The Enron scandal should ring down the curtain on a whole philosophy of free-market capitalism and a whole style of government-corporate cronyism. It should launch a national movement to leash the corrupt power of money in politics so that legislators and regulators can serve the public interest.
We have been here before, most recently when the Great Depression discredited the speculative excess invited by laissez-faire. One generation earlier, in the Progressive Era, financial panics and robber baron abuses led to demands for reform (which resulted in a 1907 law prohibiting corporate campaign contributions). In both these periods, a politically aroused citizenry elected progressives who in turn enacted profound changes in the ground rules of capitalism. But these changes remained politically secure only as long as the power of voters offset the power of money.
A new reform era in this first decade of the new century will be tougher to achieve. Enron may display all the elements of what's wrong when laissez-faire ideology meets the purchase of political influence. But despite the dot-com bust and the Enron collapse, we are not in a new Great Depression. The Enron story line is numbingly complex. The nation's attention is still focused on the hazards of terrorism. And although this is a quintessentially Republican scandal from the ideology to the cronyism, leading Democrats are implicated just enough to blur both the partisan and the ideological implications.
Nonetheless, even the most craven Democrats sense the potential for a political windfall. The mainstream press is on the case; and dominant political orders have, in such instances, been known to unravel very fast. Who would have thought in November 1972, when George McGovern lost 49 states, that Richard Nixon would resign in disgrace just 21 months later? So Enron could bring a new age of reform a little closerif the bipartisan power of money to block reform can be neutralized.
What is this scandal really about? At one level, it is old-fashioned influence peddling. By buying politicians, a favored corporation promoting a new kind of scam simply purchased immunity from regulatory oversight. Enron is not a unique case, but it is the emblem of how the entire system is corrupted by the power of political money.
Over and over again, Enron got the regulators to change the rules so that it could hide what it was doing, win special tax breaks, or manipulate markets in its favor. The ideology of deregulation provided cover for the cronyism. When Wendy Gramm, as chief commodities regulator under Bush I, slipped in a midnight rule-change after the 1992 election to exempt Enron's trades from oversight, it was consistent with the prevailing ideology. She was rewarded with a seat on the Enron board and hundreds of thousands of dollars in income. When Enron needed another favor in 2000, her husband, Senator Phil Gramm of Texas, got yet another regulation waived. Who needed regulators, anyway?
Well, capitalism, it turns out. Chicago economics, the ideology underpinning the opportunism, holds that capitalism is self-correcting. Regulation, by contrast, is said to be both inefficient and politically tainted. But in the Enron era, both assumptions have been proved wrong. Corporations don't support a brand of deregulation that allows consumers, Chicago-fashion, to efficiently hold producers accountable (that would require a form of regulation). What they support is a deregulation that allows opportunistic forays, favoritism for insiders, and quick killings. Enron also demonstrates that deregulation is at least as politically corruptible as regulation.
So at a second level, the scandal is an impeachment of laissez-faire as a principle for running an economy. Indeed, the more we learn about Enron, the more we discover that all of the parts of the market system that supposedly provide self-correction were in on the deal.
Accountants are supposed to attest to the honesty of corporate books, on behalf of shareholders and prospective investors. But Enron's accountants were involved in the scam. Banks are supposed to monitor corporations to which they lend money, as part of their fiduciary duty to depositors. But Enron's bankers got a piece of the action, too. Corporate managers are supposed to be the agents of shareholders, but Enron's executives literally granted themselves waivers from the company's own conflict-of-interest rules in order to facilitate their self-dealing. Stock analysts are supposed to serve customers, but they are rewarded to tout stocks, not to ask skeptical questions. Elected officials are supposedly the check on regulators; but whenever regulation got in the way, Enron just used its political connections to get the regulations waived. The idea that market forces can temper market manipulation is naive. By the time markets realize that a Ken Lay is a fraud and a scoundrel, the money is gone.
Is Enron atypical? It may have been the most brazen offender, but the most trusted names of American capitalismAndersen, Morgan, Citigroupalso are implicated in this scandal. And while Enron may have been greedier and stupider than others, this kind of behavior has become all too common in deals large and small. Enron parallels the savings-and-loan debacle of the 1980s. Politicians of both parties, flush with S&L campaign contributions and soothed by the song of deregulation, changed the rules so that staid S&Ls could become for-profit entrepreneurs free to speculate with other people's savings. Taxpayers had to bail out the several hundred billion dollars' worth of losses.
Nor is this scandal just about the excesses of financial deregulation. Across the economy, some regulatory reform was sensible. But the brand of deregulation we actually gotin industries as diverse as banking, energy, entertainment, and pharmaceuticalswas hopelessly corrupted by the ability of the affected industries to buy themselves an inside track with legislators of both parties.
And here lies the deepest scandal of all. Though the odor of Enron, like its political affiliation and ideology, is distinctly Republican, the company had both parties on the take. As our cover illustrates, a no-holds-barred investigation would require much of Congress to recuse itself. Fifty-one of 56 members of the House Energy and Commerce Committee, which is leading the investigation, have taken money from Enron or Arthur Andersen; likewise 49 of the 70 members of the House Financial Services Committee.
This is not to say that anyone who ever took a nickel from a self-interested contributor is hopelessly corruptedonly that there is a systemic bias in favor of organized corporate money crowding out democracy. Indeed, Enron was just the 76th largest corporate campaign contributor, dwarfed by even bigger corporations. The ranking members of every major congressional committee are recipients of largess from industries that they regulate. Four telephone conglomerates together gave more than $1 million to members of House Energy and Commerce. Real-estate interests and commercial banks gave over $2 million each to members of House Financial Services. [For more on this, see "Devil in the Details" on page nine.]
There is such a thing as the public interest, but the current system of campaign finance turns politicians of both parties into servants of private corporate interests. Republicans are more explicitly so than Democrats, but the New Democrats play the corporate-interest game essentially as Republicans doleaving the Democrats' role as tribune of the people blunted and their message blurred. On the one hand, Bill Clinton could appoint and defend a genuine public-minded regulator like Arthur Levitt of the Securities and Exchange Commission. On the other, when Levitt got serious about actually regulating corporate and accounting abuses, it was not just Republicans who warned him to desist, but also New Democrats with close ties to industry, including Senators Chris Dodd, Robert Torricelli, and Joseph Lieberman (the same Joe Lieberman now leading the Senate's investigation of Enron). More than a select committee or special counsel, we need a citizens' movement for reform.
One looks in vain today for a serious movement for corporate accountability. Those who champion "reform" of corporate governance focus on shareholder rightsand this means big institutional investors bent on maximizing share value; it doesn't mean more effective public regulation on behalf of the rights of other corporate stakeholders such as employees and small investors. That trail went cold in the 1980s.
Indeed, if you try to find the remnant of a politically and technically serious movement to hold corporations accountable, the trail leads back to early Ralph Nader. Twenty years later, citizen Nader was ill advised to run a presidential race that very likely tipped the election from Al Gore to George W. Bush, but he was surely right about the need to scrutinize corporate behavior as well as its political influence in both parties. Unfortunately, we get that scrutiny all too rarely from politicians who are constantly on the prowl for campaign cash.
Money talks. The only force that can talk louder is an activated citizenry. If we want a democratic politics that serves the broad public, we have to change the system of campaign finance. That means not just the Shays-Meehan bill, but a radical push to limit the influence of money in politics; it means not just indignation at Enron and some tighter monitoring of accountants, but a reversal of the ideology and corrupt practice of deregulation. The common imperative for all of these reforms is an informed and mobilized public, who can elect public-minded officials and reclaim our democracy.
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