WASHINGTON, Feb. 4 (UPI) -- Think Tanks Wrap-up
WASHINGTON, Feb. 4 (UPI) -- The UPI Think Tank Wrap-up is a daily digest covering brief opinion pieces, reactions to recent news events, and position statements released by various think tanks.
The Cato Institute
WASHINGTON--New Report Lists 12 Worst High-Tech Bills Of The 107th Congress
Last year saw the technology and telecommunications industries suffer a precipitous fall. While market mania and the general economic downturn were the primary causes, one often-overlooked possible contributor to the meltdown is the legal uncertainty caused by the threat of increasing regulation.
So say Wayne Crews and Adam Thierer, directors of technology and telecommunications studies at the Cato Institute, in their new biennial report, "The Digital Dirty Dozen." The study lists what they consider the 12 most misguided tech and telecom legislative proposals of the 107th Congress.
"While legislative attitudes in previous sessions of Congress were 'hands-off' in nature, the year 2001 saw policymakers shed their prior reluctance to consider regulating the Net or cyberspace. Hundreds of bills were introduced dealing with tech policy matters," the two write.
Crews and Thierer warn that legislators may adopt the telecom paradigm of "endless regulatory and legislative meddling" for the tech sector.
They explain that many parties have proposed "public interest regulation" of the industry, enforced "just and reasonable" rates for new services, and subsidies for certain services or technologies to increase household or business penetration.
"But this is the language of the past coming back to haunt the technologies of the future," they write.
The "terrible 12" bills cited in the report card include:
* A bill proposing another "break-up" of America's telecommunications system (S. 1364);
* A proposal to regulate electronic advertising and marketing activities (S. 792 and H.R. 2246);
* Bills authorizing a multi-state tax cartel that would impose taxes on the Internet (S. 512 and H.R. 1410);
* A bill regulating unsolicited e-mail (H.R. 718);
* Bills that would regulate cell phones by mandating that states prohibit individuals from using cell phones while driving (S. 927 and H.R. 1837) and mandating the FCC to establish regulations governing cellular industry quality (H.R. 1531);
* Bills seeking to, on the one hand, require non-discriminatory licensing of online content like movies and music (H.R. 2724), and on the other, to mandate copy-protection schemes.
* Bills prohibiting online gambling (H.R. 556 and H.R. 3215); and,
* Bills proposing the creation of a potentially meddlesome tax credit regime to spur broadband deployment (S. 88 and H.R. 267).
The report is available as Policy Analysis no. 423 on the Cato Institute Web site at http://www.cato.org/pubs/pas/pa-423.html.
WASHINGTON--Bush Defense Budget Based On Vested Interests, Not War On Terrorism, Says Cato Analyst
The centerpiece of President George W. Bush's 2003 budget released today is the $48 billion increase in the defense budget (the largest increase in more than two decades), and the doubling of funding for homeland security.
Ivan Eland, director of defense policy studies at the Cato Institute, had the following comments:
"Mitch Daniels Jr., the president's top budget official, justified such a hefty hike by saying it is needed 'to win the war against terrorism and protect our homeland.' To justify holding non-defense discretionary spending to a 2 percent increase to help pay for the boost in defense spending, Mr. Daniels noted correctly that Washington is 'overrun by vested interests whose livelihoods depend on extracting ever-increasing quantities of taxpayer dollars for their narrow causes.'
What Mr. Daniels forgot to mention was that vested interests also exist in the defense sector -- that is, defense industries -- that are out to do much the same.
"Most of the defense budget increase has little to do with winning the war on terrorism. More money is needed for precision munitions and special forces to fight the relatively small brushfire wars needed to combat terrorism. But those needs are fairly cheap and can be funded from the vast, existing defense budget, for example by savings generated from more rapid base closings and the scrapping of anachronistic weapons designed for the Cold War. In short, there is no need to increase a bloated Pentagon budget.
"In contrast, much of the increase in the homeland security budget is probably justified. This area has been neglected over the years as the United States has spent exorbitant sums on Defense Department programs designed mainly to defend other nations, but little on defending America itself."
WASHINGTON-- Three Myths About Enron and Campaign Finance
by John Samples
Those who want to impose more regulations on campaign finance recently succeeded in forcing a vote on their bill in the House of Representatives. They believe the Enron story makes it certain the bill will pass and become law with President Bush's signature. That's not likely.
The Enron story actually undermines three vital tenets of the reformers' faith. Campaign finance "reformers" believe that money corrupts American politics because elected officials provide special favors to their biggest donors. They take it as a matter of faith that most Americans care a great deal about money in politics.
The campaign-finance regulation lobby also counts on Democrats -- and not a few Republicans -- inside and outside Congress to advance their cause for partisan and ideological reasons. The facts so far about Enron contradict these beliefs.
Enron's money bought less than nothing. Enron contributed a little over $3 million in "soft money" to candidates for federal office from 1995 to the election of 2000. Ken Lay, the head of Enron, may have tried to extract the "quid" for his earlier "pro quos" of campaign contributions.
When Enron began to come apart in late 2001, Lay or other Enron managers called three Bush administration officials: Donald Evans, secretary of commerce; Paul O' Neill, secretary of the treasury, and Peter R. Fisher, an undersecretary of the treasury. The Enron managers wanted help, the sort of special favors the campaign-finance crowd decries.
Lay and his team got nothing from the Bush officials. Enron's share value sank to nothing as the consequences of managerial mistakes came home to roost at the New York Stock Exchange. More accurately, Enron got less than nothing from the Republicans. As Enron grew to being scandal du jour in Washington, the House Energy and Commerce Committee released a letter from an Enron vice president that reflected badly on CEO Ken Lay and his company. In other words, Republicans in the House threw gasoline on the Enron fire.
Some now say the Bush administration did not help Enron because it would have caused an enormous scandal. If so, that tells us that the current system of disclosing contributions effectively prevented the corruption so decried by reformers. Why do we need tighter restrictions if the current system worked?
Others in the reform crowd say Bush should have helped Enron given the damage done to innocent people. This is a strange argument indeed. The people who make this argument would have accused President Bush of corruption if he had proposed helping Enron. When his administration refused to help, they get attacked for not being "corrupt." Whatever he does, Bush can't win with the "reform" crowd.
On the merits, it would be lousy public policy to bail out the owners, managers, and employees of Enron. Markets work well only if badly managed businesses are allowed to fail. When managers of a corporation make huge errors, we must let them go under for the general good. If government bails out Enron, we will only have more of them in the future.
Political money isn't the issue. Sen. John McCain (R-Ariz.) and company have a big political problem: Americans don't care much about their issue. Northeastern University political scientist William Mayer recently surveyed the public opinion data and concluded, "Most Americans don't seem very concerned about campaign finance. I was, frankly, surprised how strong the evidence is on this point."
Those who want more regulation on political contributions will try to use the Enron debacle to overcome this apathy.
But the Enron scandal seems likely to turn on questions of liabilities moved off the balance sheet and the ethics and competence of auditors. If there's anything Americans are less interested in than campaign finance, it's regulatory standards for accountants.
The Democrats duck their boomerang. Congressional Democrats like to cry "corruption" and call for more regulation of political contributions that go mostly to Republicans. We aren't likely to hear much about Enron's contributions. After all, the Democrats got almost $1 million of the soft money that Enron gave to federal officials.
Do congressional Democrats believe Enron's money corrupted their judgment on policy? Judging by their spirited attacks, the Democrats are hardly going easy on Enron and its accountants. If a million in contributions didn't corrupt Democrats, how can they argue, now and in the future, that campaign contributions corrupt the Republicans? With luck, congressional Democrats may avoid the easy demagoguery of "Big Money" attacks and work instead on a serious investigation of Enron's demise.
The Enron debacle does not look like a winner for McCain and his supporters. That won't stop them from trying to blow smoke where there's no fire. As this saga winds off into the details of overseeing audits, we should remember the lesson of Enron's bankruptcy. Campaign contributions helped Enron not at all in its hour of greatest political need.
Like many faiths before, hard facts contradict the central tenet of the religion of campaign-finance reform. How long before the church itself falls to earth?
(John Samples is director of the Center for Representative Government at the Cato Institute.)
WASHINGTON--Amtrak Should File For Chapter 11, Scholar Says
Last week, Amtrak threatened to eliminate train service to dozens of states if Congress doesn't give it $1.2 billion for the next budget year. Meanwhile, the administration's budget released today provides money for Amtrak but said it should be replaced with a federal-state-private partnership, where states subsidize money-losing routes.
This Thursday, the Amtrak Reform Council will submit to Congress its plan to restructure Amtrak and the Cato Institute will release a new report, "A Plan to Liquidate Amtrak."
Edward L. Hudgins, the study's co-author and director of regulatory studies at the Cato Institute, had the following comments:
"Amtrak, the federally owned passenger rail company, is threatening to discontinue all long-distance rail service in October of this year if Congress doesn't give it $1.2 billion. But every year for the past three decades Amtrak has needed taxpayers' handouts that now exceed over $25 billion. It posted a record $1.1 billion loss in 2001.
"This week the Amtrak Reform Council will submit its too-little, too-late reform plan to Congress. Rather than give more taxpayer dollars to a railroad that runs too many money-losing lines carrying too few riders, Congress should liquidate Amtrak.
"Under a Chapter 11 bankruptcy proceeding, a trustee would manage the sale of its assets. Major parts of the system, most notably the Northeast Corridor between Washington, New York and Boston, likely could be operated profitably by private owners. Already a number of them have expressed interest. Chronically money-losing routes will and should be eliminated. Amtrak managers are incapable of turning around the failed railroad. It is time to allow private companies to salvage the potentially profitable parts of the system."
WASHINGTON--Discretionary Spending for 2003: Bush to Exceed Clinton by $124 billion
The Bush administration proposes $789 billion of discretionary spending in FY 2003, according to new budget figures released today. That figure is $124 billion, or 19 percent, greater than the $665 billion that President Clinton proposed for fiscal 2003 in his final budget two years ago. Discretionary spending includes defense and non-defense spending that is annually appropriated.
By examining past federal budgets, Cato's director of fiscal policy, Chris Edwards, found that planned discretionary outlays for FY 2003 have taken a large jump upward in each of the past four years.
"In his FY 1999 budget, President Clinton proposed discretionary outlays of $595 billion in FY 2003. The new Bush proposal of $789 billion for FY 2003 (including the Emergency Response Fund) is a stunning $194 billion or 33 percent more than Clinton proposed four years ago. This pattern of increases indicates a chronic overspending problem by the federal government.
"While upward revisions in the defense budget this year were predictable, large jumps in both proposed defense and non-defense outlays have occurred every recent year. For example, last year Bush proposed FY 2003 non-defense spending of $390 billion, but now he is asking for $410 billion in FY 2003
"While the federal government did show spending restraint in the mid-1990s, the first balanced budget in 29 years in 1998 seems to have triggered Congress and the administration to begin a spending spree. This is why quickly returning any budget surpluses as they arise to citizens through tax cuts is an important way to control the size of the government."
Finally, upward revisions in federal spending have occurred nearly across the board. For example, in his last budget, Clinton proposed FY 2003 education and training spending of $61.5 billion (budget function 500). Last year, President Bush bumped that figure up to $66.5 billion. Now Bush proposes spending on this function for FY 2003 of $70.5 billion.
"Going forward, President Bush's proposal to limit non-defense discretionary spending to 2.2 percent on average for the next five years won't happen unless he gets tough with Congress and vetoes appropriations bills that exceed his targets," says Edwards.
"If these spending increases continue, Bush is in danger of being remembered as a big-spending president rather than a tax-cutting president."
Mackinac Center for Public Policy research
(MCPP is a nonpartisan research and educational organization devoted to improving the quality of life for all Michigan citizens by promoting sound solutions to state and local policy questions through the objective analysis of Michigan issues. MCPP seeks to broaden the policy past the belief that government intervention should be the standard solution for various issues. MCPP offers an integrated and comprehensive approach encompassing the role of voluntary associations, business, community and family, as well as government.)
MIDLAND, Mich. Government "Condemnation" Power Makes Property Rights Less Secure
Donald J. Kochan
People should be able to choose whether to keep what they own. It is their right. And as founding father James Madison observed in 1792, the purpose of government is to protect these private property rights.
A just government, he wrote, "impartially secures to every man, whatever is his own." When Wayne County recently chose to take some landowners' property in order to give it to private developers, it failed this mandate of impartial, just governance.
The case involves the 1,800-acre Pinnacle Aeropark, a development that will include hotels, a golf course, retail shops, restaurants, and other businesses. To make way for this project, existing property owners must be displaced and their land condemned. The planners justify their action with the claim that the project will create thousands of jobs and generate more than 20 times the current property tax revenues in the affected communities.
Of course, some of the current owners who would be forced to give up their property for the development are not persuaded. They are challenging the condemnation of about 60 acres.
The Michigan and U.S. Constitutions specifically restrict the condemnation power to "public uses," forbidding government from taking private property away unless the government proves that the property is necessary for its operation or otherwise needed to meet its obligations to the citizenry. This vital concept is too often lost on government officials and, unfortunately, on many courts.
The Pinnacle Aeropark case is an example. On Dec. 19, the Circuit Court in Wayne County approved the county's condemnation plans. It explained that a condemnation must be examined along a "spectrum," and the facts are subject to a "balancing test," weighing whether the action is more for a "private gain" or a "public benefit." The court examined the promises of new jobs and tax revenues and the impact on "economic or social well-being."
Based on these criteria, the court ruled that Wayne County could decide which private use of property it prefers and impose that preference by force of law. The case likely will be appealed.
The court's standard favors central economic planning over private property rights and coercive property transfers over the marketplace. This reverses the presumption against condemnation generally, let alone against condemnation for private uses, in the Constitution.
Michigan court precedent has made it exceedingly difficult for private property owners to assert their rights and win. A 1981 Michigan Supreme Court decision in Poletown Neighborhood Council v. City of Detroit, upheld as a "public use" the city of Detroit's condemnation of a large tract of land to convey to General Motors for an assembly plant. Today, this precedent is used around the country to justify the use of condemnation for centralized economic planning. In Poletown, the city successfully argued that its displacement of private homeowners was justified to serve economic revitalization interests recognized by the Michigan Legislature.
Factually and legally, there are many ways to distinguish the Pinnacle Aeropark case from Poletown. For example, unlike in Poletown, the Michigan Legislature has made no specific delegating statement that condemnation for development projects such as the Aeropark are in the public interest.
Moreover, the Michigan Supreme Court demonstrated a renewed willingness to curb condemnations for private use in May 2001, when it held in Tolksdorf v. Griffith that a statute that allowed condemnation of private property in order to build private roads violated the "public use" limitation and was, therefore, unconstitutional.
In a 1996 study entitled "Reforming the Law of Takings in Michigan," the Mackinac Center for Public Policy proposed specific wording whereby the steady erosion of property rights in Michigan could be stemmed and private property rights protected -- through executive order, legislation, or constitutional amendment. Elected officials in Lansing should take the Mackinac Center's sound recommendations and protect Michigan citizens from the depredations of sweeping, arbitrary decisions.
Without judicial reanalysis of constitutional limitations on condemnation or legislation that specifically reins in the condemnation power, private property rights in Michigan will not be impartially secured. The Pinnacle Aeropark case is recent evidence that, when great deference is given to government to prefer one private use of property over another, the allure of new tax revenue will provide an incentive for the suppression of private property rights.
(Donald J. Kochan is an adjunct scholar with the Mackinac Center for Public Policy and an associate with the Washington, D.C.-based law firm of Crowell & Moring LLP.
National Center for Public Policy Research
(NCPPR is a communications and research foundation dedicated to providing free market solutions to today's public policy problems, based on the principles of a free market, individual liberty and personal responsibility. NCPPR was founded to provide the conservative movement with a versatile and energetic organization capable of responding quickly and decisively to late-breaking issues, based on thorough research.)
WASHINGTON--New Research Indicates the Earth May Be Cooling
by Amy Ridenour
After a decade of warnings that the Earth's temperature may be rapidly warming, and that this supposed warming may result in a surge of catastrophic flooding and lethal storms, it now appears that we may be in for global cooling instead.
The mammoth west Antarctic ice sheet, which contains enough water to lift the world's sea levels by 20 feet, isn't melting after all. Instead, it's actually thickening and Antarctica itself is getting cooler.
A new study by researchers from the California Institute of Technology's Jet Propulsion Laboratory and the University of California at Santa Cruz, published in the respected journal Science, found that the ice sheets of Antarctica, far from melting, actually are expanding by some 26.8 billion tons of ice a year.
The scientists, Ian Joughlin, a geologist at CIT, and Slawek Tulaczyk, a professor of earth sciences at UC Santa Cruz, speculate the thickening ice sheets are repeating a pattern that occurred from 1650-1850 when the Earth went through what became known as the Little Ice Age.
The study's lead author, limnologist Peter Doran, an expert on the study of fresh water at the University of Illinois at Chicago, is worried about the impact of the cooling on the environment.
Doran says cooling temperature not only is reducing the amount of fresh water feeding into Antarctica's lakes, but it's also making the surface ice thicker so plankton that use sunlight for energy are getting less sunlight. And that, he says, is bad news for the life forms that depend on plankton for food.
"The ecosystem would continue to diminish, and eventually it would essentially go into a deep sleep -- like a freeze-dried ecosystem," Doran said in a Jan. 21 interview with Richard Harris, a science reporter for National Public Radio.
Doran noted that only a few years ago the National Science Foundation was seriously considering moving its campsites away from lake shores to escape higher lake levels caused by the melting water.
"We went into this project with the idea that global warming was going to hit us any time now, and we kept waiting for the warm summers to come, and they never came," Doran said. "It just kept getting colder and colder, and that's the story."
The new Antarctica studies show just how prescient the Bush Administration was last year when it announced it was would not send the 1997 Kyoto Treaty to the Senate for ratification.
Supporters of Kyoto -- including most environmental groups and former presidential candidate Al Gore -- have argued that the Earth's temperature will increase by up to eight degrees over the next century and that this warming will unleash a chain reaction of environmental disasters.
A global warming fact sheet circulated by the National Resources Defense Council indulges in some particularly heated rhetoric, direly predicting that, "Sea levels will rise, flooding coastal areas. Glaciers and polar ice packs will melt. Heat waves will be more frequent and more intense. Droughts and wildfires will occur more often. And as habitat changes or is destroyed, species will be pushed to extinction."
Gore, ignoring the advice of several key Clinton Administration officials, took a last-minute flight to Japan in November 1998 to sign the Kyoto Protocol, even though the Energy Information Administration, the official forecasting arm of the U.S. Department of Energy, found that meeting the treaty's requirements could increase gasoline prices by up to 66 percent and electricity prices by up to 86 percent, and throw up to several million Americans out of work.
The Clinton administration, however, never sent the treaty to Capitol Hill for ratification, in large part because the Senate unanimously passed a resolution urging the administration not to seek approval of any global warming treaty that "would result in serious harm to the economy of the United States." President Clinton even signed appropriations bills in 1999, 2000 and 2001 prohibiting the Environmental Protection Agency from using any funds to "issue rules, regulations, decrees of orders for the purpose of implementation, or in preparation for implementation, of the Kyoto Protocol" unless and until the treaty is ratified by the Senate.
The Bush administration, now struggling to move the country out of a recession, pretty much delivered the coup de grace to the Kyoto treaty last year when President Bush announced that the United States would withdraw from Kyoto, although it would continue to participate fully in the international meetings that developed it. On June 11, 2001, the president committed his administration to support for greater levels of funding for scientific research into climate change.
In light of the new information, President Bush's decision to pursue more research seems especially perceptive.
The new Antarctica studies ought to pound the final nails into Kyoto's coffin. It's ironic that two studies suggesting that a new Ice Age may be underway may end the global warming debate.
Many of the environmental groups championing the global warming theory were zealous proponents of a global freezing theory in the 1970s. These groups then warned that a barren, ice-bound Earth might, in geological terms, be imminent.
Mark Twain once noted, "I'm from Missouri ... if I don't like the weather, I just wait a few minutes."
We might say the same about predictions from environmentalists.
Institute for Public Accuracy
(The IPA is a nationwide consortium of policy researchers that seeks to broaden public discourse by gaining media access for experts whose perspectives are often overshadowed by major think tanks and other influential institutions.)
WASHINGTON--From Manhattan to Porto Alegre: Visions of Global Democracy
*Van Jones, named by the World Economic Forum, currently meeting in New York City, as one of the "100 Global Leaders for Tomorrow." Jones founded the Ella Baker
Center for Human Rights in 1996.
"I think it is a grudging admission on their part that the growing movements against corporate-led globalization and the incarceration industry must be taken seriously. I will accept the award -- not for myself, but for the thousands of activists and concerned community members who will be locked out. The WEF meeting is essentially a gathering of 3,000 economic royalists, who dominate decision-making for 6 billion people around the world. They represent the opposite of true democracy."
*Carola Reintjes, director of the Spanish Network of Solidarity Economy.
"We are working with hundreds of groups throughout the world to build micro-businesses, fair trade processes and other forms of economic solidarity without centering on the profit motive."
*John Cavanagh, director of the Institute for Policy Studies and co-author of
"Field Guide to the Global Economy," has just returned from the World Social Forum,
which concludes today in Porto Alegre.
"The term 'anti-globalization' was always a misnomer. It is a global justice
movement, and it's emerging as a global democratic movement. As the World
Social Forum shows, it is moving beyond merely protesting against
institutions like the WEF."
*Jeffrey Rubin, associate professor of history at Boston University, is on a
MacArthur grant in Porto Alegre, writing a book on democracy and grassroots
innovation.
"Since winning the elections in 1989, the Workers Party has tried to implement a process by which people decide exactly how to allocate the municipal service budget."
*Alejandro Bendana, director of the Center for International Studies based in Nicaragua, and a member of Jubilee South.
"A tribunal on the foreign debt, held in Porto Alegre at the WSF, has determined that much of it is illegitimate and possibly illegal because it was illegal regimes that contracted it."
The Ludwig von Mises institute
(The LVMI is a research and educational center devoted to classical liberalism -- often known as libertarianism -- and the Austrian School of economics. Grounded in the work of economists Ludwig von Mises and Murray N. Rothbard, LVMI seeks a radical shift in the intellectual climate by advancing the Austrian School of economics and by promoting the market economy, private property, sound money and peaceful international relations, while opposing government intervention as economically and socially destructive.)
AUBURN, Ala.--The Real Scandal of Enron
by Christopher Westley
In the latest issue of The New Republic magazine, Peter Eavis calls Enron "a uniquely bad company," and I agree with him. From everything I have read, I think that its upper management was comprised of a smarmy group of individuals, many of whom may find themselves in one of those country-club jailhouses in the not-too-distant future.
I say: Good riddance.
But it would be wrong to read much more into this tragic event or to consider it an example of market failure. Enron enjoyed enormous growth in the latter half of the 1990s, fulfilling a need for middlemen in utility markets that naturally arose following electricity deregulation.
When it matured as a company and its revenues slowed to merely average following the end of the technology boom, it did what many firms do when profit margins narrow and market analysts' projections come down to earth: It panicked and took on riskier investments to cover for inevitable losses. The Sunbeam Corp. was caught doing this a few years ago, as were Cendant and Tyco. Needless to say, such strategies rarely work, and markets do not reward them.
A much better strategy for firms that find themselves in Enron's position is to be forthright in financial statements and to make organizational adjustments as necessary to give shareholders faith in the possibility for future earnings. Markets will reward such a strategy that complies not only with sound financial principles, but with moral ones as well.
For instance, lost in the Enron-dominated news cycle of the last two weeks were items about two other firms that I think will be around for awhile. First, Amazon.com reported its first quarterly profit for the fourth quarter of 2001. Most people are surprised to learn that this most popular Internet retailer has consistently earned losses since first going public in 1995. Yet investors have constantly (and voluntarily) pumped capital at Amazon in anticipation that, at some time in the future, a profit will be made.
Admittedly, Amazon.com could not go on forever without earning a profit, but as long as investors liked the company and believed in its eventual profitability, they were willing to maintain faith in it. Amazon's honesty with its investors over the years, even about some of its clumsier ventures, has been essential for investors to maintain their faith in the company.
Second, Kmart, the ugly stepchild of the retail industry, filed for Chapter 11 bankruptcy around the same time. Kmart's board of directors decided to take advantage of this legal status to make adjustments it couldn't make, while maintaining commitments to creditors. It will shut down unprofitable stores and contemplate how to revamp its image as a 1970s-era retailer.
Investors, and even Martha Stewart, appear to be staying with the company, displaying faith in the ability of its board to transform the firm into a modern retailer and to assure some level of future profitability. Instead of "Enron-ing" its image or financial statements, Kmart was forthcoming with investors and chose a painful but tested long-term strategy for success.
It's tempting for any firm to assume riskier ventures to cover for structural deficiencies in its business plan. Firms cannot pursue this strategy indefinitely, however, and markets always punish this behavior. As Holman Jenkins noted in an insightful Wall Street Journal piece a fortnight ago, markets will punish this behavior whether or not it is glossed over in the federally mandated annual audits of public companies.
In fact, as with much government regulation, these laws have created perverse incentives for accounting firms to avoid highlighting any financial problems, while complying with the letter of the law, so as to maintain their lucrative professional relationships with public companies. Jenkins notes that Arthur Andersen's missing Enron-related emails "may well contain a record of Andersen wringing its hands hopelessly over this dilemma, as accounting firms have done since time immemorial."
What makes Enron unique, however, was its close ties to the political class and the desire of many in the media to identify what they considered to be Bush's Whitewater scandal. Far from an example of a market failure, Enron's saga shows that firms which invest too much in politics can easily become complacent in the face of changing market conditions.
In economics, this is called government failure, and we can blame the growing requirement for firms to divert resources to grease palms in Washington as a necessary business investment for its occurrence.
If there's a scandal to be found in the Enron debacle, it is this: Enron's faith that its political investments would eventually solve its problems caused it to avoid making necessary changes in its organization until it was too late. Anyone who checks Enron's stock price, now listed on one of the penny stock exchanges, knows that the market has penalized this strategy. Amazon.com and Kmart also faced adversity, and better lessons can be learned from their response to it.
(Christopher Westley is an assistant professor of economics at Jacksonville State University.)
