The Mixed Economy Monster

by | May 13, 2002

Six months after the collapse of Enron, the left is still sputtering in violent outrage at the company, and with good reason. This display of wrath is the only way to keep people from noticing the real emotion underlying the Enron feeding frenzy: elation. The Democrats are elated that, having failed to provide actual leadership, […]

Six months after the collapse of Enron, the left is still sputtering in violent outrage at the company, and with good reason. This display of wrath is the only way to keep people from noticing the real emotion underlying the Enron feeding frenzy: elation.

The Democrats are elated that, having failed to provide actual leadership, they at least have one good smear campaign they can use against the Republicans. The leftist economic pundits are elated that, in the middle of a sea of wealth produced by capitalism, they have one example they can point to as alleged evidence of capitalism’s failure. And now California Governor Gray Davis is elated because he has someone else to blame for the power crisis he presided over.

The few lonely souls left at Enron just released internal memos describing the strategies the company used to manipulate California’s electricity trading system. A typical tactic was to buy power under price caps imposed by the state government, then resell it to a neighboring state, then sell it back to California under a different system that was exempt from price caps.

The Enron documents describe this manipulation frankly, referring to strategies with posturing tough-guy nicknames like “Death Star,” “Ricochet” and “Get Shorty” (the title of a gangster film). This is consistent with Enron’s dishonest corporate culture; one scam, an attempt to fool Wall Street analysts by building a fake trading “nerve center,” was described by its own creators as Enron’s “Potemkin village.”

But none of this is mysterious or shocking. There are dishonest people in any industry, in any country, in any culture. The question is: what enables them to take over a market and profit from dishonest tactics? Who is responsible for the perverse trading incentives that Enron exploited? The answer: the very politicians and pundits who are now screaming with carefully staged outrage.

To begin with, no amount of “manipulation” would have worked if California still had the surplus of power that it enjoyed in the early 1990s. But for the past decade, while California’s economy and power needs grew, environmentalists systematically blocked the construction of new power plants. Enron’s documents admit that it sometimes created the “appearance” of a shortage, but it was environmentalists who created the reality.

Then California supposedly deregulated its power system. How? By imposing hundred of pages of new regulations, of course. They forced the state’s utilities to sell off their power plants, banned them from making long-term contracts that could have locked in reliable supplies of power at lower prices, and instead forced the utilities to buy most of their power on a day-ahead market. California’s utilities were made utterly dependent on the day-to-day price fluctuations on power offered by independent traders like Enron.

As if this weren’t bad enough, California created a government-controlled entity, the misnamed Independent System Operator (ISO), entitled to buy power during shortages at extravagantly high prices. Producers soon realized that, by withholding power on the regular market, they could sell it at far higher prices to the ISO.

The upshot: California’s utilities were forced to buy power in a government-controlled market that encouraged producers not to sell until prices skyrocketed and the system was on the verge of a blackout.

Governor Davis didn’t create this system, but he did nothing to make it better. When power prices spiked, he decided they would go down if he simply decreed that they go down. So he imposed the price caps, which created their own set of perverse incentives.

Did Enron exploit this system? Sure. But don’t forget what kind of system they were exploiting: a system of short-sighted and irrational government controls. Enron could only loot California’s utilities because the state’s government had bound them hand and foot in a web of environmental restrictions and nonsensical “deregulation” regulations.

But isn’t this web of regulations the very system championed by every liberal, from California’s Democrats to columnists for The New York Times? Aren’t they the ones who expect the economy to keep growing while the government chokes off every source of oil and electricity, from Alaska to California? Aren’t they the ones who want a “mixed economy,” with a free market “balanced” by a host of regulations that ham-handedly manage its every move?

That is the liberals’ system, so what right do they have to complain when a company like Enron takes advantage of it? Enron is the Frankenstein monster of the mixed-economy liberals. It is time they owned up to their responsibility as its creators.

Robert Tracinski was a senior writer for the Ayn Rand Institute from 2000 to 2004. The Institute promotes the philosophy of Ayn Rand, author of Atlas Shrugged and The Fountainhead. Mr. Tracinski is editor and publisher of The Intellectual Activist and TIADaily, which offer daily news and analysis from a pro-reason, pro-individualist perspective. To receive a free 30-day trial of the TIA Daily and a FREE pdf issue of the Intellectual Activist please go to TIADaily.com and enter your email address.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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