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Jewish World Review July 12, 2002/ 3 Menachem-Av, 5762

Lawrence Kudlow

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Consumer Reports

A class above the corruption | In front of a New York audience on Tuesday, President Bush unveiled a revised plan to counter corporate wrongdoing and accounting fraud, saying, "There can be no capitalism without conscience, no wealth without character." Adam Smith, the father of free-market economics, couldn't have said it better.

Smith always argued that smooth-functioning markets require ethical behavior at their center. From Day One of his presidency, Bush has applied this rule even more broadly, emphasizing the need for ethical clarity and moral certitude in all areas of American life. He has successfully applied the rule of ethics to the war on terror, and now he is transferring the very same principle to root out corporate corruption.

From the election campaign to today, poll after poll shows that the public believes Bush is a leader with strong character and unshakable moral principles. Following the blowups of WorldCom, Enron and Tyco -- and many other rotten apples -- Bush's honest outrage has been heartfelt, and not political.

It has also shone above the political carping of Tom Daschle, Al Gore, Richard Gephardt and other national Democrats who would locate the source of the contagious virus of accounting fraud and corporate corruption within the Bush administration. Theirs is a political, reckless and silly approach to a serious situation. The bad-business bug gained strength and spread well before George W. Bush became president. And today, it is a grave problem that requires sober solutions.

Serious Democrats, such as Banking Committee head Paul Sarbanes and Investigations Subcommittee chairman Carl Levin, have taken a completely different tack from the business-as-usual partisan politics of the Daschle gang.

Sarbanes has crafted a significant proposal to set up an independent accounting-standards board -- one that will end conflict of interests between the auditing and consulting functions, properly score stock options, create new pressure for independent boards of directors, and legislate tough legal sanctions on executives, bankers, auditors, accountants and others who violate the new standards.

The accounting system desperately needs a fix -- it is even more incoherent than the dreaded tax code. A new accounting-standards board should come under the aegis of the SEC. Along with proposals from the New York Stock Exchange to create truly independent boards of directors, this action will promote honest accounting and shareholder-based corporate governance.

Meanwhile, Levin has just as seriously proposed giving the SEC, the federal government's principal accounting overseer, the right to levy tough fines on corporate evildoers without having to go to court first. Suburban liberals like Sarbanes and Levin, it seems, have suddenly become conservative lawmakers who will "move corporate accounting out of the shadows," as Bush rightly put it, and protect the basic workings of our wealth-creating capitalist system.

Bush, in tune with these focused Democrats, has proposed a doubling of the maximum prison term for mail- and wire-fraud statutes from five to 10 years. This severe jail-time penalty will greatly concentrate the executive mind. And so will Bush's proposal that fraudulently earned bonuses and compensation must be returned; and so will his request that corporate officers and directors who engage in serious misconduct be barred from again sitting in corporate-leadership positions. More, if the Bush corporate doctrine moves through Congress, top executives will now have to certify their financial statements with their own signatures. False reporting could lead to jail.

It seems that our more serious men in Washington want to bolster the rule of law by strengthening the incentive to choose right from wrong. Incentives matter. If you tax something more, you get less of it. If you tax something less, you get more of it. A 10-year jail term for rotten corporate apples -- or their accountants -- is a huge legal tax on wrongful actions.

Of course, standing behind higher ethical standards in business is the great American investor class. Covering over 50 percent of American households and more than 80 million people, this group is positively changing financial practices and the political culture. These shareholders have lost enormous wealth, in part from dishonest accounting and egocentric corporate misdeeds. And they're furious.

Financial markets have been democratized in the past 15 years with the rise of this investor class. They have already voted to depress the stock market as a signal of their indignation, and they're now prepared to vote this November against the silly politicians who fail to realize the enormity of the current problem. Consider this: Slightly more than 60 percent of the investor class voted in the last election. This may be the most powerful lobby in America.

In no uncertain terms, this new political movement is forcing Washington to renew the rule of law, strengthen accounting and financial standards across the board, and restore a proper incentive system that will return Adam Smith's ethical epicenter to the greatest wealth-creating machine in all of history. The days of egocentric and corrupt Soviet-style corporatism have come to an end. In the stock market, moral amnesia is dead.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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