The hype of corporate corruption - and its roots
You know the mood has changed when you can read an opinion article in the Wall Street Journal and its main focus is what the author calls "White-Collar, Big-Money Psychopaths." The current, burgeoning scandal of corporate corruption lends itself to this kind of analysis. Evil plutocrats? We got 'em. There's Kenneth Lay, pretending to create a brand new company trading energy, while secretly constructing a financial scam that robbed millions of people by fiddling the books (and bribing journalists to keep quiet). There's Samuel Waksal, ImClone's financial genius and a rising star of the once-beloved biotech field. He's caught trying to dump $5 million worth of shares before government drug regulators announced bad news on one of his most promising potential products. There's Dennis Kozlowski, spectacularly rich, yet still trying to avoid sales taxes on $1 million worth of art. Now there's WorldCom's Bernie Ebbers, whose company somehow mistook current expenditure for capital investment - all to help inflate earnings reports and push up stock prices. And most delicious of all, there's Martha Stewart, the ubiquitous, manic home decoration guru, who's now enduring the kind of tabloid treatment once reserved for mob bosses. (Actually, the tabs have tended to be far kinder to mafiosi). Her sin? Dumping ImClone stocks allegedly after an insider tip from her friend Samuel Waksal. They're all connected - these corporate crooks. Or so it seems to the populist imagination.
People are lapping all of this up - and why wouldn't they? For economic leftists, it's a very belated opportunity to bash a twenty-year boom that lifted millions out of poverty and created the wealth to win the Cold War and revolutionize information technology. For Europeans, the word "yankenfreude" springs to mind. After a decade or more of watching the American economic model extolled as the unquestioned paradigm for success, the Euros and the Japanese, not to mention the Latin Americans, can barely conceal their glee at the fall of once-mighty Wall Street. And indeed the fall has been grim. The first half of 2002 was the worst for Wall Street since 1970. The Standard and Poors 500 index, regarded as the most reliable of the major indexes for the market as a whole, ended down 14 percent last Friday from the beginning of the year. That follows a 10 percent loss in 2000 and a 13 percent loss in 2001. The Dow has done better - down a mere 8 percent in six months. But when you consider that this slide has occurred during a recovery, the mood swing is unmistakable.
That's why you can expect further breathless headlines in the European press, pouncing on every new revelation of inflated profits as evidence that the American economic miracle of the last decade was a sham. In fact, things have become so dire that even Al Gore has emerged from hibernation to comment. "You see now what it means to have an administration that's committed to fighting and working on behalf of the powerful, and letting the people of this country get the short end of the stick," he inveighed to supporters at a Manhattan fundraiser last week. To cap it off, Gore attempted to connect the business scandals to the Bush administration. Private corporations, he claimed, "are not telling the truth about their future liabilities so they can shovel money out to executives at the top. That is exactly what the Bush-Cheney tax plan will do. They are misleading the country about the extent of the liabilities they are putting on us ... on you."
There is, of course, a seam of truth in some of this. We're learning now that American accounting practices were seriously awry in the last part of the last century - and the stock market won't rise until the worst of the news has come out into the open. Several high-profile companies - most of which, revealingly, were in the once white-hot technology, telecom, or biotech fields - have been found to have engaged in "creative accounting" worthy of Jackson Pollock. At a time when executive salaries were also going through the roof, and when much of those salaries were related to stock options, and stock options were related to balance-sheets, the attempt to squeeze ever more money out of what was already a fantastically prosperous period seems retrospectively obscene. Some of these abuses are, in president Bush's words, "outrageous." And the mood change in America will lead to far greater scrutiny of the balance sheets companies rely upon as the benchmark of their success. In this sense, change surely is in the air.
But in a deeper sense, the hype can easily get overblown. To be sure, it's not yet clear if the pattern of shady accounting extends beyond the frothier companies of the 1990s to more traditional "old economy" companies. But as of now, the phenomenon is still a tiny fraction of American companies. And it's far more persuasively explained as a classic function of a bubble economy than as a deep structural problem in the American economy. This is a hangover, not a depression. And the long-term gains of the twenty-year bonanza that preceded it far outweigh the temporary headaches of the after-effects.
It's a classic result of human nature, which is why, perhaps, it has such appeal as a story. As the American boom lasted beyond any previous limits, hubris took over. Rather than marveling at the wealth that had already been created, businessmen judged themselves by their latest deal and by the gains and success of their rivals. Small risks turned out to be no big deal as the money kept coming in and growth kept accelerating. So companies took bigger risks, assuming that continued growth rates would cover up any downside. This confidence that nothing could ever go wrong allowed companies to paper over worrying losses and failed investments, in the hope that by the end of next year's profit bonanza, the details would be lost in the wash. In the long run, of course, a reckoning was inevitable. And so, in classic bubble fashion, the end of the boom became a hyper-boom, and the riskiest risked more, and the bigger the risk, the harder they fell. This is the pattern of every single boom and bubble since Tulip mania. America's new economy wasn't immune to the laws of economic gravity and basic arithmetic.
At the same time, the coming back to earth has hardly been catastrophic. In many bubbles, the burst has been sudden and intense. This one has been drawn out over three years, allowing plenty of people to get out of the market in orderly fashion. In many bubbles, an intense recession has followed. In fin-de-siecle America, the end of the boom was followed by one of the mildest recessions in history, and by some reckonings, no recession at all. The boom wasn't followed by a bust, but by a slow working out of unsustainable market values and corrupt business practices. Moreover, the same week that the bad corporate news reached a media frenzy, the government put out new statistics revising first quarter growth upward from 5.6 percent to a red-hot 6.1 percent. Personal consumer spending rose 3.3 percent in the same quarter, hardly presaging a collapse in demand. The recessionary decline in corporate spending and investment slowed as well. Even when you subtract the boost to growth rates from a reduction in inventories, the U.S. economy is still growing at a respectable 2.5 to 3 percent pace, with low inflation. And the productivity gains of the mid to late 1990s, though not as profound as some once believed, have not gone away and are, in fact, on current measures, accelerating. Besides, the big decline in the stock market happened eighteen months ago.. The chances of a huge collapse from today's modest levels look slim.
This helps explain why, European schadenfreude notwithstanding, this economic adjustment hasn't been a huge cultural event in the United States. It may yet happen, but there is no discernible public mood that an entire culture has changed, that capitalism has been discredited, or that some vast new populist move to re-regulate business and finance should now follow. Some of this is because of the long, drawn-out nature of the shake-out. When stocks drop 10 percent a year after two decades of growing at twice their historical rate, it doesn't have the same impact as, say, the crash of 1929 or 1987. And when unemployment remains relatively low and property prices keep rising, it seems even less traumatic. Some of this cultural insignificance, however, is also obviously a function of September 11. That shattering psychological event is still the dominant feature of the American mood. Compared with its epochal impact, corporate corruption and stock market decline seem more like perennial features of human nature than some deep warning that things are deeply awry in the most successful economy on earth.
Moreover, what we're seeing now is less a portent of the future than a retroactive snapshot of what was going on a few years ago. From Enron to Andersen to Tyco, these were Clinton era abuses, in some cases exposed by the Bush era Securities and Exchange Commission. The same goes for Xerox and WorldCom. If these abuses had occurred as the first stock meltdown had been occurring, they might have been able to define an era. But now, in a different, more sober age, they seem like symptoms of a period already past. In some ways, they were deeply consonant with Bill Clinton's cultural ethos. When the president of the United States acted as if the only ethical criterion that mattered was what he could get away with, it's not entirely surprising that this attitude seeped outward into the general zeitgeist. I'm not saying Clinton was responsible for this corporate corruption - just that his administration was responsible for policing it and for setting the moral tone of the country.. And the boom began to spiral out of control at exactly the time that Clinton was fighting impeachment and desperately needed economic exuberance to insulate him from potential political suicide. No-one in the White House had an incentive to poop the party then. So although the Democrats have done much to associate George W. Bush with his old friend Kenneth Lay, Lay's cultural resonance is far more complicated. Perhaps that's why it's hard to think of this current spate of scandal as something new and significant, as opposed to old and predictable.
It's also true that Clinton's association with the boom years - and the way in which they clearly helped many middle class Americans - has deflected a coherent left-wing attack on the legacy of the 1990s. After the crash of 1987, the Democrats and liberals made every effort to portray the 1980s as a decade of greed, fomented by selfish Republicans. But that is politically much harder to do with the 1990s. It was an era when the Democrats finally managed to persuade Americans that they could manage the economy. Today, the Democrats don't have any deep incentive to alter that perception. That's why they want to link the current corporate excess with a Republican administration - a strategy undermined solely by the facts. Equally, the Republicans are not exactly eager to elevate corporate corruption in the national consciousness. The president will give a strong speech soon, we're told, coming out strongly against these shenanigans. And so he should. Republicans should be even tougher on those who abuse and undermine the capitalist system than Democrats. But it's still a political loser for him. The Republican party still is in the public mind a pro-business party. When business stinks, the aroma spreads.
So hold off on the 1930s analogies. Don't look skywards for falling CEOs. There are surely a large number of executives and board members worried about when the next shoe will fall, and whether it will be on their own heads. And many of them should suffer - in jail if necessary. But corner-cutting at the height of speculative bubbles is not exactly news, and most sensible investors understand that. The danger now is that foreign schadenfreude and a populist press will deepen pessimism beyond that which is rational. In that case, predictions of doom could become self-fulfilling. But it's worth remembering that such excessive gloom and populism is as irrational as the hubristic mania at the height of the last boom. It may be emotionally satisfying. But it is not related to the reality of the enormous prosperity the last twenty years brought - or the even greater riches that still lie tantalizingly ahead.
June 30, 2002, The Sunday Times of London
copyright © 2002 Andrew Sullivan