POLITICAL CAPITAL
By ALAN MURRAY

Write to Alan Murray at alan.murray@wsj.com

ENRON AND CALIFORNIA
Enron in California Teaches A Lesson About Deregulation

California Gov. Gray Davis and his backup singers, Sens. Dianne Feinstein and Barbara Boxer, say it is a crime, and want Attorney General John Ashcroft to investigate. They think memos released last week, detailing Enron Corp.'s trading schemes with colorful names such as "Death Star," "Get Shorty" and "Fat Boy," are the smoking gun that will prove the energy company ripped off Californians during their time of crisis.

Well, good luck getting a conviction. Californians certainly were shortchanged. But it is far from clear Enron committed a crime.

I carry no brief for Enron. The company's accounting chicanery, to my legally untrained mind, clearly constituted fraud. Executives brazenly lied to shareholders. But in the California situation, Enron executives were doing what their shareholders wanted: buying low and selling high. "This is just arbitrage, and arbitrage is what traders do," says Stanford University economist Frank Wolak. The complaining California politicians are like a man who leaves a $100 bill lying on the sidewalk, and then cries "thief" when he discovers it missing.

Yes, the California market did have prohibitions against "gaming," "anomalous market behavior" and "unusual trades or transactions." But the energy lawyers I have talked to say such prohibitions were so vague as to be almost useless. Where, exactly, is the line between aggressive, profit-maximizing trading, on the one hand, and "gaming," on the other? No one really knows. And if no one knows, no one is likely to go to jail for stepping beyond that line.

There are a couple of points deep in the memos that suggest something sinister. The discussion of the "Get Shorty" strategy, for instance, talked of the need to submit "false information that purports to identify the source of the ancillary services" that are being traded. A related strategy of selling nonfirm -- or interruptible -- power as firm -- or noninterruptible -- power also reeks of misrepresentation. The lawyers at the Federal Energy Regulatory Commission, which is investigating to see if crimes were committed, no doubt will zero in on both those strategies. But even there, they will find it difficult to make a case. "Firm" and "nonfirm" energy are indistinguishable as the electrons whiz into California via transmission lines. The crucial factor will be whether Enron intended to defraud state authorities, and proving such intent will be difficult unless some current or former Enron executives decide to squeal.

So what are the lessons to be drawn from these new memos?

Well, they shouldn't be taken as evidence that deregulation is a bad idea. The benefits of deregulation, which if done correctly can both lower prices and encourage innovation, can hardly be overstated. From airplanes to banks to trucks to telecommunications, a quarter century of deregulation helped fuel the American economic boom at the end of the 20th century. The U.S. demonstrated an almost unique ability to remake itself, foiling the grim predictions of historians such as Paul Kennedy, political scientists such as Mancur Olson and economists such as Tibor Scitovsky, who all argued that a sort of economic sclerosis would inevitably infect the U.S., as it has all wealthy and powerful nations. After a century of global economic dominance, the U.S. managed to head off sclerosis, and emerge in a new century as still the strongest and most nimble economy in the world.

Instead, the California experience highlights one of the great paradoxes of deregulation -- that it can be more difficult than regulation itself. The notion government regulators can simply close up shop, and let a fully functioning and competitive marketplace emerge, has been disproved time and again. Libertarians argue all market problems have their roots in government actions. Maybe so, but that is a chicken-and-egg argument that has little use when overhauling a marketplace that has been controlled by the government for a century.

A former Federal Communications Commission chairman, whose name I'll withhold to protect the sanctity of sideline soccer-dad chat, once complained to me his picture never appeared in The Wall Street Journal, while those of his recent successors, Reed Hundt and Michael Powell, appear frequently. That is because the 1996 telecommunications act, designed to get government out of the business, actually had the perverse effect of making the FCC more important than ever. It stands in judgment over pivotal decisions about how the marketplace will be shaped.

The same holds for electricity. California's bungled effort to create a free market for energy shouldn't be seen either as an argument against Enron, or an argument against electrical deregulation. Instead, it should be taken as a lesson that 1) deregulation of the nation's electrical system needs to be designed by smart people who are acting, as much as possible, in the public's interest; 2) the deregulated system needs to have very clear rules that apply nationwide, and don't vary state to state; and 3) those rules need to be enforced by a well-staffed, muscular federal-regulatory agency.

Deregulation, it turns out, is hard government work.

2002-05-13: Economic Forecasts

The Economist's poll of forecasters produces an average forecast rate of GDP growth for the United States of 2.8% in 2002 and 3.5% in 2003--which cumulates to a full two percentage points more of growth in the next two years for the United States than the Euro zone. The only industrial economy forecast to grow faster than the United States over the next two years is Australia. Any signs that the 00s will be the decade for some other country than the United States to lead the industrial core in growth are still invisible.

There are two remarkable things about this pattern of forecast growth. The first is that the fastest-growing countries of Australia and the United States are also the countries with enormous trade deficits. (In absolute values, of course, Australia's trade deficit is much smaller than the U.S. because it is a much smaller economy; but as a share of GDP it is comparable.) Normally large trade deficits are a sign that aggregate demand has outrun supply. This time, however, it appears at least as likely that the large trade deficits are driven from the capital account side--that it is because foreign investors want a share of the opportunities that they see in these fast-growing economies. This does not mean that these trade deficits are benign: U.S. Treasury Secretary O'Neill's rediscovery of the Lawson doctrine that trade deficits are good when they are not accompanied by budget deficits is likely to prove short-sighted. But it does mean that good things are probably going on on the supply side of both of these fast-growing economies.

The second remarkable thing is that the implicit forecasts of U.S. unemployment show little or now change over the next two years. If the growth forecast comes true, unemployment is likely to be in the 5.5% to 6.0% range in two years. Whether this is to be mourned or not depends on what one thinks the NAIRU of the U.S. economy is. It seems likely that Alan Greenspan thinks that the NAIRU is considerably less than 5.5%, and so is now looking for tools with which to stimulate aggregate demand further. But what tools does he have? Short-term interest rates are now down to 1.75% per year.

2002-05-12: Let Us Now Praise Right-Wing Hacks

David Broder* thinks that the success of the Heritage Foundation and the Cato Institute is "something to cheer" because they are so "proficient in generating and promoting ideas" and have great "intellectual honesty." I disagree: I think David Broder has lost his ability to distinguish intellectual wheat from partisan chaff. Cato and Heritage's main function is to provide soundbites. As a result,their work can rarely be relied on: too much of the time, even when the good, straight, accurate arguments are on their side, the guys from Cato and Heritage are likely to come up with something twisted, inaccurate, and misleading that sounds punchy. (Brendan Nyhan also disagrees with Broder, and expresses it better than I do.)

For example, consider Stephen Moore, sometime Director of Fiscal Policy Studies at Cato, sometime a Fellow at the Heritage Foundation. Let me pull down from the shelf Stephen Moore and Julian Simon (2000), _It's Getting Better All the Time: 100 Greatest Trends of the Last Hundred Years_ (Washington, D.C.: Cato Institute). It's a book I by and large agree with: things are a lot better now than they were 100 years ago. It's a book I'm sorry I bought, because I cannot refer to it without carefully checking every word, and wondering on each page, "Is this a place where Moore is trying to make me into a fool?"

Let me open it at random....

Page 59... in "the broadest measure of a nation's overall economic performance" they headline total GDP rather than GDP per capita. GDP per capita has multiplied more than sixfold over the century, but GDP has grown by more--more than twentyfold. But is total GDP a good measure of overall economic performance? No. A country where population quadrupled and living standards halved would see its total GDP double....

Page 61... nothing wrong here...

Page 63... the graph of median family income is no series I have ever seen before: certainly it is not the case that the years 1989-1994 are the only years since 1947 in which median family income has declined...

Page 65... oh this is an absolute beauty: "The Millionaire Next Door... less than 5000 Americans, or less than 0.1 percent of households, were millionaires in 1900.... Today there are almost 8 million millionaire households in the United States [or 7.7% of households." The problem is that a dollar back in 1900 had about 20 times the purchasing power of a dollar today. If you want to answer the question "How many people today are as wealthy as a 1900-millionaire?" you need to look at the people today with wealth more than $20 million--about 0.5% of households. Now it's not that Moore is confused about the statistics--it's just that he would rather give you the (phony) number that an American today is 77 times more likely than an American in 1900 to be a "millionaire" than the (real) number that an American today is 5 times more likely to have the purchasing power of a 1900-era-millionaire than an American in 1900.

Now on all four of these charts the basic point Moore wants to make is true: America is much richer and there are many more millionaires now than in 1900, median family income has risen steeply over time, the U.S. edge over other countries in productivity has grown, and American economic growth in the twentieth century has been amazing and remarkable. He can tell his story and he can tell it strong without resorting to false, erroneous, or misleading calculations at all.

Yet still he makes them. Only one of the four items above headlines what everyone would agree are the right numbers. The other three do not. Moore simply cannot resist gilding the lily. He cannot resist making things much "clearer than truth." The result is that I cannot believe a word he writes. It's frustrating. Moore's book is completely usless.

Now why does Moore follow this strategy of grasping for the weak and false but good-sounding bite when there are strong, powerful, and valid arguments on his side? The reason is that he is embedded in an ecology in which the major players are people who can't evaluate the substantive strength of intellectual and policy arguments, aren't especially interested in learning the substance of public policy in any depth, yet have acquired substantial journalistic influence without every learning that their own biases and kneejerk reactions are not automatically valid. In such an ecology, what use are a commitment to education first and partisanship second? What use are scruples? What use is an unwillingness to make the worse appear the better cause? You lose them if you swim in the seas of Cato and Heritage, just as animals that live underground lose their eyesight...

*Thanks to Two Think Tanks--Heritage and Cato

by David S. Broder
Wednesday, May 8, 2002; Page A21


This is a week of celebration for two of Washington's great dissenters on the right. On successive nights, dinners are honoring Edwin Feulner for his 25 years at the helm of the Heritage Foundation and Edward Crane for his role in founding the Cato Institute a quarter-century ago. The success of their think tanks is something to cheer, even if, as is my case, you often disagree with their policy prescriptions.

To appreciate what they have achieved, you have to recall that in 1977, when Feulner left his congressional staff job to run the four-year-old Heritage (which he had helped found) and when Crane started Cato out in San Francisco, Jimmy Carter had just been inaugurated and Democrats controlled both houses of Congress. "It was not a hospitable time for Republicans, let alone conservatives," Feulner recalled.

Today, with Republicans running the White House and the House of Representatives and one vote away from regaining control of the Senate, it is easy to see the triumph of conservatism as a historical inevitability. It was not. The political victory can be credited largely to Ronald Reagan. But it was also an intellectual battle, in which Heritage and Cato, along with the older American Enterprise Institute, played a critical role.

Heritage and Cato have become so proficient in generating and promoting ideas that the liberal movement has had to create its own think tanks to compete. With generous corporate and foundation support and thousands of grass-roots contributors, Heritage boasts a staff of 185 and a budget of $28 million; Cato, 98 staffers and $16 million.

In their headquarters buildings, Heritage on Capitol Hill and Cato in a handsome modern structure closer to the White House, they sponsor a steady stream of conferences and churn out papers and books, nudging and prodding the policymakers and opinion-shapers. Feulner has Heritage on hair-trigger, rushing out suggestions before congressional hearings and bill markups. "We sweat the details" critical to the legislative process, he told me. Cato, Crane remarked in a separate interview, "is a little more academic and long-term in its thinking."

Heritage, which had a foothold in Washington when Reagan arrived, wrote a blueprint for his first term called Mandate for Leadership, which became a kind of handbook for the new administration. Tax cuts, missile defense, enterprise zones for cities and scores of other ideas migrated from Heritage to the White House and Capitol Hill.

Cato, which moved to Washington in 1982, has sponsored legal studies influential in the Supreme Court decisions reviving the 10th Amendment limits on federal authority. At times, their agendas overlap. A central, but still unfulfilled dream of Cato's since 1979, now shared by Heritage, is the conversion of Social Security into a system of private retirement accounts.

But the two are not twins. Heritage is mainstream conservative, emphasizing free-market economics and robust national security policy, with some forays into social policy on health care and welfare reform. Cato is libertarian in its roots, more radical in its critique of federal programs, more skeptical about the U.S. international role and decidedly liberal (in the classic sense) on issues of personal freedom and civil liberties.

Their usefulness in Washington politics stems from their intellectual honesty and their willingness to question conventional wisdom, even when their friends are in power. A case in point is the bipartisan but outlandishly expensive farm subsidy bill, which President Bush is preparing to sign. Heritage's Stuart Butler denounced it last week as "a shameless example of corporate pork-barrel spending." And when the establishment was recently cheering the latest campaign finance "reform," Cato and Heritage held forums challenging the government's right to regulate political speech.

In this city, noted for the narrowness of its intellectual range, it is sometimes wildly unpopular -- but absolutely vital -- to have institutions that question fundamental assumptions and occasionally declare that the emperor of the moment has no clothes. Cato and Heritage do that -- to Republican presidents as well as Democrats.

They are also models of healthy democratic discourse at a time when too much of the policy debate here takes the form of "Crossfire"-style exchanges of insults. They have staffed themselves with scholars and writers who share their basic political orientations. But their doors are open to other views, and the policy forums they run are not only stimulating but good-tempered.

What Crane told me is true: "The Washington think-tank world is a great example of how people can have a civil discussion and debate. You don't see it in politics, but politics these days is largely devoid of content."

As long as that is true, all of us who work here in politics or journalism have reason to be thankful that Heritage and Cato are around.

Spinsanity: Creaky foundation

A journalism dean credits the Heritage Foundation for being what it's frequently not: Rigorous, evenhanded and scholarly.



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By Brendan Nyhan



May 10, 2002  |  In his latest column, the Washington Post's David Broder extols the virtues of the Heritage Foundation and the Cato Institute, two of the nation's most powerful and influential think tanks, on their 25th anniversaries. He writes that their "usefulness in Washington politics stems from their intellectual honesty and their willingness to question conventional wisdom, even when their friends are in power."

But his paean fails to acknowledge how ideology and public relations concerns can dictate -- and distort -- much of Heritage's work. What about the foundation's methods, which are more than just an intellectually honest questioning of the "conventional wisdom"? As John Judis describes in his book "The Paradox of American Democracy," the foundation is dedicated to producing good conservative P.R., not rigorous scholarship. Founder Edward Fuelner wanted a "quick response capability" and article-length pieces rather than dense scholarship. Some years ago, Burton Pines, a Heritage vice president, said this of the think tank's mission: "We're not here to be some kind of Ph.D. committee giving equal time. Our role is to provide conservative public-policy makers with arguments to bolster our side."

Of course, there is nothing wrong with this in general, and Broder surely understands how Heritage operates. However, it should be pointed out that the many position papers and Op-Eds it pumps out are often less than rigorous (or worse).

Consider the flaws in some recent Heritage work. Last year, the foundation's Center for Data Analysis launched an attack on a report by the Center on Budget and Policy Priorities (CBPP) about income inequality and tax policy. CBPP responded by taking Heritage's charges apart in embarrassing detail. Most notably, Heritage blatantly misstated the source of CBPP's data, which was clearly cited in the original report, in an attempt to cast doubt on it. This was either a massive error or a troubling attempt at misdirection.

The CBPP authors wrote that their study "relies primarily on the latest data available from the Internal Revenue Service on income and income tax trends." Heritage's rejoinder: "Shapiro and Friedman badly misuse data to create a statistical mirage of growing income inequality in America from 1992 to 1998. The Census Bureau warns researchers not to do this because of major survey changes in 1994." However, these changes were made in the Current Population Survey carried out by the Census Bureau, not the IRS data used by CBPP.

Or consider the March 28 Washington Times Op-Ed by Heritage's Daniel Mitchell praising Russia's flat tax, which Jonathan Chait rightfully excoriated in the New Republic Online. (As the McKenna senior fellow in political economy, Mitchell is blessed with the imprimatur of the institution and given assistance in placing Op-Eds, securing radio interviews, etc.) In his piece, he argues that the fact that Russia has seen tax revenues rise "proves the class-warfare artists in Washington completely wrong when they argue that tax revenues would fall and the rich would get a big tax cut if America adopted such a system. The Russian experience confirms -- again -- that tax revenues rise under a flat tax."

Of course, "intellectual honesty" would require Mitchell to at least acknowledge that he's drawing a conclusion with little evidence to support it. Russia's previous tax system was corrupt; President Vladimir Putin instituted a flat tax as part of a reform effort that also included toughened enforcement. As Chait says, "Any system that involved a strong central government rationalizing and enforcing tax laws would be more efficient than the old Russian system." Moreover, the situation in the United States is obviously almost totally different, yet Mitchell pretends as if Russia's experience provides a useful comparison.

Despite this slipshod work, Broder's overwrought praise continues. He calls the think tanks "models of healthy democratic discourse at a time when too much of the policy debate here takes the form of 'Crossfire'-style exchanges of insults."

While Heritage generally doesn't put out highly aggressive jargon, its experts employ public relations tactics that often polarize public debate. Mitchell in particular appears to specialize in highly charged metaphors equating tax policy with civil rights.

In an Op-Ed in the Washington Times this week, Mitchell condemns the Supreme Court's infamous 1857 decision in the Dred Scott case (which ruled that slaves who escaped to free states were still considered the property of their previous owners) and then attempts to connect the case with a proposed change in corporate tax policy, writing that "some U.S. companies soon may be treated in a similar manner" to slaves under Dred Scott due to a bill in Congress that would prevent U.S. corporations from re-chartering in countries with "better tax laws," such as Bermuda. "The politicians who support this are acting as if these companies belong to the government," he writes. Does Broder actually believe that comparing corporations, legal entities chartered by the government, to human beings owned as slaves is somehow superior to "'Crossfire'-style exchanges"?

Last year, in an interview with the New Republic's Anand Giridharadas, Mitchell similarly compared tax evasion with the civil rights movement, saying that he could not condemn a family that "deposits their assets offshore in the face of a confiscatory tax like the death tax, any more than I would condemn Rosa Parks for sitting in the front of that bus."

Obviously, Mitchell feels passionately about these issues, and it is his job to serve a strong advocate for them. But this shouldn't be what passes for intellectual honesty and healthy democratic debate in Washington. Broder should expect more.

Think of it: 1000 diocesan priests in the Archdiocese of Boston. In the last ten years alone, the Archdiocese has settled 70 different child abuse cases. Consider how many people worked with those 70. Consider how many hands any piece of official paperwork moves through. Consider the normal human tendency to hang from the gossip vine. From these numbers alone, it is clear that most diocesan priests knew or had to work hard not to know of Bernard Law's child abuse policies. Yet did any of those who knew or ought to have known go to the Globe or the Herald? No. Did any protest to Bernard Law that his policies were unwise, offensive, sinful, un-Christian? I have found one who did: Bishop John D'Arcy.

The breadth of the scandal is important. In Timothy Noah's version of Bernard Law's "management tips," Law "doesn't sweep the mess under the rug. He has people to sweep messes under the rug for him." Calls for the resignation and defrocking of Bernard Law seem grossly inadequate, almost beside the point--even if he is telling the truth about how quickly and completely he forgot what his child abuse policies were. Law did not do it alone. There are his peers--Egan, Mahony, and others. There are the implementers of Law's policies--Thomas Daily (now bishop of Brooklyn), Gilbert Phinn (sometime director of clery personnel) who told pedophiles shifted to new parishes *not* to tell the pastors of their new churches about their crimes, John McCormack (now bishop of Manchester), Robert Banks (bishop of Green Bay), Alfred Hughes, William Murphy, and how many others? There are those who worked for the implementers. And then there are the 500 who knew, or ought to have known, almost all of whom seem to have been too cowardly to consider the well-being of their parishioners, or the honor of their God.

Out of 500, only one known to be righteous. At the level of institutions, this says shocking things about the processes by which diocesan priests are chosen and trained: you have to work very hard to get such a large proportion of cowardly yes-men who will not think or act for themselves.

2002-05-09 Free Pants!

2002-05-08: Did the U.S. Encourage the Failed Coup in Venezuela Because the National Security Council Is Staffed by McCarthyite Nutboys?

Did the U.S. Encourage the Failed Coup in Venezuela Because the National Security Council Is Staffed by McCarthyite Nutboys? With a lead in like that, you certainly expect the answer to be, "Yes." And the answer is, "Probably." Consider Elliott Abrams, Senior Director of the National Security Council for "Democracy, Human Rights, and International Operations" and fervent believer in the righteousness of Senator Joe McCarthy.

Back in 1986 Elliott Abrams wrote an article for National Review ("McCarthyism Reconsidered," National Review February 26, 1996, pp. 57-60) in which he advanced five theses that I still cannot believe the National Review editors allowed to see the light of day:

(1) The key issue in assessing Joe McCarthy was whether the State Department was running its security policy poorly. Senator McCarthy did not need to demonstrate that there were spies in the State Department. Instead, all he needed to do was to show that there was *some* evidence the State Department had overlooked that an employee was a security or loyalty risk.

(2) In most of his cases McCarthy adduced persuasive evidence; the State Department's efforts stood condemned; and the screams of 'Red Scare' were efforts to occlude the truth.

(3) That in spite of some blunders, McCarthy's record for truthfulness was, given his metier, extremely good. After all, McCarthy was not in physics but in politics, a business that "permitted a certain latitude."

(4) Buckley and Bozell's book, McCarthy and His Enemies deserves special praise for standing up to the liberal anti-McCarthyist hysteria of the 1950s. It challenged the liberals' claim to the moral high ground. Buckley and Bozell rightly claimed that the essence of McCarthyism was to defend liberty from Communism.

(5) McCarthy fell not because he was a bad man working for a bad cause but because he was smeared by the iron triangle of liberal journalists, liberal bureaucrats, and liberal politicians.

If this is the kind of person who staffs the Bush National Security Council, is there any hope that this administration will have a foreign policy true to America? It seems very unlikely...