Reform School

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FEBRUARY 4, 2002

Reform School

Does the Enron scandal prove we need campaign finance reform? Of
course it does. When a corporation that has insinuated itself into
the political process through a massive combination of financial
donations and high- pressure lobbying is revealed to have built its
fortune on a stack of lies, it's no great leap to think that the
system of political influence it exploited shares some of the
blame.Yet not everybody sees it this way. The lack of evidence that the
White House intervened to save Enron after it began to falter--the
lack of a "smoking quid pro quo"--has led some to conclude that
Enron's Washington influence did no good at all. "[W]hat did the
Bush administration do to return the favor? Apparently, nothing,"
reported The Wall Street Journal last week. "Of the many bad
financial decisions Enron made, investing $2.4 million in the 2000
political elections now looks, in retrospect, like a conspicuously
bad one." Campaign reform opponents, not surprisingly, agree. "If
anything," says House GOP election honcho Tom Davis, "Enron shows
that money doesn't buy special influence." But this argument, while
charmingly counterintuitive, happens to be wrong. The Enron debacle
could not have occurred were it not for the stranglehold that it
and other special interests enjoy over our political system.

The trouble with the Enron-wasted-its-money thesis is that it
defines the role of campaign finance too narrowly. Yes, if the Bush
administration had acted to help Enron after it began to fall
apart, that would have constituted a major scandal. It would also
have been stupid. After all, the only thing the administration
could have done would have been to organize some sort of loan, from
either Congress, or the private sector, or the Federal Reserve. None
of these would have been easy to arrange, nor would they have
helped much anyway-- once your firm has been exposed as essentially
a crooked Ponzi scheme, borrowing money can't save you. To suggest
that Bush's failure to act shows that Enron got nothing for its
money is tantamount to concluding that your health insurance
premiums did no good because the hospital failed to cure your

So what did Enron get for its money? Plenty. For one thing, it stood
to reap huge windfalls from the Bush administration's energy plan
(parts of which read as if they came from Ken Lay's keyboard) and
from its stimulus bill (under which Enron would have received $254
million in corporate tax cuts). Granted, these Bush administration
favors didn't contribute to Enron's downfall. But that's almost
certainly because this oh-so-friendly administration has held
office for only a year. To find the political kindnesses that
enabled Enron's dubious business practices, you need to go back

For years Enron used its Washington clout to create what one
executive called a "regulatory black hole"--a zone where Enron
could operate almost completely free from federal oversight. To
take perhaps the most egregious example, Senator Phil Gramm--who
received nearly $100,000 from Enron, and whose wife served on
Enron's board--fought off a 1997 attempt by the Securities and
Exchange Commission (SEC) to require companies to disclose their
investment in "over-the-counter derivatives," an Enron specialty.
And just before Bush took office, Gramm was instrumental in
appending onto an unrelated appropriations bill a measure locking
in the deregulation of derivatives--an item that congressional
staff referred to as "the Enron Point." Enron used its investment
in derivatives to cook its books, and it was the lack of federal
oversight that allowed the company to escape detection for so

Even beyond the political favors specific to Enron, the company's
stratospheric success and subsequent crash were facilitated by any
number of federal policies that owed their existence to large
contributions and aggressive lobbying by business interests.
(Several of these were noted in the magazine's editorial last week,
"The Real Enron Scandal.") In 1997, for example, the Senate
neutered a plan to limit the portion of a worker's 401(k) plan that
can be invested in a single company. If enacted, this would have
protected the Enron employees who lost their life savings; but
corporations--who prefer having workers heavily vested in company
stock-- lobbied to kill it. That same year, financial interests
(including Enron) beat back another attempt, this one by the
Commodity Futures Trading Commission, to require disclosure of a
kind of derivative in which Enron had invested heavily; as a
result, the company was able to keep its financial practices a
mystery to outsiders.

In recent years, Treasury Secretary Lawrence Summers also tried to
close down tax shelters and offshore tax havens, which Enron used
aggressively to conceal its finances. These efforts, too, were
stymied by Congress, which was heavily lobbied by affected
industries, including the accounting lobby. Accounting firms also
pushed Congress to prevent another would-be reformer-- Arthur
Levitt, the previous chairman of the SEC--from banning them from
auditing firms for which they do outside work. (Precisely this
conflict-of- interest arrangement may have encouraged Arthur
Andersen's lax audit of Enron, from which it received $27 million
in nonaudit fees.) As part of this campaign, 52 members of
Congress--most of whom served on the committees that oversee the
SEC, and many of whom received generous donations from the
accounting lobby-- wrote letters to Levitt, some threatening to cut
the SEC's budget if he didn't back down. All of these stymied
reforms could have alleviated the Enron debacle or possibly
prevented it altogether.

A defender of unregulated campaign finance might argue that Enron
and other business interests would have gotten these favors even if
they hadn't donated millions. After all, conservative officeholders
and the business lobbies that support them generally share a
pro-business ideology, so maybe Congress would have done K Street's
bidding in all these instances without having to be bribed. But
this oft-heard argument falls apart upon examination. To begin with,
many of the legislators who helped kill the reforms Enron hated
were Democrats such as Charles Schumer and Joe Lieberman--who,
while hardly left-wing ideologues, have no general predisposition
toward narrow corporate interests. And even though Republicans tend
toward free-market conservatism, that conservatism could just as
easily take the form of, say, laissez-faire opposition to corporate
welfare, rather than lapdog agreement with the K Street agenda.

Moreover, even if you believe that political donations merely
bolster the prospects of politicians who already philosophically
agree with the donor, that hardly exonerates the system. It simply
means that unregulated campaign finance helps candidates whose
views dovetail with moneyed interests to defeat candidates whose
views don't. And if donors aren't helping their ideological
sympathizers win, then why are they spending their money?
Businesses, at least in the aggregate, tend to have a reasonable
grasp of their immediate self- interest. They don't throw away
hundreds of millions of dollars for nothing.

The next line of defense against campaign reform is fatalism: Money
will always evade government restrictions, so why not just lift the
rules and require disclosure? On page 17, Noam Scheiber makes a
variant of this argument, maintaining that if K Street can't lure
politicians with direct donations, it will simply lure them (and
their staffers) with the promise of lucrative jobs, such as the one
Enron gave Wendy Gramm.

It's true that limiting campaign donations won't achieve everything
reform advocates desire. If Congress bans soft money, as the
McCain-Feingold bill would do, special interests will spend
unregulated sums to run their own advertising on behalf of favored
candidates and causes. (That might still represent an improvement:
Since candidates couldn't control the outside support, it would be
less valuable to them, and hence they'd have less interest in
pleasing the moneymen.) But ultimately the holes in McCain-Feingold
don't undermine the case for campaign finance reform; they
illustrate the need for reforms that provide candidates with public
financing, either through direct subsidies or free TV time. If
candidates have ample funding to run their campaigns, then they
will need special-interest spending less. As for the prospect that
K Street will just dangle more plum jobs before underpaid public
servants, you could tighten up revolving-door laws and raise
government salaries so it becomes more attractive to stay in public
service, and harder to cash in on K Street. Besides, Washington
lobbies have only so many jobs to offer. They can't hire

No laws can completely ferret out sleaze, of course. But the
fatalistic notion that the power of special interests bears no
relationship to the strength of campaign finance laws flies in the
face of history. The political influence of business is not
constant. As myth colleague John B. Judis wrote in his recent book,
The Paradox of American Democracy, it has waxed and waned over the
course of the last century. Reforms intended to limit that power can
work. Their effectiveness merely diminishes over time, until
eventually the system grows so corrupt that the moment arrives for
a wave of new reforms. It is just possible that Enron paves the way
for another such moment.

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