Enron et al deserve our appreciation

Alexandra Samuel
July 24, 2002

I've been surprised to hear businesses clamouring for more regulation recently.

Business people usually complain that they need less government intervention, not more.

They demand lower taxes, less red tape, fewer regulations. They say government rules get in the way of doing business and make companies less efficient and less profitable. That's why it came as a surprise to find so many big companies calling out for more government oversight.

Enron pioneered new levels of accounting complexity to shed light on an under-regulated accounting industry. Tyco's CEO personally volunteered to illustrate the fine line between art collecting and tax evasion. WorldCom juggled billions in expenses to expose the vulnerabilities in a deregulated telco market.

How can we interpret their shenanigans except as a desperate plea for help?

It all comes down to a classic collective action problem: Businesses need capital, which means that they need some sort of market in which capital can be exchanged. A smoothly functioning stock market provides businesses with easy, flexible access to capital.

The problem is that while every company is better off in the presence of a functioning stock market, each individual company stands to do even better by cheating the market. But if each individual company makes the self-interested decision to cheat the market, investors lose confidence in the market, the market collapses, and everyone is worse off.

By a stroke of luck, most advanced market economies have access to an institution expressly designed to solve this kind of collective action problem: government. It looks like many companies are waking up to the crucial role government plays in enabling strong and profitable markets.

By profitable I mean markets in which companies have actual revenues that are greater than their actual expenses. It's easy to confuse that kind of profitability with Profitability™, in which companies' apparent expenses are greater than their apparent revenues.

That's the kind of distinction that government can help us to make. Without those tricky government regulations any old company could just walk around pretending that Profitability™R was the same as profitability.

True, government looks sluggish compared to private industry. It doesn't have the financial flair of Arthur Anderson, or the resourcefulness of Martha Stewart.

But it is good at a couple of things: making rules, and enforcing them -- the key ingredients for a functioning stock market. Enron, Tyco, and friends have all volunteered to underline this point.

More than a few Wall Street folks are now shuffling their feet and muttering about how maybe there should be some rules about the relationship between auditors and their clients.

But rules only work if they're enforced. Regulatory bodies like the SEC need more resources if they're going to catch companies who are trying to beat the system.

That's the kind of scenario that businesses used to label Big Government, and do their best to oppose.

But now we know better -- thanks to the brave companies who had the courage to demonstrate just how much our markets depend on reliable government oversight.

Be sure to send them a note of thanks. I'm sure they'll appreciate it at the parole hearing.