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Business as usual in the disinformation age.
The backlash against high-stakes exams.
Southern Bellwether
For unions to survive, they must organize in Dixie.
The Permanent War.
Viewpoint
A double standard on terrorism.
Appall-o-Meter
Israel targets Arafat.
Russia's last independent network goes under.
Dumping on Nevada
The Department of Energy approves Yucca Mountain as a nuclear waste site.
Prison Blues
Starbucks, Nike, others profit from inmate labor.
Against the Odds
Public housing residents eke out some rare victories.
Autumn of the Patriarch
BOOKS: What a difference a pop makes.
BOOKS: Carey McWilliams and the Fool's Paradise.
MUSIC: It's to Change punk rock.
The Docs' Good News
FILM: Documentaries are alive and well at Sundance.
Tony Kushner, Native Son
INTERVIEW: The playwright on America, Israel and terror.
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February 1, 2002
Enronomics 101
Business as usual in the disinformation economy.
The sordid, still unfolding tale of Enron’s crash is a story with several
themes: common greed that soared to uncommon dimensions; the failure and foiling
of government regulation; duplicitous accountants, lawyers, bankers, executives
and politicians on the corporate take. But it also makes a compelling argument
that the new information economy should really be called the disinformation
economy. In the disinformation economy, there is a systematic effort to hide, distort
and lie as a way of gaining wealth and power. In itself, this is old stuff,
but the techniques for such deception are more sophisticated and elaborate than
ever. Even though insider dealing is a crucial part of the disinformation economy,
on the surface the economy relies heavily on public information, certainly much
more than in the era of handshake deals between private capitalist titans. In
this time of deregulation and globalization, as markets grow more all-encompassing
and less constrained, failures of information can have much more dire effects.
Even on capitalist terms, markets require full, accurate and universally available
information to guide rational decisions by investors, consumers and citizens.
Disinformation raises the level and cost of irrationality even as it promises
a free market utopia.
Fundamentally, Enron transformed itself from an energy supplier into an almost
totally unregulated financial institution. The profits Enron generated came
mainly from its on-line trading of electricity and natural gas. (Other trading,
especially in telecommunications bandwidth, was less successful.) The bulk of
this trading was in “derivatives,” complex financial instruments used
to hedge or speculate about future prices. Unlike open futures markets in agricultural
or financial commodities (like Treasury bonds), Enron not only ran the marketplace,
but was a major participant in the trades. The derivative contracts were often
opaque and confusing, even to experts. So this market was especially murky and
open to manipulation. To succeed Enron needed markets—starting with energy—that were deregulated,
volatile and actively traded. Deregulation provided the instability that created
an incentive for hedging and speculation as well as opportunities for Enron
to profit, often by taking advantage of minor discrepancies in prices within
the marketplace. Clear, predictable information about energy prices typical
of regulated utilities hurt Enron; chaos and confusion were its manna. Keynes
described financial euphorias as bubbles forming on bubbles. Enron was blowing
its own bubbles. In the real-world economy, electricity deregulation has been a massive failure
for consumers. Many can’t easily take advantage of the confusing choices
in deregulated markets—just like for telephone service. For them, deregulation
most often means disinformation and overwhelming marketing madness. And in most
places, energy prices have actually gone up. Enron’s machinations played a major role in driving up energy costs in
California. (Emergency shortages soared after a bill deregulating energy trading
pushed by Texas Republican Sen. Phil Gramm on behalf of Enron was passed, then
ended when federal price controls were reimposed, according to Public Citizen.)
One study concluded that electricity prices on the California-Oregon border
recently dropped 30 percent simply because Enron went bankrupt and could no
longer use its market power to set prices. Yet with widely fluctuating prices,
it is harder for utilities to plan for new generating capacity, setting the
stage for future shortages or supply manipulation and price hikes. Enron is not the only sinner; neither is Andersen. Over the past six years,
Business Week reports, investors have lost $200 billion as a result of
783 audit failures at firms that overstated profits, and such incidents doubled
from 1997 to 2000. The fallout from Enron has helped to precipitate other major
bankruptcies, like Global Crossing, or reorganizations, like Tyco, as investors
worry about the reliability of all corporate statements. Former Securities and
Exchange Commissioner Arthur Levitt, whose efforts to tighten accounting practices
were blocked by Congress, says that a “culture of gamesmanship”—a
polite term for lying, cheating and deceiving—took hold in the frenzied
new economy of the ’90s. Politicians helped create the fertile environment for growth of the disinformation
economy. Gramm and his wife Wendy, a former director of the Commodity Futures
Trading Commission who joined Enron’s board shortly after retiring, pushed
through key regulatory rulings and legislation that fostered derivative trading
and kept Enron free from regulation. Enron’s political contributions—disproportionately
to the Republicans, especially to Bush and his cronies, but also to many Democrats—are
now notorious. Maybe Bush didn’t bail out a failing Enron, but he did end
Clinton’s plans to rein in foreign tax havens. Bush’s energy plan promoted 17 policies that Enron had lobbied for, including
six visits with Vice President Dick Cheney while he headed the energy task force.
Even within the industry, most of those proposals are controversial, such as
promoting energy deregulation and derivatives, guaranteeing energy traders open
access to all transmission lines, and repealing the Public Utility Holding Company
Act (which restricts multi-state holding companies from diversifying into ventures
unrelated to their core utility business). But as part of the disinformation
society—and in keeping with other Bush moves to restrict freedom of information
and access to presidential records, Cheney is fighting to keep secret the deliberations
of the energy task force, despite a lawsuit being filed by the General Accounting
Office.
Until the dot-com and stock market collapse, many analysts argued that computers,
the Internet and telecommunications had created a “new industrial revolution”
that had transformed the economy into a recession-proof fountain of growing
productivity and profits. But Northwestern University economist Robert Gordon
has concluded that nearly all of the accelerated productivity growth in the
late ’90s came from growth in manufacturing of durable goods, especially
computers and related equipment. There was virtually no acceleration of productivity
in the rest of the economy. The hype about Internet business and the information economy spurred an investment
boom, fed by brokerage firm stock promoters (“analysts”) who even
late last fall rated Enron a “buy.” Enron was worth $60 billion to
shareholders before it tanked, wiping out many of its own workers’ retirement
funds. But most observers ignore damage Enron wreaked on the way up: Its exaggerated
promise of returns drew investment away from other potential investments. What
would the country be like if the billions wasted on Enron had been used rationally
and for some real social good, not swept up in the throes of an economy built
on lies and deceit? Even within its own corporate walls, if Enron had plowed money into its wind
power division instead of its fraudulent trading division, it could have helped
reduce national dependence on Middle Eastern oil and created more stable energy
prices. Similarly, illusory high rates of return—profit and growth in stock
value—at Enron and other “revolutionary” companies put unrealistic
pressure on other businesses to match those returns, distorting investment decisions
and helping to undermine some industries, including many domestic manufacturers. The tentative moves emerging in Washington toward regulation of accountants,
pension plans, accounting rules and other troubled aspects of the Enron debacle
are small, if necessary, steps toward the broader task of unmaking the disinformation
economy. But the entire political culture has been so contaminated with disinformation
that now—even in the wake of this scandal—both Republicans and Democrats
are promoting further energy deregulation. Greed undermined professions that
once claimed the public trust—accountants, lawyers, bankers—demonstrating
the need for tighter regulation. But who can do that if government itself is
corrupted? |
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ven more than the dot-coms, Enron—the aptly nicknamed “crooked E”—was
the star of the new “information economy.” During the past decade,
economic fortune-tellers said that the future of business lay in exploiting
the Internet and information technologies to create boundless productivity growth
and profits. At the same time, there was a continued ideological push toward
deregulation of all markets, and financial firms increased their domination
over producers of goods and services. Tapping into and deceptively feeding the
decade’s collective delusion of unlimited wealth through computerized financial
wheeling and dealing, Enron soared in a few years from a sleepy utility to the
seventh-largest company in the United States—and one of the most widely
praised.
ut Enron hasn’t just corrupted individual politicians by buying influence
through campaign contributions. The irony is that the political corruption ends
up destroying one foundation of the market economy itself—reliable information—and
exacerbating what economist Michael Perelman calls “the natural instability
of markets.”