Dereg Run Riot
Enron and the Constitution.

By John Samples, director of the Center for Representative Government at the Cato Institute.
February 28, 2002 9:10 a.m.

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.