The Republic of Virtue. F. H. Buckley
of the political fence have condemned them, yet they also find beneficiaries and therefore defenders on both sides, too.
Objective measures of corruption are hard to come by, and generally unreliable. But a subjective measurement is readily available and quite useful. Transparency International, a highly regarded German NGO, produces a Corruption Perceptions Index (CPI) every year, rating countries on the basis of reporting by respected observers, including businessmen and experts from the country itself.22 People are asked such questions as:
• Are misbehaving public officeholders prosecuted or penalized?
• Are there effective public auditors?
• Is corruption a problem in the court system? The tax bureau? Inspection bodies?
• Is the executive accountable to oversight institutions?
• Has the government been captured by special interests?
The responses to these questions are used to score each country on a scale of 0 to 100, with higher scores meaning less corruption. The CPI has been criticized for its subjectivity,23 but any ranking system of this nature must inevitably rely on judgment calls, and the CPI is in fact the most widely followed measure of public corruption.
How does the United States do? In 2014 it scored 74 out of 100, giving it a rank of 17th place behind higher-scoring countries.
As Table 1 shows, Denmark beats us hands down on government integrity, with a score of 92.
TABLE 1
Transparency International’s Corruption Perceptions Index 2014
Frank Fukuyama has said that “getting to Denmark” should be the goal of public policy.24 That might seem an impossible dream, though, since Denmark is much more ethnically homogeneous, and societies where people are more alike have been shown to be generally more trusting25 and less corrupt.26 But we couldn’t turn America into Denmark, and we wouldn’t even want to do so. As a self-styled “nation of immigrants,” America prides itself on its diversity, and we’re not about to change that. Moreover, some countries that beat us in the CPI rankings are far more welcoming to immigrants. While 14 percent of American residents (legal and undocumented) are foreign-born, the figure is 20 percent in Canada and 26 percent in Australia, the true nation of immigrants. Canada scores 81 on the CPI, and Australia comes in at 80. Evidently, ethnic diversity isn’t an excuse to throw up our hands over corruption.
Corruption is a silent killer of the U.S. economy, and it’s possible to put a number on this. The dots in Figure 1 represent 107 countries, with their 2014 CPI score on the horizontal axis and their 2015 per capita gross domestic product on the vertical axis.27 Through a standard econometric estimation technique described in Appendix A, the diagonal straight line estimates how corruption affects a country’s wealth (per capita gross domestic product). From corrupt and poor Afghanistan up to honest and rich Luxembourg and Singapore, less corruption means a higher GDP.
The model tells us that if America’s CPI score were to rise to Canada’s score of 81, its per capita GDP would increase from $54,629 to $59,914. Were the CPI score to increase, per impossibilia, to the level of Denmark at 92, per capita GDP would rise to $68,219. For America as a whole, that would amount to an 18 percent or $3.2 trillion increase in the country’s wealth. Think of that missing wealth as the tax that corrupt politicians, regulators and judges impose on all Americans.
The results shown in Figure 1 are consistent with the many cross-country, empirical studies on how public corruption impoverishes people.28 Within the United States as well, there’s a penalty for living in corrupt states. Measuring differences in corruption state by state is tricky: looking at the numbers of state prosecutions of government officials might not be very helpful, since fewer prosecutions could mean either that officials are more honest or that state prosecutors are themselves corrupt. The way around this problem is to look at prosecutions brought by the federal government, since the Justice Department can be presumed to employ uniform standards across the country. With federal prosecutions as a proxy for levels of corruption, it has been shown that corrupt states have significantly lower economic growth.29 Another study found that corrupt states have lower bond ratings, which means they pay higher interest rates on their public debt, and these costs are passed on to taxpayers in those states.30 As a matter of common observation, Louisiana and Mississippi (first and second, respectively, in federal corruption prosecutions per capita) aren’t exactly economic dynamos.
FIGURE 1
More Corruption, More Poverty
Source: GDP per capita, PPP International Monetary Fund World Economic Outlook (April 2015); Transparency International Corruption Perceptions Index 2014.
It’s easy to see how public corruption can impose costs on a country’s or state’s economy. The fraudulent or criminally irresponsible firm that escapes prosecution harms everyone touched by its actions. The honest and efficient firm might fail in the market, while the corrupt, inefficient one flourishes. Even if he plays by the rules, the crony capitalist who milks the system will draw resources from better firms that fail to invest in politics. By schmoozing with Obama and his green-energy appointees, Solyndra was able to score a $570 million loan guarantee from the federal government. The company manufactured solar panels and lost money on every panel it sold. It was like the old garment industry joke where the boss’s son wonders how they stay afloat when they lose money on every suit they sell. “We make it up on volume,” says the boss. For Solyndra, making it up on volume meant passing the loss on to the American taxpayer.
If Transparency International isn’t terribly impressed with American integrity, the World Justice Project (WJP) has no better opinion of us. The WJP, cofounded by a former head of the American Bar Association, collects data from the general public and from legal professionals to rank countries according to their adherence to the rule of law.31 Among the factors considered are equality before the law, an efficient and honest judicial system, and the absence of corruption. Russia came in at 75th place out of 102 countries on the Rule of Law Index in 2015, way behind former communist countries that invested more heavily in the rule of law: Estonia (15), the Czech Republic (20), and Poland (21). What about America? It’s not Russia, not by a long shot, but it still doesn’t rank all that high, coming in at number 19. On the particular measure of an absence of corruption, the United States ranks 20th.
Until fairly recently, the rule of law wasn’t on economists’ radar screens. To explain why some countries were wealthy and some not, they would refer to natural endowments, such as valuable minerals or oil; or point to a country’s infrastructure or to human capital investments, such as those provided by a public education system; or note differences in culture or religion. Over the last forty years, however, economists have increasingly pointed to the role of institutions, such as a legal regime that protects property rights and enforces contracts, in explaining a country’s wealth. That’s the difference between North Korea and South Korea, one country desperately poor and the other rich, but alike in all respects except for their political and legal institutions.32
A corrupt country might be rich