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Jewish World Review July 9, 2002 / 29 Tamuz, 5762

Bill Steigerwald

Bill Steigerwald
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If capitalism is 'soulless' then show me something better: 10 minutes with Alan Reynolds


http://www.NewsAndOpinion.com | Alan Reynolds has seen, researched and commentated on his share of economic highs and lows in the last few decades. A former columnist for Forbes and Reason magazines, and a regular contributor to such publications as the Wall Street Journal and National Review, he is one of the original "supply side" economists who worked on Ronald Reagan's budget transition team in 1981. Now a senior fellow at the libertarian Cato Institute, he talked about the continuing spate of business scandals and the stodgy state of the economy, by phone Friday from his home near Washington, D.C.

Q: Do the current scandals at Enron, Tyco and WorldCom represent any inherent "soullessness" of capitalism, as some claim, or are they just aberrations?

A: I think you have to say they're aberrations. They're quite different. You mentioned Tyco. Tyco consists of the CEO not paying his sales tax. Whether that is a corporate sin or not, he was fired. Most of these guys were fired. Another thing they all have in common is that they are almost all in telecommunications or related to it. Even Enron got deeply in debt largely because of an excessive bet on broadband communication. So yeah, they're kind of aberrations.

Q: It seems a little hysterical, but someone also said the scope and scale of these scandals are the worst since the Great Depression.

A: That's an interesting analogy, because we always have more bankruptcies toward the end of a long boom period. What happens is that companies get too deeply in debt and business goes sour and you can't pay your bills.

You have to remember that this is not primarily just an accounting question. Changing the accounting wouldn't have prevented these companies from going bankrupt. It just would have let us know about it quicker.

The fundamental problem is, people say there shouldn't be any more Enrons. Do they mean the government should bail out failing companies? What does that mean?

A lot of companies failed in 1930 to 1933, and a lot of companies failed in the early 1990s, when we were coming out of a fairly mild recession, and certainly in the early '80s, when we were coming out of a fairly deep one.

There is a cyclical pattern to this - if by this we mean bankruptcy. If we mean cover-up, I might have to do my history on that. But I suspect that it's part of human nature to try to cover up trouble.

Q: Is the reputation of capitalism, which has improved greatly in the last 10 to 15 years, endangered by these well-publicized scandals?

A: Well, there was never any alternative to capitalism, if you mean by that private markets and pricing. If you mean, has the reputation of deregulation been tarnished, that's arguable. But it's not clear that there was any regulation or deregulation involved in these cases, other than FASB, the Financial Accounting Standards Board.

Q: What is that?

A: They basically set accounting standards, and the question - particularly with Enron - is, was what it did - namely hide its debt - OK? It may have been in accord with generally accepted accounting practices. If it was, obviously we need to change the accounting practices.

Q: Some people are calling for tougher regulation by the SEC and other agencies. Do we need that?

A: First of all, the SEC has neither the special knowledge nor the incentive to catch things before they happen. They were not early to detect the Enron problem. Fortune magazine was way ahead of them. They were not early to detect the WorldCom problem. WorldCom was way ahead of them - WorldCom is the one who revealed that.

So this faith in government regulation isn't warranted by the evidence. And, of course, every time government regulation fails, it is only natural that the politicians say we need more of it. So naturally, they are using this opportunity to expand the power and authority and scope of the SEC.

And the head of the SEC, Harvey Pitt, being under some pressure himself, is trying very hard to appear like a tough guy. But when he appears like a tough guy, it depresses the market of any stock he's talking about. And very often that causes the problem, by pushing the company into a bankruptcy, an insolvent situation.

Q: Do enough people in the media and business and politics really understand capitalism and what it is and why it works?

A: Well, first of all, we have to define our terms. If by capitalism, you mean the stock market or something of that sort, clearly you could have a capitalist economy that worked entirely on debt.

There's nothing in a market economy that necessarily requires selling shares in your company. There are plenty of capitalist enterprises that are privately owned and don't sell shares - Gallo wine. The investment firm Forstman, Little. Until recently, most of the accounting firms. Certainly, Arthur Anderson isn't a publicly traded company - thank goodness. Thank goodness, I don't own shares.

Q: Define capitalism, quickly - as if Brian Lamb on C-SPAN asked you.

A: Well, capitalism, remember, was a phrase spun by its critic, Karl Marx. What he never did is define anything other than capitalism. That is to say, socialism was just defined in utopian terms: Suppose everyone would work just as hard regardless of what he was paid.

It's stupid to assume an economy in which incentives don't matter. If you're going to start with an assumption like that, you're going to end up with a description of something we've never seen.

Was there capitalist activity in the Soviet Union at its height, when it was supposedly communist? Sure. Is there capitalist activity in communist China? Even in Cuba? To ask the question is to prove how absurd it is.

If we mean that socialism - when the government owns everything and runs everything - is being proposed as an alternative, we haven't learned anything from the collapse of the Soviet Union. And if that isn't being proposed, what is?

In other words, if somebody says this shows capitalism doesn't work, well tell me what does? The antithesis has always been an economy in which every job and every choice and every activity is under control of government officials. There's another word for that. That's dictatorship.

Q: What is capitalism's greatest virtue?

A: Freedom. That was easy. Maximizing choice and minimizing government interference with individual choice.

Q: What's the most important thing that politicians and policy makers can do now to make sure the U.S. economy stays healthy?

A: Well, economies prosper from secure property rights. Regulation makes those rights insecure; therefore, it's not a good idea, generally. Economies prosper from maximum choices, entrepreneurship, the ability to do things. You don't want to put a lot of restrictions in the way of that.

So basically, what are important are secure property rights, sound money, reasonable taxation and predictable regulation. I don't object to some changes; there might be some changes warranted.

But let's be very clear about what's going wrong and what we plan to do and why we're doing what we're doing. Just giving more power and authority to, say, a single SEC official to put Ernst & Young out of business, which the courts shot down, is not the way to go.

Q: Given the anti-business rhetoric that seems to be bubbling up, are you worried about the long-term health and vitality of our economy?

A: No, no. I have been writing on the economy for 30 years and that sort of story - the anti-business rhetoric - is very big in certain elements of the press and is very big in certain elements of academic life. But it comes and goes - and mostly goes. It has no great significance. Some people are just grouchy.

There is a constant propensity, particularly during and just after a recession, to write extreme and gloomy stories about all sorts of things. It's primarily a left-wing phenomenon. They seem to peddle bad news and gloom, when all that is really happening is we're in a cyclical downturn.

Q: Are we coming out of one now?

A: Sure.

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JWR contributor Bill Steigerwald is an associate editor and columnist at the Pittsburgh Tribune-Review. Comment by clicking here.

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02/12/02: Has Soldier of Fortune gone soft?

© 2002, Bill Steigerwald