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 s
the unraveling of the Enron debacle continues on Capitol Hill, we
will hear much about bamboozled investors, manipulative managers,
and the excesses of the free market. Yet focusing only on corporate
malfeasance may lead us to miss the biggest failure of all: The
nullification of our Constitution's constraints of congressional
authority, which, believe it or not, helped set the stage for the
Enron disaster.
Article I of
the Constitution says, "all legislative power herein granted
shall be vested in the Congress of the United States." It nowhere
permits Congress to delegate its lawmaking authority to the executive
branch or anyone else. Congress makes laws, the executive branch
carries them out. Having Congress make the laws and face the voters
in the next election assures democratic responsibility in American
politics. Having federal agencies make laws violates the separation
of powers and threatens tyranny.
For most of
American history, the Supreme Court upheld the original constitutional
design and rejected congressional efforts to delegate legislative
authority to bureaucrats. Early in the New Deal, the Court struck
down the National Industrial Recovery Act (NIRA) as an unconstitutional
delegation of authority to the Roosevelt administration.
Justice Benjamin
Cardozo called the NIRA "delegation running riot." Shortly
thereafter, Roosevelt revealed his court-packing plan. Roosevelt's
threat worked. For the next 40 years, the Court did not use the
non-delegation doctrine to strike down business regulation. The
federal bureaucracy grew in size and power.
Enron shows
the bitter consequences of abrogating the Constitution. Let's look
closely at one part of the Enron story.
In the 1990s,
Enron was rapidly expanding, especially overseas. The managers of
Enron wanted to set up partnerships and to shift debt off its books
into foreign operations. (When these partnerships and the hidden
debts came to light late last year, Enron's share price collapsed
and the company sought bankruptcy protection.) Their efforts to
set up the partnerships, however, ran up against certain parts of
the Investment Company Act of 1940.
In 1996 Enron
tried to get Congress to grant it an exemption from the 1940 law.
Congress refused to do so. Enron essentially lost a political struggle
in Congress with the Investment Company Institute, the main trade
association of the mutual-fund industry.
If the non-delegation
part of the American Constitution still restrained the federal government,
Enron's loss in Congress would have been the end of the story. There
would have been no exemption for Enron from the Investment Company
Act. Without the exemption, one of Enron's lawyers told the New
York Times, there would have been no partnerships and no debt
off the books in the foreign operations.
But the story
did not end with Congress. Enron was determined to get the exemption
from the Investment Company Act. They learned that the Securities
and Exchange Commission, an executive branch agency, had the right
to grant an exemption from the Act. Of course, the SEC could grant
that exemption because Congress had delegated such authority to
the agency.
Enron hired
a former director of the investment-management division of the SEC
to lobby the agency for the exemption. In 1997, the agency granted
the exemption for Enron's foreign operations. He only needed five
paragraphs to override the will of Congress. From a constitutional
perspective, an SEC division head, whom no one elected, overruled
Congress, who must stand for election by the people.
I do not pretend
to know whether granting Enron an exemption from the Investment
Company Act of 1940 seemed like good public policy in 1997. Appearances
notwithstanding, the exemption may even be justified despite what
we think we know in 2002. The passage of time and smart economists
will ultimately decide that question. Let's leave aside the policy
substance and focus on the policy process regarding Enron.
The way Enron
obtained its exemption from the Investment Company Act contravenes
both our Constitution and basic democratic principles. One good
response to the Enron disaster would for the Supreme Court to aggressively
apply the non-delegation doctrine to the federal bureaucracy. Another
step forward would be for voters to hold Congress accountable for
letting bureaucrats make law. The Enron debacle should be all the
testimony we need of the dangers of government by bureaucrats instead
of by the people.
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