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Enron and bad laws

By W. James Antle III
web posted February 18, 2002

With the collapse of a major corporation and the evaporation of its employees' retirement benefits and shareholders' wealth, it is difficult to imagine how the Enron debacle could have any worse consequences. Unfortunately, the political class has set out to disabuse us of this notion.

Those who prefer government growth to real economic growth are invoking Enron's name in their campaign to discredit tax-rate reduction. Senate Majority Leader Tom Daschle (D-SD) has accused President Bush of "Enronizing" the federal budget and the economy with his tax cut (which no fewer than 12 of Daschle's Democrats plus Jim Jeffords voted to pass). The argument is that tax cuts have brought back budget deficits, imperiled Social Security and otherwise destabilized the economy, much like Enron's questionable arithmetic and duplicitous accounting wrought havoc upon their finances.

Sen. Tom Daschle
Daschle

Government spending and economic growth are actually the primary determinants of whether there will be a surplus or a deficit. If federal spending had risen no faster than the rate of inflation, there would have been surpluses in 28 of the 32 fiscal years since 1970. Instead, federal spending grew 120 percent above inflation during this time period. It is difficult for federal revenues to keep pace with such rapidly increasingly outlays. However, economic growth has more to do with fluctuations in these revenues than tax rates. In real terms, personal income tax receipts were 28 percent higher in 1989 than in 1981, despite the drop in the top income tax rate from 70 percent - 50 percent on "earned income" - to 28 percent over the same period. Overall nominal tax collections grew by 99.4 percent.

When the economy grows, revenues increase while a contracting economy produces declining revenues. According to one static estimate, the recent tax cut was responsible for no more than 11 percent of the drop in the surplus while the recession was responsible for 72 percent. It is also important to note that the bulk of the tax cut as implemented to date has been in the form of demand-side rebates, rather than the lower marginal income tax rates that remove barriers to productive economic activity. Daschle has yet to explain how canceling any of the tax-rate reductions, especially for "the rich" who are in fact an excellent source of investment capital as well as small business owners filing individually, will somehow lead to more economic growth.

If anything, a bigger tax cut that simplifies the tax code, lowers or eliminates the capital gains tax and favors production over consumption is what is needed. The redistributionist crowd would be certain to dismiss any such pro-growth policy as a "giveaway" to the wealthy. Any serious tax cut can be so described, notwithstanding the misleading nature of describing the return of money to the people who earned it as a "giveaway," when just 32 million taxpayers shoulder 83 percent of the income tax burden. Clever demagogues are sure to find a way to exploit Enron for the purposes of demonizing this income bracket during tax policy debates.

Campaign finance reform is another more egregious example of how politicians are using what happened to Enron as an excuse to push through initiatives they favored before the company's plight. Kenneth Lay and other Enron bigwigs generously bankrolled politicians of both parties. This is said to justify sweeping reforms that will remove the pernicious influence of their money from the political process, freeing our elections of corrupting influence. Hence, the Shays-Meehan bill (a companion of McCain-Feingold) has passed the House and is lumbering toward the Senate. Some commentators worried that Enron would produce bad laws just like the Watergate scandal did in 1974; here is the proof.

Shays-Meehan is such a constitutionally dubious piece of legislation that some of those who voted for it, along with White House aides urging Bush not to veto it, are confident that the Supreme Court will ultimately overturn it. It will weaken political parties by banning soft money and place onerous restrictions on independent advocacy groups, which is why it is opposed by such disparate forces as the NRA and the ACLU.

It is also based on flawed premises. First, the reason corporate giants and others spend so much money trying to influence elections is because the federal government's reach is so vast. The government is so heavily involved in taxing, spending and regulating that election outcomes can reshape entire industries. Given what almost happened to Microsoft, it is even conceivable why businesses might view campaign contributions as a form of protection money.

Business will always search for ways to influence government policy and connect with elected officials as long as the federal government is doling out billions of dollars worth of corporate welfare, loans, tax breaks and special favors. Money is not corrupting the political process - rather, the money is flowing in because that process is already so thoroughly corrupt. Only reducing the scope of government to its proper functions will curb this.

The worst aspect of this bill is the limitation on "issues ads" by independent groups. Some of these ads will be effectively prohibited during the final 60 days of a campaign cycle while people seeking to air other ads will face burdensome disclosure requirements. This is an unambiguous violation of the First Amendment. Just as freedom-minded people would not restrict media outlets and editorials because some of their reportage or commentator was unfair or misleading, these ads should not be broadly restricted because some of them suffered from the same faults. One man's special interest is another man's animating cause. These regulations remove a venue for the expression of ideas and the criticism of public officials which, whatever we think of specific ads or their sponsor's motives, is essential to a free society.

Such advertisements aggravate incumbents because they dislike having their records criticized. But elected officials' public records deserve to be scrutinized by a wide range of people with a variety of points of view. Shays-Meehan also serves these incumbents' interests by accentuating their hard money advantage through the soft-money ban. It is challengers that most frequently benefit from soft money. A study by the Cato Institute found that similar restrictions at the state level have most hurt challengers, who are less able to withstand a decline in contributions than incumbents. Without financial help from their respective political parties, the study found challengers lose 2.8 percent of the vote compared to 1.9 percent for incumbents. Nor have campaign-finance laws at the federal level helped challengers in the past: at the dawn of the 20th century, the congressional incumbency rate was 75 percent compared to over 90 percent today.

Moreover, Shays-Meehan supporters such as Rep. Chris Shays (R-CT), Rep. Martin Meehan (D-MA) and Sen. John McCain (R-AZ) have failed to make a compelling case that money is as corrupting to the electoral process as they say. Most congressional votes seem motivated by regional concerns, ideology and party loyalty. There is also zero evidence that the current system of campaign finance somehow contributed to Enron's malfeasance. Despite $3 million in soft money donations to both parties, Ken Lay and company have nothing to show for their financial contributions. Enron was allowed to fail by the Bush administration. The Republican-controlled House Energy and Commerce Committee released a letter critical of the company's practices from an Enron vice president. A wide variety of members of Congress have called for oversight of Enron and even the prosecution of Lay, ranging from Reps. Billy Tauzin (R-LA) and Ed Markey (D-MA) to Sens. Ernest Hollings (D-SC) and Peter Fitzgerald (R-Ill.).

The next bad idea politicians will come up with in response to Enron will be heavier regulation of the free market. "Deregulation" of the still heavily regulated energy industry will be blamed for the defrauding of Enron's investors and employees and the myth of the complete impartiality of government regulators - something that should be impossible for someone to believe at the same time they insist the process is entirely corrupt in support of Shays-Meehan - will be revived. Despite the contradictory nature of this re-regulation drive and campaign finance reform, both of course are problems that politicians say cry out for government solutions.

The conduct of Enron's executives and the suffering that company's downfall has caused among those depended on it for their livelihoods is tragic and those responsible should be punished. But it doesn't need to be the backdrop for politicians who use scandals to promote bad ideas.

W. James Antle III is a senior writer for Enter Stage Right and can be reached at wjantle@enterstageright.com.

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