?
11/07/00: Exprienced Gore? Yeah, right
11/01/00: Interventionist follies
10/17/00: America's brightening prospects in Ukraine
10/11/00: GOP budget scandals
10/03/00: How a pharmaceutical 'crisis' was created
09/27/00: Clinton's empathy has helped nobody
09/13/00: AlGore's risky budget policies
09/05/00: Military readiness and Korean commitments
08/29/00: Let sleeping hypocrites lie
08/21/00: Targeting a journalistic pariah
08/15/00: European garrison for Kosovo?
08/08/00: Journalistic cleansing at the Boston Globe
08/04/00: Junk science on trial
06/22/00: Eternal vigilance is the price of liberty
06/15/00: The end of U.N. peacekeeping
06/07/00: The Clinton regulatory miasma
06/01/00: Administration stupidity, congressional cowardice
05/25/00: The silence of the international community
05/18/00: Protecting the next generation

05/11/00: Freer trade with China will advance human rights

05/04/00: How not to save the Constitution

04/28/00: American tripwire in Korea long ago disappeared: Why are we still involved?

04/18/00: Clinton administration believes the IRS is too gentle, wants more auditors

© 2002, Copley News Service