Thursday, December 8, 2016

Further Thoughts on "Systematic Corruption"

Matt Yglesias got his ideas of "systemic corruption" from this paper, which was written in 2006, well before even Trump's first candidacy in 2012 and treats the idea of "systematic corruption" as a historical relic rather than a present-day concern.  So clearly it was not written to serve any partisan agenda.

The author defines his terms as follows:
What I define as systematic corruption is both a concrete form of political behavior and an idea. In polities plagued with systematic corruption, a group of politicians deliberately create rents by limiting entry into valuable economic activities, through grants of monopoly, restrictive corporate charters, tariffs, quotas, regulations, and the like. These rents bind the interests of the recipients to the politicians who create them. The purpose is to build a coalition that can dominate the government. Manipulating the economy for political ends is systematic corruption. Systematic corruption occurs when politics corrupts economics.  
In contrast, venal corruption denotes the pursuit of private economic interests through the political process. Venal corruption occurs when economics corrupts politics.
The author goes not to say that venal corruption is simply the result of human failing.  No structure can prevent it; the only remedy is to prosecute the offenders.  Systematic corruption, by contrast, is a form of structural corruption and can be prevented with appropriate structures and institutions.  He also argues that systematic corruption will ruin an economy in a way that venal corruption cannot.

At the time this country was founded, the author argues, one of the leading sources of systematic corruption was in corporations, which were deeply suspect.  A corporation back then did not mean what it does now.  A corporation was a quasi-governmental body, created by special act of the legislature, given a licensed monopoly and a variety of privileges that differed depending on the charter.  And how did corporations persuade the legislature to charter them?  Usually by paying for the privilege.

Most notorious of the corporations of the day was the East India Company, which was run on a for-profit basis, but exercised many governmental functions (such as fielding armies) and ended up becoming the de facto government of much of India.  The Boston Tea Party was undertaken in response to the British government granting a monopoly on tea imports to the colonies to the East India Company.  Many of the American colonies started out as for-profit corporations.*  We would presumably agree that for a for-profit corporation be be running a de facto government, or a government to be operated as a for-profit corporation, is a dangerous mixing of separate functions that cannot end well.

All of this meant that at the time this country was founded, corporations were viewed with deep suspicion as repositories of legal privilege and economic distortion.  Yet there was a vast, undeveloped country and a great clamor for infrastructural development.  How was this to be done without the resort to corporations?  Ultimately, in the 1840's, states came up with an American invention to resolve the problem -- create a single incorporation act and allow anyone who wanted to incorporate to do so administratively.  At the same time, they forbade governments from investing in private corporations.  Governments wishing to build infrastructure directly must finance it with taxes, or with bonds that would ultimately be paid by taxes, approved by the voters.

This, in the authors view, resolved the problem of systematic corruption so well that Americans forgot all about it.  Certainly, venal corruption remained.  In fact, throughout the Gilded Age it became so rampant that it gave rise to the Progressive movement founded largely to fight such corruption.  The Progressives allowed both governments and corporations greater freedom in how they wished to be structured.  For local governments, this took the form of home rule and allowed the people to vary from the general form of chartered government.  For corporations, this meant moving away from a one-size-fits all administrative charter and allowing corporations to organize as they saw fit.  One such change was allowing corporations to buy stock in other corporations.  This lead to a great wave of mergers, and turned corporations into vast accumulations of private wealth that threatened to subvert democratic government.

Progressives sought to tame these monstrosities by governmental regulation.  The author points out that this would have been viewed with alarm by past generations as opening the door to systematic corruption:
In classic commonwealth political theory, increasing government regulation raised as many red flags as did special corporate charters. Regulation created the opportunity for creating rents, and rent creation created the possibility for political manipulation of the economy. One could see James I or Charles II supporting Progressive policies, not Whig commonwealthmen. If, on the other hand, political and economic competition limit rent creation and dissipation, they also make it safer for the government to regulate in positive and negative ways. Competition and entry create their own balanced equilibrium. This could only have happened if Americans came to trust their government more than they ever had in the colonial, revolutionary, or early national periods. . . . Giving the national government control over food and drugs would have seemed insane to the founding fathers, Federalist and Republican. Such regulation opened up vistas of rent creation beyond the imagination of James I or Charles II.
In the clear light of hindsight, that is a remarkable statement -- certainly a remarkable one to make as late as 2006.  Americans these days do not trust their government.  A large libertarian movement has arisen that absolutely sees the Progressive Era as a national fall from grace (and, by implication, the Gilded Age as our golden age).  And libertarians, it seems safe to say, would fully agree in the dangers of governmental regulation, and the risk that it would lead to "systematic corruption," Indeed, some would probably give such fears as a major reason for opposing any sort of economic regulation.  A common argument by libertarians is that the effect of Progressive Era health and safety regulations was to increase concentration and squeeze out the little guy because large companies could afford to comply and small companies could not.

Are they right?  Should be refrain from any sort of economic regulation because it can be used to limit entry and make economic success contingent on political connections?  I suppose I would answer that it is remarkable how many libertarians, or at least pseudo-libertarians, fear government only in its mommy functions and never give a thought to the dangers of its daddy functions, even though these are by far the more dangerous.  After all, armies can stage coups.  They have, indeed, done so on many occasions.  Should we therefore disband our army out of fear that it will stage a coup?  Somehow we and other advanced democracies have managed to have armies and never have a coup or anything close to one.  How is that possible?  The answer lies in what, for the lack of a better term, I would call the general culture.  Our army has never been tempted to stage a coup because such a thing is simply unthinkable.  Our military are trained from the very start in the importance of respecting civilian control.  Without knowing much about our military structure, it seems a reasonable assumption that it has institutional safeguards in place to detect and root out any such sign of disloyalty.  But in the end, these succeed because the general culture of our military does not allow a coup.

Every President from FDR to Nixon abused the U.S. surveillance system to spy on political rivals. Does that mean we shouldn't have a surveillance apparatus?  Here, too, reforms to set regular rules as to how it was used (mostly) put an end to such abuses.  Under Bush II and Obama our surveillance state has certainly grossly overreached and desperately needs paring back.  But it has not been abused against individual enemies the way it was from the 1930's to the 1970's.

So if we can keep the military and the intelligence agencies from being used corruptly to further partisan goals, why not the regulatory bureaucracy?

An important reason our bureaucracy is able to resist the lure of systematic corruption is something that began before the Progressive Era at the federal level and continued throughout it on the state and local level -- civil service reform.  By protecting government employees from arbitrary dismissal, the civil service was able to keep them from using the regulatory apparatus for narrowly partisan purposes.  We also have rules on procurement and bidding for private contractors, again to discourage the use of government contracts in a systematically corrupt fashion.  If libertarians and the Republican establishment care about systematic corruption (and they should), maybe they should think twice about proposals to make government employees easier to fire.  What happens the first time a government employee is fired for refusing to enforce regulations in a politicized manner? What happens when you remove an important barrier against crony capitalism?

I would further ask whether we have eliminated systematic corruption as far as the author claims.  For instance, government has at least one avenue for making economic success hinge on political connections -- procurement.  That is why there are strict rules about competitive bidding and process of selection, to ensure that the choice is not made corruptly.  At the same time government regulations -- mostly written by Democrats -- often impose labor standards on all government contractors above and beyond what general regulations require.  Is this the beginning of systematic corruption?  Yet that is only a matter of policy, not politics.  And in this case, Republicans are the worst offenders.  Under Ronald Reagan, the Department of Housing and Urban Development (HUD) became a patronage network,  with contracts going to the politically connected.  Something similar happened under Bush II.**  And now it is set to recap once again under Ben Carson.  Of course, HUD contracts make up an infinitesimal share of the US economy.  How many other contracts are vulnerable to that sort of political favoritism.  And then there was the Trump tweet about cancelling Boeing's contract to build Airforce One and suspicion that the threat may be retaliation against Boeing for criticizing Trump's policies.  Rush Limbaugh has suggested that the tweet was retaliation against Boeing for supporting the Clintons.  To supporters, this was to be applauded as a crack down on the old crony-ism.  But how hard is the subtext to read?  If that is so, then it is also a warning not to companies not to donate to my political opponents if you want to preserve your government contracts.  Systematic corruption, here we come. (Unless, of course, he was just being impulsive).

And finally, is the distinction between venal corruption and systematic corruption and clear-cut as the author claims?  Consider this article about the problems that occur when governments start to outsource what were once core functions.  Public goods are run on a for-profit basis.  For-profit garbage collection companies insist that cities create a certain quota of garbage and demand penalties for recycling programs.  Companies running toll roads impose penalties for car pooling, improvement to public road, or when governments suspend tolls for evacuation during natural disasters.  And contracts are often locked in place for decades, preventing technological innovations that would serve the public well.  In short, when government outsources core functions, it is effectively licensing monopolies that usurp governmental functions on a for-profit basis, and we are back to the East India Company.  Yet nothing in the article suggests that such contracts are given on the basis of political favoritism.  Under the article's taxonomy, this would not be systematic corruption, just really bad venal corruption.  Venal corruption on a Gilded Age scale.  And evidence, perhaps, that venal corruption, on a large enough scale, may be more dangerous than the author thinks.

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*At the same time, the author emphasizes the importance put on balanced government, with the proper harmony among the many, the few and the one.  This balance was seen as precarious, and the slightest upset in the balance might lead to corruption and ultimately the loss of liberty altogether.  Although he does not elaborate on it, this would seem to imply that there is only one right way to form a government or else it will go out of balance and be corrupted.  How this was compatible with the difference in government between England and the U.S. or between different U.S. states he does not address.
**But emphatically not under Bush I, who appointed the squeaky clean and committed Jack Kemp.

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