[problem solved; all is better now!] 'Political Market' Reigns When Business Scandals Hit, Reaction Was Swift
By Steven Pearlstein Washington Post Staff Writer Wednesday, July 31, 2002; Page E01 There is nothing uniquely American about corporations that cook their books, or accountants and bankers who countenance it, or executives who use corporate treasuries as personal piggy banks. But it is probably only in the United States that a mere eight months after corporate scandal first made its way to the front pages, major corporations would be brought to their knees, rich and powerful people would face criminal charges and a president who once considered regulation a dirty word would preside proudly at a White House signing ceremony for one of most comprehensive pieces of economic regulation since the Carter administration. "For all their faults, American markets demand performance, and our political market is no different," said Adam S. Posen, a senior fellow at the Institute for International Economics. "Once problems become obvious, our pragmatic policymaking delivers results. That's why our economy cannot run too far off the rails." Posen and other analysts argue that it is the strength of this "political market" -- no less than the nation's flexible labor markets, open product markets and brutally efficient financial markets -- that helps explain why U.S. companies are so competitive and the U.S. standard of living is among the highest in the world. Consider, for example, that despite a decade of deep recession that has lowered the standard of living for its people and stripped it of its status as an economic superpower, Japan has yet to deal with the crippling bad-debt problem in its banking system that nearly every economist agrees is the necessary first step toward reviving its economy. "In Japan, the ruling party is so entrenched and so dominated by special interests that are opposed to fundamental change that the economy is paralyzed," said Martin N. Baily, also a senior fellow at the Institute for International Economics. Japanese refer to the past 10 years as the "lost decade." But for the past two years, even a popular new prime minister backed strongly by Japanese voters has been unable to clean up the banking system or push through even modest economic reforms. Because of a similar political paralysis, Argentina over the past four years has gone from being the richest country in Latin America to a state of national bankruptcy. A succession of presidents and economic ministers proposed one economic reform plan after another over the past year in the hope of winning emergency financing from the International Monetary Fund. But each plan was rejected by parliament or withdrawn after violent street protests by Argentines who have concluded that they don't trust any politician to come up with a fair and effective solution. In Europe, meanwhile, scandals involving billions of dollars siphoned from government-controlled banks and political slush funds financed with corporate cash have largely been swept under the rug. Stonewalling and political pressure have prevented prosecutors from bringing charges while parliamentary committees have shown little, if any, interest in pursuing the allegations. The press has largely distinguished itself by ignoring the scandals. "In terms of dealing with corporate corruption, the Europeans are light years behind us," said Lester Thurow, a professor of management and economics at the Massachusetts Institute of Technology. "Their scandals don't even surface." Contrast that with what has gone on here since the Enron scandal began last fall. Within months after its role in Enron Corp. was revealed, Arthur Andersen LLP, one of the world's leading accounting firms, was convicted of a felony and is melting into oblivion. The chairman of the Securities and Exchange Commission, who in his first months in office had talked of "kinder and gentler" regulation, responded to calls for his ouster with a flurry of new rulemaking and investigation that is forcing companies to review past financial statements and adopt more conservative accounting standards. And Republicans in the Bush administration and the House, who at first dismissed the idea of corporate and accounting reform legislation, by last week rushed to embrace such a plan, not because they agreed with it but because not doing so might well cost them control of both houses of Congress in the November election. In so doing, they were forced to turn aside the protests of traditional business allies who had given generously to their political campaigns. "I don't think that in other countries there would be such a powerful or such a quick response," said Elhanan Helpman, an economist at Harvard University. "The system here is much more flexible and practical, and certainly much more sensitive to political opinion." This is not to argue that the U.S. political system works perfectly -- far from it. After all, Posen noted, it took more than a decade for the United States to figure out whether and how to eliminate a huge government budget deficit. Political stalemate prevents solution of such vexing problems as failing urban public schools, a Social Security system facing insolvency, a chronically underfunded public transportation system and a health-care system that leaves tens of millions of families without insurance coverage. But, as the experience with the recent corporate scandals demonstrates, once the American public decides that a problem has become a crisis and something should be done, little can stand in its way. "When we get a head of steam up, it happens," Posen said. "I have to tell you that when all this started, I predicted that nothing would happen," said Uwe E. Reinhardt, an economist who teaches accounting and corporate governance at Princeton University. "I figured that the accountants could buy off Congress again, a few companies would get a slap on the wrist and the business community would issue some new set of best practices. "I was wrong," Reinhart said. "Now I think we're going to have 10 to 15 years of really good [corporate] governance."
