Corporate scandals are again in the news. HealthSouth, Freddie Mac, ImClone’s boss off to jail and Martha Stewart sitting at the prison gate. What’s going on?
Media pundits and Democratic presidential candidates are quick to blame the current administration: “The worst unemployment since the great depression,” they crow. Funny though … they all seem to have jobs writing and “speechifying” about it. (The unemployment rate was twice this high when I found my first corporate job.) It’s too bad these folks haven’t thought about the economy, though. Were that the case, they would probably be silent on the subject. Silence would be their best defense.
Recently, the Economist looked at corporate accounting scandals in light of some new research by Mihir Desai of the Harvard Business School (“Many Happy Returns?” May 10, 2003, p.57). The professor looked at what’s called the “tax-book gap.” That’s the difference between the profits corporations report to shareholders, and the taxes they pay the government. Fraudulent? No, the differing rules for taxes and accounting always yield a discrepancy, but the professor found that it grew at an alarming pace during the 1990s. Traditionally, this gap was almost completely explained by depreciation, employee share options, and foreign income. But by 1998, his work found that these adjustments accounted for less than half of the gap.
While the professor was not able to explain the other half of the gap, the Economist was willing to give it a try. “Perhaps the gap is due to the growing use of Enron-style rule-gaming, which creates (briefly) healthy accounting numbers but cannot get past the more prudent tax rules. If so, a growing tax-book gap may herald accounting troubles to come.”
Understatement is part of the Economist’s charm. But I sympathize with those who want to bring back the “go-go” years of the 1990s. Financial pundits promised us that the Internet was a one-way pipeline to prosperity. Stockbrokers touted the “new economy.” Economic statistics only went up. Yet beneath this apparent prosperity, there was a problem. The numbers weren’t real. It was a house of cards. The spectacular profits existed only in the minds of Arthur Andersen’s auditors, corrupt corporate executives feeding at the stock-option gravy train, unquestioning investors and “analysts” who had never witnessed a downturn. Boom skeptics received little media face time (after all, they were obviously wrong), and government happily validated the economic statistics in its monthly reports. But a funny thing happened to retirees on their way to the bank: Reality mugged them.
The left blames Bush for a sluggish economy, but in the same breath they rail against tax cuts for business and investors. Do leftists really think that an increase in (un)earned income tax credit targeted toward those scamming the system is going to create new jobs? Not outside the wine and tobacco industries. The poor don’t create jobs, they need jobs.
But then what does one expect from individuals who view government as the solution to every problem? Their language is telling: “We can’t afford tax cuts.” The left’s identity is government. The Democratic Party owns the patent on “turbo spin,” where its spokesmen actually feed off their own exhaust to generate ever more shrill and far-fetched stories, which are then amplified and broadcast by media pundits, before being re-fed to leftist spokespeople. It’s rather like the way Mad Cow disease became a threat to the cattle industry: One can only grind up dead cows (or DNC spokesmen) and feed them to the rest of the herd for so long. Eventually, you wind up with a whole herd of mad cows.
In the world of turbo spin, there are no facts, and this suits today’s media personalities, news reporters, government bureaucrats and corporate chieftains. Without facts, truth does not exist. That leaves only opposing viewpoints. Compromise becomes the order of the day – it alone can satisfy those on both sides of an issue.
But what if one side is right – and the other wrong? Facts are the only sound foundation on which to build the next economic boom. Democrats can offer no hope for the future until they acknowledge their economic sins of the past. This for them is difficult: Reality does not exist for the left. Without facts and truth, there can be no reality – only utopian daydreams, raging adolescent hormones and endless legal debates over the “real” meaning of the word “is.”
