Enron's Bastard Children: Oh, what legislation you have spawned!

As a political scandal, Enron has fizzled out. Democrats know that the story is not going to dominate the midterm elections and are searching for other clubs with which to hit the Bush administration. So the scandal won't hurt Republicans. It could still, however, damage the economy and Americans' liberties.

That's because Enron has inspired, or is being used to justify, quite a few bills in Congress. The near-universal assumption in Washington has been that the Enron debacle proves that policy changes are necessary. While some changes might indeed be worthwhile, let's not forget that the system has actually worked pretty well. The market detected that the company was cooking the books and drove it to bankruptcy, and then the media and government came in to administer the requisite public censure and prosecution. Some employees and investors lost their shirts, which is sad, but such things happen all the time.

Could a system be designed that would prevent any company from ever cooking its books for any length of time? It's hard to see how, at least at a reasonable cost. Even under the wisest policies, we are occasionally going to have some Enrons -- especially in the late stages of booms, when lenders and investors have grown careless. Getting burned by Enrons will then make everyone more cautious.

Few in Congress think this way, of course. And there has been no interest in policies that might actually improve corporate governance, like ending the tax code's bias against dividends, which has weakened their ability to serve as a signal that a company's earnings are real.

The bills that are being considered have three things in common. First, they are presented as "reforms" that would "prevent future Enrons." Second, they are in fact only tangentially related to Enron's actual abuses. Third, they are, on the merits, bad ideas.

Already, Enron hysteria has led to the passage of one regulatory bill: the McCain-Feingold campaign-finance "reform." Although legislators constantly invoked the alleged "lessons of Enron" during the debate over the bill, it would have done nothing to prevent Enron. It wasn't political favors that made Enron a success. (Anyway, McCain-Feingold would have allowed Enron executives to donate more money to politicians' campaigns, since the law raises the limits on individual contributions.)

Political outrage over Enron has thus inspired a law that, among other things, makes it much harder for angry citizens to run campaign ads complaining about a politician's ties to the company. If that makes sense to you, you will be pleased to learn that Congress is now turning its attention to three other areas that it deems in need of reform: employee pensions, stock options, and the accounting industry.

Pensions. The public was sympathetic to Enron employees whose 401(k) plans, full of the company's stock, became worthless when the stock did. That sympathy was heightened by misleading media coverage that exaggerated the employees' losses and underestimated the extent to which they were responsible for their own travails.

Realizing that the public's concerns are misplaced, President Bush has offered proposals that address the concerns without doing much harm. For example, the Bush proposal would prohibit executives from selling their company's stocks during periods when regular employees are not allowed to do so.

Many Democrats want to go much further. Sens. Boxer and Corzine would mandate that company stock make up no more than 20 percent of employees' 401(k) accounts. In their rhetoric, employees across the land are being forced or fooled into owning too much company stock, and they, the legislators, are giving them more options. Other Democrats want to reconsider the whole shift to 401(k) plans over the last generation.

In reality, the market has been responding on its own to employees' desires for diversified portfolios. The percentage of plans that even allow the purchase of company stock has shrunk. When employees do hold company stock, it's usually by choice. If Microsoft employees had been prohibited from owning much of their company's stock, Sens. Boxer and Corzine would no doubt be holding hearings demanding to know why Bill Gates wasn't sharing the wealth.

Boxer argues that the government is justified in overriding the decisions of employers (and employees) because 401(k)s are a kind of government program to begin with -- a "tax subsidy." That's true only if the multiple taxation of savings and investment is accepted as the normal rule and any federal decision to tax some savings only once is a generous gift from the government. Nice to know where she's coming from.

Stock options. Supposedly, one of the ways Enron cooked the books was by hiding the cost of the stock options it gave out. Stock options give people the right to buy shares of the company at today's price (or some other set price) at some point in the future. The idea was that an executive who had stock options would have an incentive to make the company's stock rise.