A few months ago, Democrats in Congress were giddy about Enron. Here, they thought, was the kind of scandal they could tie around the necks of Republicans all the way until Election Day. But it hasn't worked out that way. It turned out that there wasn't any "smoking gun" tying Republican policies to the Enron collapse, and most voters understand that the Bush administration hasn't been around long enough to have had anything to do with what happened at Enron.
As a consequence, Democrats in Washington are moving away from Enron and seeking greener fields for attacking Republicans. However, liberal pundits are not so quick to give up hope on making political hay out of Enron. Ralph Nader's group, Public Citizen, and Robert Kuttner, editor of The American Prospect magazine, among others, are working hard to use Enron as an excuse to roll back deregulation.
The gist of the Nader-Kuttner critique is that deregulation is what caused the Enron collapse. If we had only had more government bureaucrats and more government agencies looking over the shoulders of Enron executives, they say, Enron would still be a viable enterprise. Furthermore, they imply that all deregulation courts similar disaster. Hence, the solution is re-regulation of industry, turning back the clock on 25 years of bipartisan efforts to get government out of regulating the inner workings of American businesses.
The evidence supporting the re-regulation argument is extremely thin. It is very easy, with the benefit of hindsight, to say that perhaps some timely government intervention might have saved Enron. But there is no evidence whatsoever that it is possible to create a government agency sufficiently competent and nimble enough to have prevented Enron's wrongdoing except in hindsight. Such an agency's regulators would have been misled, just as Enron's board was, or induced to look the other way at questionable activities, as Arthur Andersen was.
It is only in the liberal imagination that government bureaucrats have the intelligence, skill and training to compete head-to-head with highly paid, aggressive, well-educated business executives intensely motivated by greed. The amount of money top executives supposedly fleeced from Enron is in the billions of dollars. Does anyone really believe that some GS-15 bureaucrat would have stood in the way of Enron's alleged chicanery with that kind of money at stake? I think not.
What, then, prevents other corporate executives from emulating Enron's? The answer is market discipline. Those with the most at stake -- shareholders -- play a critical role in overseeing the management of companies they own. After all, they are the ones who really pay the price when company stocks fall to zero, as Enron's has.
Obviously, it is impractical for someone who owns only a few shares of stock to pay adequate attention to what management is up to. They must depend on those with large holdings, such as mutual funds and employee pension funds, to do the dirty work. Many of such funds have tens of billions of dollars under management, and may own hundreds of millions of dollars worth of stock in individual companies. It is well worth their while to keep a close eye on the inner workings of the companies they invest in. They also have a fiduciary responsibility to do so.
In recent years, large investors such as CalPERS -- the California government employees pension fund -- have become more aggressive in overseeing the operations of companies in which they owns large blocks of stock. With about $100 billion in assets, CalPERS has both the resources and the expertise to know, far better than small investors or government bureaucrats, what management is up to and to blow the whistle when it sees something fishy. CalPERS has admitted that it did a poor job overseeing Enron and suffered a $100 million loss as a consequence.
The financial analyst community is another group far more capable than government bureaucrats to discipline misbehavior at the corporate level. They are very well-paid and well-trained to make judgment calls on the wisdom and soundness of corporate activities and strategies. And financial analysts can make companies pay a severe price instantaneously by issuing "sell" recommendations that can cause stock prices to collapse almost instantaneously. With managers increasingly being paid with stock options, those at fault can pay a heavy personal price for unwise and unethical behavior.
Economists estimate that consumers now save tens of billions of dollars each year in lower airline fares, telephone bills and other costs because of deregulation. It would be foolish to throw the baby out with the bathwater because of one corporate screw-up. The answer to Enron is not re-regulation, but greater transparency and scrutiny of management by those with the ability and responsibility to do so: institutional investors and financial analysts. In short, more market discipline, not re-regulation, is the way to prevent future Enrons.