Monday, July 24, 2006

Legalize Bribery!

Randy“Duke”Cunningham (Why must the journalists always include the“Duke"? Would we not know him otherwise?) in jail for bribery. Tom Delay indicated for campaign-finance shenanigans. William Jefferson accused of corrupt entanglements with a Nigerian vice president. In other eras, Congressmen videotaped taking briefcases full of money from FBI agents posing as Arab sheikhs. The high-school history lessons on Boss Tweed, the spoils system, etc.

Corruption is the bane of very age in every place, analyzed by Machiavelli, the Indian author Kautilya in the Arthashastra (quite possibly the world's first management text four centuries before Christ, by Confucius, and more recently by the anti-corruption NGO Transparency International and thousands of economists. I would like to make a (very immodest) proposal that most of bribery's ills could be remedied quickly by one simple step: legalizing it.

Corruption is a problem for several reasons. First, it distorts resource use. It means that resources are artificially diverted to the firm that pays the biggest bribe rather than the firm that can create the most value. If cars are made by a firm owned by the dictator’s son, because he has monopolized access to the resources, then those resources are unavailable to start not just different car companies but perhaps companies in industries to which the country, by virtue of innate comparative advantage, is better suited.

Second, corruption causes a huge amount of resource diversion into rent-seeking rather than productive activity. If there are big prizes to be handed out by the state, then every business finds that it must devote substantial resources to getting its own prizes and fighting off prizes awarded to others at its expense. None of this is free, as a casual glance through the Washington, DC phone book, with its pages upon pages of National Pressure Group of This, National Organization for Campaign-Finance Bribery on Behalf of That, will show. More acutely, society's best and often end up stamping meaningless forms in exchange for bribes or rising up the ladder and deciding how the major prizes at the legislative level will be allocated in exchange for truly major-league bribes. Instead, of fighting over the distribution of the pie, they could be out applying their talents toward making it bigger. These problems are especially acute for the poorest countries, where the opportunity cost of such resources and talents is in relative terms the greatest.

How much does this cost? No one knows for sure, although the strong link at the nation-state level between widespread corruption and brutal poverty suggests it is high, as this chart showing the relation between the Transparency International Corruption Perceptions Index of clean governance (0-10, 10 cleanest) and per capita income suggests:

Work in the economics literature estimate the full cost of rent-seeking at anywhere from ten percent to more than 60 percent of GDP in many societies. So clearly it ain’t cheap.

The longstanding recommendation of the rent-seeking literature is to eliminate corruption by eliminating opportunities for corruption – in other words, by eliminating the special privileges generated by law that provide the chance for government employees to extract income from the producers. But that is easier said than done: how can a government whose members depend so heavily on such regulations and the bribe opportunities they generate be persuaded to repeal them? Such things occasionally happen to small degrees – the Indian government repealed some of its licensing requirements after the 1991 economic crash there – but wholesale elimination is rare. And this is surely in part because the political-competition process is hindered by the public’s lack of knowledge about what the rent-seeking raj is costing them.

And so I propose that bribery of public officials in the U.S. be legalized immediately. The only requirements are that all bribes must be publically recorded, must be paid in cash rather than in-kind (e.g., as golf trips to Scotland), and the proposed laws on which influence is sought must be recorded. Such transparency will have one enormously positive effect: it will let the public know what the efficiency cost of any proposed law or regulation is by informing them as to what various pressure groups are willing to pay to have (or avoid having) it written. If a tariff imposes $10 billion in costs on consumers, that figure will be easier to get a grip on based on what manufacturers are willing to pay to have it imposed. Such transparency will facilitate public pressure by groups typically too diffuse to pay attention (especially consumers) because of high informational costs. It will also expose officials to the pressure of shame when it comes to bribery generally, because now it is all out in the open. To the extent that corruption creates a moral crisis for society, a belief that it is ethically crippled and hence until it is fundamentally remade (perhaps violently), there will be no progress, such shame may overcome this impasse. Who knows – it might even lead to pressure for a less intrusive state to begin with.

To be sure, there are problems of implementation – the practicalities of associating a particular regulation with a particular bribe, for example. But I am confident that a government that can discern the emanations and penumbras in the Constitution is up to the task. Tell a friend.


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