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Archive for the ‘Corruption’ Category

Compared to international bureaucracies such as the IMF and OECD, the United Nations has very little power to impose bad policy.

But that does not mean it should be immune from criticism. There’s an anti-market ideology at the UN and I have specifically condemned the bureaucrats for sloppy and misguided work on taxes (here and here), poverty (here and here), and guns (here and here).

Needless to say, there’s also a lot of waste and corruption at the UN.

I wrote about that topic back in 2017, so let’s take a follow-up look at how our tax money is being spent.

Let’s start with a just-released report in the New York Times. Written by David Fahrenthold and , it is a depressing snapshot of how money is squandered by insiders at the bureaucracy.

At the United Nations, two officials had a problem. The little-known agency they ran found itself with an extra $61 million, and they didn’t know what to do with it. Then they met a man at a party. Now, they have $25 million less. …experienced diplomats entrusted tens of millions of dollars…to a British businessman after meeting him at the party. They also gave his daughter $3 million to produce a pop song, a video game and a website promoting awareness of environmental threats… Things did not go well. …U.N. auditors said the man’s businesses defaulted on more than $22 million in loans — all money meant to aid the developing world…diplomats and former U.N. officials say the tale also demonstrates what critics say is a serious problem with the U.N.: a culture of impunity among some top leaders, who wield huge budgets with little outside oversight. …The top official at the Office for Project Services, Grete Faremo of Norway, remains in her post.

Some of the previous scandals at the UN have involved more than money.

Kathryn Snowdon’s 2018 report in the Huffington Post is very disturbing.

Charity workers from 15 international aid organisations have been implicated in a sex-for-food scandal at refugee camps in west Africa, according to a new leaked report… The 84-page document…identified more than 40 aid organisations “whose workers are alleged to be in sexually exploitative relationships with refugee children”. …Researchers spoke to 1,500 people, and said claims against 67 people were passed to senior UNHCR officials, but…none were prosecuted.

Some readers may wonder if the UN’s failures are the result of inadequate funding.

Hardly. As explained in National Review by Brett Schaefer, the bureaucracy is adept at playing games to ensure it always has plenty of cash.

Between 1960 and 2016, there have only been two times when an initially approved U.N. regular budget was lower than the preceding budget. …the U.N. General Assembly approved a $285 million (5 percent) cut in the two-year regular UN budget for 2018-2019, U.N. watchers took notice, but cautioned that…the U.N. adjusts its two-year budget at the mid-point to account for new expenditures and expenses. …Not only did the “cut” announced by the U.S. Mission to the United Nations…disappear, but the regular budget is actually $130 million higher than the final budget for 2016-2017. …this outcome is typical. …In 2012, the Obama administration bragged that the agreed-upon budget was “the first U.N. regular budget since 1998 – and only the second in the last 50 years – that has gone down in comparison to the previous budget’s actual expense.” The 2012 budget, however, also ended up being significantly higher than the initial budget after mid-biennium additions.

Here’s a chart from the article showing overall spending on the left axis, along with the additional spending that sneaks in during the mid-point of the budget cycle.

Brett explains there is a tiny bit of good news.

…the U.N. regular budget will shift to an annual budget starting in 2020. …This change will help, but will not cure the fundamental problem.

I confess, by the way, that I have no idea if that change actually happened.

But I feel confident in predicting that the UN’s budget has gone up rather than down.

Last but not least, even Richard Haass of the Council on Foreign Relations concedes the United Nations has a dubious track record. Here are some passages from his 2020 article published by Project Syndicate.

The United Nations has fallen far short of its goals to “maintain international peace and security,” “develop friendly relations among nations’’ and “achieve international cooperation in solving international problems.” …The UN Security Council, the most important component of the UN system, has made itself largely irrelevant. …The organization’s own shortcomings haven’t helped: a spoils system that puts too many people in important positions for reasons other than competence, lack of accountability, and hypocrisy (such as when countries that ignore human rights sit on a UN body meant to uphold them).

I’ll close with the observation that I’ve met plenty of nice and sincere people when participating in programs at the United Nations.

But the understanding of economic policy at the UN is utterly abysmal. Until and unless that statist mindset is eliminated, giving more money to the bureaucracy would be rewarding the pursuit of bad policy.

P.S. Maybe international bureaucrats would have a better understanding of economic policy if they weren’t exempt from the income tax.

P.P.S. The United Nations almost surely wastes the talents of some very capable people.

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At the risk of understatement, I am not a fan of the Internal Revenue Service. But, as shown in this closing segment from a recent interview, I get especially outraged when IRS bureaucrats engage in criminal behavior and nobody cares.

This should outrage everyone that we have officials at a powerful agency illegally leaking confidential information.

My daughter’s dogs even registered their disapproval during the interview (I’m dog sitting for a few days).

We don’t know how many IRS bureaucrats were involved, and we also don’t know whether the motive was money, ideology, or partisanship.

Maybe all three.

This is very reminiscent of what happened about a dozen years ago when other IRS bureaucrats stifled Tea Party groups in order to boost President Obama’s reelection prospects.

Despicable then, and despicable now.

A few months ago, the Wall Street Journal editorialized about this latest scandal.

Democrats want to give $80 billion to the Internal Revenue Service to audit millions of Americans each year. Yet…after the progressive website ProPublica first published the secret tax information of rich Americans, the tax agency still can’t explain what happened. …IRS Commissioner Charles Rettig…promised when the leak occurred…to find out what happened, but in September he told Senators, “We do not yet have any information concerning the source.” Since then it’s been crickets. …The leak is a crime, but tracing it isn’t merely a matter of criminal enforcement. The breach highlights the general failure of the IRS to protect taxpayer data.  …As troubling is the limp response by the IRS. A separate GAO report this May found that the tax agency failed even to enforce its own authentication protocols, which would help to detect breaches when they occur. …The new money for the IRS is harmful on its own terms, but it’s all the worse when it is provided without strings to an agency that has no idea who is stealing private tax data.

Amen.

Hopefully Republicans won’t be stupid (again) and go along with big budget increases for the corrupt IRS bureaucracy.

By the way, ProPublica this morning published a new story based on their stolen data.

Written by Paul Kiel, it claims rich people pay a very low tax rate.

If your company’s stock shoots up and you grow $1 billion richer, that increase in wealth is real. …From 2014 to 2018, the 25 wealthiest Americans grew about $400 billion richer, according to Forbes. To an economist, this was income, but under tax law, it was mere vapor, irrelevant. And so this group, including the likes of Bezos, Elon Musk and Warren Buffett, paid federal income taxes of about 3.4% on the $400 billion, ProPublica reported. We called this the group’s “True Tax Rate.”

There are two points worth making after reading this nonsense.

  1. The left generally makes misleading claims about the tax rate on rich people by ignoring the fact that any dividends and capital gains they receive also are subject to the corporate income tax. The bottom line is that Warren Buffet does not pay a lower tax rate than his secretary.
  2. The new version of this claim, as illustrated by the ProPublica excerpt, is that the rich have a low tax rate because they aren’t hit with a tax when their assets increase in value. But that’s because an increase in wealth is not an increase in income, just as a decrease in wealth isn’t a loss of income.

If ProPublica wants to add a wealth tax on top of the current income tax, they should be honest and openly make that argument.

Instead, they opted to concoct and disseminate a make-believe tax rate.

The takeaway is that the IRS budget should not be increased, period. And it definitely should not be increased because that would reward criminal bureaucrats.

P.S. Don’t forget that the IRS has embraced a ludicrous claim about a $1 trillion tax gap.

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When the Center for Freedom and Prosperity released this video back in 2009, we wanted people to understand the link between big government and big corruption.

Simply stated, unethical people are naturally drawn to politics and unethical interest groups naturally seek to obtain unearned wealth (a process known as “rent seeking“).

The obvious takeaway is that making government bigger is going to mean that these unsavory groups will have even greater ability to engage in corruption.

None of this is a surprise to libertarian-oriented people. And it’s definitely not a surprise to the Washington insiders who benefit from this racket.

But it’s always a surprise when left-leaning journalistic outfits accidentally stumble on the truth. As evinced by excerpts from this story from Jonathan O’Connell and Anu Narayanswamy in the Washington Post.

President Biden’s domestic…drew unprecedented attention from Washington lobbyists and special interest groups last year. The lobbying industry had a record year in 2021, taking in $3.7 billion in revenue as companies, associations and other organizations pressed Congress and the Biden administration over trillions of dollars in new pandemic spending and rules… The jump in 2021, when lobbying spending was about 6 percent higher than 2020, came as the government’s pandemic interventions and record expenditure took center stage, including an additional $1.9 trillion in pandemic relief and a $1.2 trillion infrastructure package.

Needless to say, the explosion of lobbying is a predictable response to politicians having an additional $3 trillion-plus of other people’s money to distribute to their political supporters.

Not to mention the massive expansion of regulation and red tape, some general and some because of the pandemic.

What worries me is that this expansion will be permanent.

Thousands of companies and organizations appeared to hire lobbyists for the first time during the pandemic, as more than 3,700 companies and other groups that spent no money lobbying the government in 2019 paid lobbyists last year. ..,Among the new entrants are dozens of health-care, technology, tourism and recreation companies, including individual museums, theaters and entertainment firms. …Some of those groups may have hired lobbyists as a temporary measure initially but decided to increase their spending as the pandemic continued, said Dan Auble, an OpenSecrets senior researcher. …“I think it’s likely there are some people who came to Washington a couple of years ago and have stuck around, or industries that realized the benefits they could accrue by having an active presence in Washington.”

I’m somewhat nauseated by “the benefits they could accrue by having an active presence in Washington.”

That phrase is like thieves discussing the benefits they could accrue by having an active presence near ATMs.

But notice that I didn’t write that I was totally nauseated. That’s because lobbying is not inherently unethical. There are groups that feel compelled to hire lobbyists merely because they want to protect themselves from being hurt by high tax rates, pointless red tape, and misguided trade rules.

They simply want to be left alone.

Wouldn’t it be nice if we lived in a society where good people didn’t have to worry about predatory politicians (and a world where bad people didn’t have the ability to steal from others by using government?

P.S. Here’s a good video about how Washington gets fat and happy from corruption. And here’s an amusing video about “Kronies.”

P.P.S. I’ve been accused of corruption and I wasn’t upset. That’s because I realize I’m different than most everyone else in Washington.

P.P.P.S. One of the messages in the above video is that you can’t control corruption merely by passing more laws dealing with issues such as campaign finance.

P.P.P.P.S. At the risk of stating the obvious, corruption in Washington is a bipartisan problem.

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I’ve written columns about wonky economic concepts such as “deadweight loss” and “public goods.” Today’s topic is “rent seeking,” which is part of “public choice” and is described by Professor Alex Tabarrok of George Mason University.

To elaborate, here’s a video from Professor Michael Munger from Duke University.

The basic message of both videos is that “rent seeking” occurs when interest groups manipulate the political system to obtain undeserved riches.

And there are all sorts of examples of policies that exist solely because interest groups get politicians to tilt the playing field – including trade barriers, farm subsidies, occupational licensing, and bureaucrat salaries.

As pointed out in the videos, these rent-seeking policies reduce prosperity.

But what’s the origin of the term? In the modern era, it’s often associated with Gordon Tullock, one of the founders of public choice school of economic analysis.

But the term actually was coined a couple of hundred years ago by David Ricardo, as explained by Professor David Henderson of the Naval Postgraduate School.

Rent seeking” is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. …People are said to seek rents when they try to obtain benefits for themselves through the political arena. …But why do economists use the term “rent”? Unfortunately, there is no good reason. David Ricardo introduced the term “rent” in economics. It means the payment to a factor of production in excess of what is required to keep that factor in its present use. …What is wrong with rent seeking? Absolutely nothing. I would be rent seeking if I asked for a raise. My employer would then be free to decide if my services are worth it. Even though I am seeking rents by asking for a raise, this is not what economists mean by “rent seeking.” They use the term to describe people’s lobbying of government to give them special privileges. A much better term is “privilege seeking.”

To elaborate, there’s nothing wrong with rent seeking as defined by Ricardo.

But rent seeking is now associated with “privilege seeking,” which obviously is very unsavory.

Ben Casselman of FiveThirtyEight also wrote on rent seeking.

Imagine you run a barbershop and you learn that someone is planning to open a rival business down the street. What do you do? One option, of course, would be to compete the old-fashioned way by offering lower prices or better service. But the old-fashioned way is hard! Wouldn’t it be nice if you could keep your competitor from setting up shop in the first place? There’s evidence that a growing number of businesses in the U.S. are trying to do exactly that. And while that may be good for them, it’s bad for entrepreneurs, workers and the economy as a whole. …Economists call this kind of behavior “rent-seeking,” which is another way of saying “gaming the system to make more money than you’ve earned.” …There is evidence that rent-seeking, in various forms, is becoming more common in the U.S. economy. In a recent paper, economist Dean Baker argued that rent-seeking has driven much of the recent increase in income inequality. And while Baker is a liberal, conservatives are also concerned about rent-seeking, such as land-use restrictions that make it hard to build housing in high-priced coastal cities.

The bottom line is that politicians spend much of their time buying their way to reelection by providing undeserved goodies to various interest groups. You can call it rent seeking. You can call it corruption. Or you can call it politics.

But one obvious takeaway is that shrinking the size and scope of government is the only effective way of reducing rent seeking.

P.S. If you’re in the mood for more economic wonkiness, here are several videos that explain “Austrian economics” and two videos that explain the price system.

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Given my libertarian sensibilities, I would probably object to foreign aid programs even if they worked.

But I don’t have to deal with that potential quandary because we have ample evidence that you don’t get prosperity by giving money to politicians in poor countries.

Indeed, such policies arguably exacerbate poverty by enabling bad policies such as a bigger burden of government spending.

And when government gets bigger, that creates more opportunities for corruption (the same problem exists in developed nations).

Yet the crowd in Washington seem willfully blind to these problems.

For instance, in a column for today’s Washington Post, Treasury Secretary Janet Yellen and USAID Administrator Samantha Powers opine on the topic of global corruption and never even acknowledge that more government enables more corruption.

Around the world, in countries as varied as Russia, Venezuela and China, the wealthy and the well-connected launder their assets through complex networks of shell companies or transactions involving art, real estate and, occasionally, cryptocurrencies. …what links all corrupt acts is that they take resources from citizens, undermine public trust and — ultimately — threaten the progress of those who fight for democracy. …Autocrats use public wealth to maintain their grip on power, while in democracies, corruption rots free societies from within. …Moving forward, the U.S. government will require many U.S. and foreign companies to report their true owners to the Treasury and to update us when they change hands. We’re also working toward new reporting requirements for real estate transactions and will be enlisting other nations to address these issues. …the United States will deepen and expand support for those fighting kleptocrats and bad actors through a new anti-corruption response fund. …we’ve seen politicians win landslide victories by running on anti-corruption platforms. We want to support their reforms.

Rather than deal with the underlying problem of excessive government, Yellen and Powers focus on the symptom of politicians with stolen loot.

They specifically want readers to think politicians in the developing world won’t steal as much if there’s more red tape that makes it hard for them to invest their loot in the United States.

But since existing laws and regulations against money laundering have been an expensive failure, their proposals seem like a triumph of hope over experience.

If they really wanted to help poor people in the developing world, they would junk the current approach and instead use foreign aid as a reward for good policy (as measured by getting higher scores in the Economic Freedom of the World index).

But they are pursuing the opposite approach.

Mary Anastasia O’Grady of the Wall Street Journal is not impressed by how USAID has been leveraging foreign aid to promote bigger government.

Here are some excerpts from her column on how the bureaucracy is using its supposed anticorruption project as a tool to help the left take power in Guatemala.

Some Americans think of foreign aid as nothing more than money down the drain. If only. U.S. government spending in Latin America is being used by an activist bureaucracy to promote its leftist agenda. If it succeeds, U.S. taxpayers will end up subsidizing instability and economic misery. A U.S. Agency for International Development “anticorruption” forum last week is the latest example. Featured participants included former Guatemalan Attorney General Thelma Aldana and former Guatemalan prosecutor Juan Francisco Sandoval. Both are living in the U.S. and have warrants for their arrests for alleged corruption pending at home. …Rep. Norma Torres (D., Calif.), a champion of the Guatemalan left, was also a panelist at the USAID event, which brings us to the forum’s common denominator: a political agenda…to clear a path for Guatemala’s Jacobins. …Your tax dollars at work.

P.S. During the era of the “Washington Consensus,” there were people in the foreign aid establishment who understood that free markets and limited government were the only effective way of helping poor nations. Today, by contrast, international organizations openly push for bigger government.

This video show why groups such as the IMF and OECD are wildly wrong.

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I sometimes try to go easy on the IRS. After all, our wretched tax system is largely the fault of politicians, who have spent the past 108 years creating a punitive and corrupt set of tax laws.

But there is still plenty of IRS behavior to criticize. Most notably, the tax agency allowed itself to be weaponized by the Obama White House, using its power to persecute and harass organizations associated with the “Tea Party.”

That grotesque abuse of power largely was designed to weaken opposition to Obama’s statist agenda and make it easier for him to win re-election.

Now there’s a new IRS scandal. In hopes of advancing President Biden’s class-warfare agenda, the bureaucrats have leaked confidential taxpayer information to ProPublica, a left-wing website.

Here’s some of what that group posted.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. …ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period. We’re going to call this their true tax rate. …those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.

Since I’m a policy wonk, I’ll first point out that ProPublica created a make-believe number. We (thankfully) don’t tax wealth in the United States.

So Elon Musk’s income is completely unrelated to what happened to the value of his Tesla shares. The same is true for Jeff Bezos’ income and the value of his Amazon stock.*

And the same thing is true for the rest of us. If our IRA or 401(k) rises in value, that doesn’t mean our taxable income has increased. If our home becomes more valuable, that also doesn’t count as taxable income.

The Wall Street Journal opined on this topic today and made a similar point.

There is no evidence of illegality in the ProPublica story. …ProPublica knows this, so its story tries to invent a scandal by calculating what it calls the “true tax rate” these fellows are paying. This is a phony construct that exists nowhere in the law and compares how much the “wealth” of these individuals increased from 2014 to 2018 compared to how much income tax they paid. …what Americans pay is a tax on income, not wealth.

Some journalists don’t understand this distinction between income and wealth.

Or perhaps they do understand, but pretend otherwise because they see their role as being handmaidens of the Biden Administration.

Consider these excerpts from a column by Binyamin Appelbaum of the New York Times.

Jeff Bezos…added an estimated $99 billion in wealth between 2014 and 2018 but reported only $4.22 billion in taxable income during that period. Warren Buffett, who amassed $24.3 billion in new wealth over those years, reported $125 million in taxable income. …some of the wealthiest people in the United States essentially live under a different system of income taxation from the rest of us.

Mr. Appelbaum is wrong. The rich have a lot more assets than the rest of us, but they operate under the same rules.

If I have an asset that increases in value, that doesn’t count as taxable income. And it isn’t income. It’s merely a change in net wealth.

And the same is true if Bill Gates has an asset that increases in value.

Now that we’ve addressed the policy mistakes, let’s turn our attention to the scandal of IRS misbehavior.

The WSJ‘s editorial addresses the agency’s grotesque actions.

Less than half a year into the Biden Presidency, the Internal Revenue Service is already at the center of an abuse-of-power scandal. …ProPublica, a website whose journalism promotes progressive causes, published information from what it said are 15 years of the tax returns of Jeff Bezos, Warren Buffett and other rich Americans. …The story arrives amid the Biden Administration’s effort to pass the largest tax increase as a share of the economy since 1968. …The timing here is no coincidence, comrade. …someone leaked confidential IRS information about individuals to serve a political agenda. This is the same tax agency that pursued a vendetta against conservative nonprofit groups during the Obama Administration. Remember Lois Lerner? This is also the same IRS that Democrats now want to infuse with $80 billion more… As part of this effort, Mr. Biden wants the IRS to collect “gross inflows and outflows on all business and personal accounts from financial institutions.” Why? So the information can be leaked to ProPublica? …Congress should also not trust the IRS with any more power and money than it already has.

And Charles Cooke of National Review also weighs in on the implications of a weaponized and partisan IRS.

We cannot trust the IRS. “Oh, who cares?” you might ask. “The victims are billionaires!” And indeed, they are. But I care. For a start, they’re American citizens, and they’re entitled to the same rights — and protected by the same laws — as everyone else. …Besides, even if one wants to be entirely amoral about it, one should consider that if their information can be spilled onto the Internet, anyone’s can. …A government that is this reckless or sinister with the information of men who are lawyered to the eyeballs is unlikely to worry too much about being reckless or sinister with your information. …The IRS wields an extraordinary amount of power, and there will always be somebody somewhere who thinks that it should be used to advance their favorite political cause. Our refusal to indulge their calls is one of the many things that prevents us from descending into the caprice and chaos of your average banana republic. …Does that bother you? It should.

What’s especially disgusting is that the Biden Administration wants to reward IRS corruption with giant budget increases, bolstered by utterly fraudulent numbers.

Needless to say, that would be a terrible idea (sadly, Republicans in the past have been sympathetic to expanding the size of the tax bureaucracy).

*Financial assets such as stocks generally increase in value because of an expectation of bigger streams of income in the future (such as dividends). Those income streams are taxed (often multiple times) when (and if) they actually materialize.

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Government breeds corruption by giving sleazy people a way of obtaining unearned wealth. Politicians and special interests are the winners and workers, consumers, and taxpayers are the losers.

It’s easy to find examples. Simply look at tax policy, spending policy, regulatory policy, energy policy, industrial policy, agricultural policy, foreign policy, health policy, trade policy, drug policy, and bailout policy. Or anything else involving politicians and their cronies.

Hmmm…, I wonder if there’s a lesson to be learned from that list?

But just in case some people are slow learners, let’s consider some new scholarly research from the Federal Reserve.

The study, authored by Joonkyu Choi, Veronika Penciakova, and Felipe Saffie, explores whether companies that give cash to politicians are then rewarded with cash from taxpayers.

The American Recovery and Reinvestment Act (ARRA) was enacted in the midst of the Great Recession, and over one-fourth of the funds were channeled directly to firms with the primary goal of saving and creating jobs. These stimulus funds were sizable and valuable to firms, with the average grant awarded exceeding $500,000. With hundreds of thousands of dollars on the line, firms may have incentive to exert political influence… Are firms successful in influencing the allocation of stimulus spending? …This paper provides empirical answers… We find that firms’ campaign contributions to state politicians before the enactment of ARRA have a positive and significant impact on the probability of winning ARRA grants… We find that firms that contribute to winning candidates are 64 percent more likely to secure an ARRA grant and receive 10 percent larger grants. …The allocative distortion caused by political connections is sizable. Although only 6 percent of grant recipients contribute during local elections, they account for21 percent of total ARRA grants.

I feel like I need to take a shower after reading those results. Maybe I’m a political prude, but it galls me that politicians and interest groups have so much ability to fleece the rest of us.

And now you know what I refer to Washington as America’s “wretched hive of scum and villainy.”

The obvious takeaway from this research is that we’ll have less corruption if we have less government.

Which was my message in this video.

While I obviously like my video on the topic, I very much recommend this video interview with Andrew Ferguson.

P.S. Speaking of videos, here’s some satire about government corruption.

P.P.S. We shouldn’t be surprised that Obama’s so-called stimulus produced lots of corruption. The same was true with regards to Obamacare and green energy, which were his other main initiatives.

P.P.P.S. In the future, I’m sure we’ll see studies finding lots of corruption in Biden’s recent “stimulus” plan.

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When I write an everything-you-need-to-know column, I’m inevitably guilty of hyperbole.

All that I’m really doing is highlighting a very compelling example of how politicians make a mess of just about anything they touch.

That’s even true in the rare cases when they’re trying to enact policies I prefer.

The crux of the problem is that politicians like having some level of power and control over various sectors of the economy, for the simple public choice-driven reason that they can then extort bribes, campaign cash, and other goodies.

Which is good news for donors, crooks, and cronies, as P.J. O’Rourke wisely noted.

But it’s bad news for those of us who don’t like sleaze. Yet sleaze is almost inevitable when politicians have power to interfere with private market transactions.

Check out these excerpts from a Politico report.

In the past decade, 15 states have legalized a regulated marijuana market for adults over 21, and another 17 have legalized medical marijuana. But in their rush to limit the numbers of licensed vendors and give local municipalities control of where to locate dispensaries, they created something else: A market for local corruption. Almost all the states that legalized pot either require the approval of local officials – as in Massachusetts — or impose a statewide limit on the number of licenses, chosen by a politically appointed oversight board, or both. These practices effectively put million-dollar decisions in the hands of relatively small-time political figures – the mayors and councilors of small towns and cities, along with the friends and supporters of politicians who appoint them to boards. …They have also created a culture in which would-be cannabis entrepreneurs feel obliged to make large campaign contributions or hire politically connected lobbyists. …It’s not just local officials. Allegations of corruption have reached the state level in numerous marijuana programs, especially ones in which a small group of commissioners are charged with dispensing limited numbers of licenses.

Needless to say, what’s happening in the marijuana industry happens wherever and whenever politicians have power.

“All government contracting and licensing is subject to these kinds of forces,” said Douglas Berman, a law professor at Ohio State University who authors a blog on marijuana policy. …“There’s a lot of deal-making between businesses and localities that creates the environment of everyone working their way towards getting a piece of the action,” Berman said. Whether it’s city or county officials that need to be appeased, local control is “just another opportunity for another set of hands to be outstretched.”

The report concludes by noting that corruption can be avoided very simply. Just make sure politicians and other people in government have no power or authority.

States that have largely avoided corruption controversies either do not have license caps — like Colorado or Oklahoma — or dole out a limited number of licenses through a lottery rather than scoring the applicants by merit — like Arizona. Many entrepreneurs, particularly those who lost out on license applications, believe the government shouldn’t be in the business of picking winners and losers and should just let the free market do its job.

Amen.

I’ll conclude by noting that politicians are doing the right thing in the worst way.

I want to end the War on Drugs because it is a costly failure. It’s not that I think drug use is a good idea. But I recognize that the social harm of prohibition is greater than the social harm of legalization.

And, as a libertarian, I believe people should be free to make their own decisions (consistent with the libertarian non-aggression principle, of course), even if I happen to disapprove.

Sadly, politicians are not legalizing pot for libertarian reasons.

Instead, they see it as a way of having a new product to tax (and they’re botching that). And, as illustrated by today’s story, they see it as a way of lining their own pockets.

I’m almost tempted to say we’d be better off if marijuana was criminalized so it could be sold on the black market instead.

But the real moral of the story is that government power is a recipe corruption.

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Most readers care about economic developments and economic comparisons involving the United States.

Some readers also care about what’s happening in other major nations, such as China, Germany, Italy, France, Japan, and the United Kingdom.

Relatively few readers, by contrast, care about economic developments in nations with comparatively small economic footprints, such as Peru.

That’s understandable, but I want to cite Mary Anastasia O’Grady’s recent column in the Wall Street Journal because she focuses attention on the very important – and very unsavory – relationship between big government and corruption.

Her column is about political turmoil in Peru, but what she writes applies everywhere in the world.

…it’s hard to see how an electorate that so often votes for populism at the polls can extricate itself from the grasp of crooked politicians. The hard left’s solution, which is to rewrite the 1993 constitution and give the state a larger role in the economy, would make things worse. …Peruvians are frustrated. They have been told that by voting they can secure an honest government. But elected officials repeatedly turn out to be self-interested and corrupt. …Yet as fast as they throw the bums out and bring in new ones, more scandals arise. At the core of this dysfunction is a state with vast powers to redistribute wealth. …Even voters who say they want less corruption may find that change conflicts with their self-interest. The siren song of populism draws them to politicians who can hand out plenty of government jobs and other goodies in a world of weak institutional checks.

Amen.

I made the same point, for instance, in this 2009 video from the Center for Freedom and Prosperity. And I was focusing on the United States.

Simply stated, when politicians have more power over the allocation of a nation’s resources, the greater their incentive to abuse that power.

To be sure, it’s not a linear relationship.

A country’s political culture also matters. Some nation’s have developed very low levels of tolerance for corruption, so there’s not a strong relationship between corruption and the size of government.

As you can see from Transparency International’s Corruption Perceptions Index, the Nordic nations are among the countries that are especially good in this regard.

But nation’s from the developing world, including the perennial bottom-dweller Venezuela, tend to get poor scores.

The moral of the story is that it’s especially important to limit government (and therefore limit opportunities for corruption) in countries that don’t have high scores.

I’m including this data because Peru, unfortunately, is in the bottom half of nations.

Not a terrible score when compared to Venezuela, but weak compared to Chile.

That being said, I want to close with a dose of optimism about Peru.

Today’s final visual is a chart showing how economic freedom in the country dramatically increased starting in the mid-1980s when the “Washington Consensus” was ascendant. And, just as Prof. William Easterly found in his research, this eventually kick-started much better economic performance.

P.S. It is worrisome that Peruvian economic policy stopped improving beginning about 2005. And based on Ms. O’Grady’s column, it seems unlikely that policy will get better in the near future.

P.P.S. Chile remains (at least for now) the big economic success story of Latin America, though Panama deserves a bit of attention as well.

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Earlier this month, I reviewed some evidence and analysis about the corruption in Washington.

Today, let’s look at some tangible examples of how the political elite routinely exploit their positions to enrich themselves by pillaging taxpayers.

We could start with the obvious example of Hunter Biden, but he’s just the tip of the iceberg. I noted way back in January that several members of Joe Biden’s family have cashed in on their connection to the former Vice President.

It goes without saying that lobbyists and other special interests are funneling money to the Biden family because they expect that they’ll be rewarded with lucrative contracts and other goodies from the government. Heck, the Biden family is basically cutting out the middleman in this picture.

But this isn’t a partisan issue. Plenty of Republicans also play the same game.

A column by Larry Getlen in the New York Post describes how this racket works.

Rather than risk their careers taking bribes for potentially minuscule rewards, …today’s politicians are savvier, engaging in what he calls “corruption by proxy.” While politicians and their spouses are often subject to rigid regulations on what gifts they can accept and what sort of business they can conduct, others around them — like their friends or children have no such obstacles. So while a politician could theoretically wind up in prison for accepting $10,000 for doling out favors, establishing overseas connections that could land your children multi-million-dollar deals is harder to detect, and often legal. …This ethical looseness is endemic throughout the federal government. …it has spread like a virus through Congress, where the lines between members, their families, and lobbying groups have become indistinguishable.

Senator Mitch McConnell gets some unfavorable attention in the column, along with many other lawmakers from both parties.

And if you want even more examples, you can easily search the Internet if you want to learn about the unsavory actions of other senior officials – including Nancy Pelosi and Diane Feinstein.

The inescapable takeaway is that we have an unholy trinity of politicians, big government, and corruption.

And it’s totally bipartisan.

For instance, the Atlantic put together a very harsh assessment of the Trump Cabinet back in 2018.

Shulkin and Carson face the same problem: dubious use of taxpayer dollars in their duties as secretaries. They can console themselves knowing that they’re in good company. Interior Secretary Ryan Zinke, EPA Administrator Scott Pruitt, Treasury Secretary Steven Mnuchin have been caught in extravagant expenditures, too. Less heartening is the sixth example, Tom Price, who was unceremoniously forced out as secretary of health and human services in September 2017. There are so many cases of huge spending of taxpayer dollars by Cabinet secretaries that it’s easy to lose track of them all—or simply to become desensitized.

The list is damning (and is costing taxpayers a lot of money).

…a trip to Europe during summer of 2017. The government paid not only for Shulkin, but also for his wife, a security detail, and other staffers. Almost half of the trip was devoted to tourism, visiting castles and then the Wimbledon tennis tournament, to which the Shulkins improperly accepted tickets. …Carson’s big problem is a $31,000 dining-table set purchased for his office, which far exceeded regulations on spending for decoration. …Price was forced to resign after spending more than $1 million on travel on private and military jets. That’s the largest single figure to emerge, but only by a hair, while the type of behavior has occurred repeatedly. Documents obtained by the left-leaning watchdog group CREW suggest Mnuchin racked up nearly $1 million in his own travel, including a notorious trip to watch the eclipse at Fort Knox in Kentucky, publicized by his wife Louise Linton’s Instagram feud about it. …Interior Secretary Ryan Zinke, who took a security detail along when he went on a non-work-related two-week vacation in Greece and Turkey last year. …For still-opaque reasons, the Interior Department paid $139,000 for a door for Zinke’s office… Scott Pruitt, the EPA chief, who has spent more than $100,000 on first-class tickets, an expenditure he attributed to the need for security.

But even more damning is this sentence.

Because fiscal conservatism isn’t an organizing principle for the Trump presidency, it’s easier for Cabinet secretaries to justify big spending.

In other words, taxpayers are getting screwed because Trump has been profligate (even more of a big spender than Obama!).

And let’s not forget that the corruption is so bad that some Trump insiders have wound up in legal trouble.

But remember, this is a problem with both political parties, and it’s a near-inevitable consequence of having a bloated federal government that is collecting and redistributing trillions of dollars (and also wielding enormous regulatory power, which also can be improperly used to reward friends and punish enemies).

Let’s close by adding to our collection of politician humor. After all, if they keep ripping us off, we at least deserve a few laughs.

P.S. The silver lining to all the bad news discussed above is that the American people are aware there is a problem. According to Chapman University’s Survey of American Fears, “For the fifth year in a row the top fear of Americans is corrupt government officials. And as in the previous five years, the fear that our government is corrupt far exceeds all others we asked about. More than 3/4 of Americans said they are afraid or very afraid of corrupt governmental officials in 2019.”

P.P.S. If there was a gold medal for insider corruption, the Clintons would own it (Obama and his people were sleazy, but amateurs by comparison).

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Earlier this year, I asked “Why are there so many bad and corrupt people in government?” and suggested two possible explanations.

  1. Shallow, insecure, and power-hungry people are drawn to politics because they want to control the lives of others.
  2. Good people run for political office, but then slowly but surely get corrupted because of “public choice” incentives.

I’m sure both answers apply to some extent. But let’s consider whether one answer is more accurate in more cases?

In an article for Quillette, Professor Crispin Sartwell of Dickinson College looks at this chicken-or-egg issue of whether people are corrupted by government or corrupt people gravitate to government.

“Power corrupts,” as the saying goes, and a corollary is that, other things being equal, the more power, the more corruption. …But perhaps the explanation runs the other way: It’s not only or not even primarily that power corrupts, but that corrupt people seek power, and the most effectively corrupt are likeliest to succeed in their quest. …That is, it is likely that a political career would attract moral corner-cutters. …There may be a certain percentage of people who seek power because they want to do good, or it may be that in the back of their minds, every political leader believes that he intends to do good. But to use power to do good, you’ll have to do whatever’s necessary to get that power. You’ll likely have to compromise whatever basic moral principles (“tell the truth,” for example) you came in with. …political power is a constant temptation to hypocrisy, or just flatly demands it. And when the public persona and the private reality come apart, a human being becomes a moral disaster, a mere deception. That is a fate common among politicians.

Professor Sartwell may not have a firm answer, but one obvious conclusion is that good people will be scarce in Washington.

And it’s not just the politicians we should worry about. The whole town seems to attract dodgy people.

In a 2018 study, Professor Ryan Murphy of Southern Methodist University found that Washington has far more psychopaths than any other part of the country.

Psychopathy, one of the “dark triad” of personality characteristics predicting antisocial behavior, is an important finding in psychology relevant for all social sciences. …While a very small percentage of individuals in any given state may actually be true psychopaths, the level of psychopathy present, on average, within an aggregate population (i.e., not simply the low percentages of psychopaths) is a distinct research question. …The most extreme data point is the District of Columbia, which received a standardized score of 3.48. …The presence of psychopaths in District of Columbia is consistent with the conjecture found in Murphy (2016) that psychopaths are likely to be effective in the political sphere. …The District of Columbia is measured to be far more psychopathic than any individual state in the country, a fact that can be readily explained…by the type of person who may be drawn a literal seat of power.

Moreover, we know that the crowd in D.C. figuratively screws taxpayers, but it appears they’re also busy screwing in other ways.

Residents in Washington, D.C. have the highest rates of sexually transmitted disease, compared to 50 states, according to a recent Center for Disease Control and Prevention report. Out of the four kinds of STDs that the CDC report identified – chlamydia, gonorrhea, primary and secondary syphilis and congenital syphilis – the district scored No.1 in the first three by a large margin… For every 100,000 D.C. residents, 1,083 cases of chlamydia were reported. Alaska came in second with only 772 cases. Similarly, the district had 480 cases of gonorrhea per 100,000 population, double the rate of Mississippi, which ranked second.

Since this report was based on data in 2016, it’s possible another state has overtaken D.C.

But given Washington’s big lead, that would take a lot of risky extracurricular activity.

This tweet caught my eye because it nicely captures how the “experienced” people in Washington often may be the worst of the worst.

And we’ll close with this quote, which comes down on the side of bad people naturally gravitating to government.

P.S. If you like mocking the political class, you can read about how the buffoons in DC spend their time screwing us and wasting our money. We also have some examples of what people in MontanaLouisianaNevada, and Wyoming think about big-spending politicians. This little girl has a succinct message for our political masters, here are a couple of good images capturing the relationship between politicians and taxpayers, and here is a somewhat off-color Little Johnny joke. Speaking of risqué humor, here’s a portrayal of a politician and lobbyist interacting. Returning to G-rated material, you can read about the blind rabbit who finds a politician. And everyone enjoys political satire, as can be found in these excerpts from the always popular Dave Barry. Let’s not forgot to include this joke by doctors about the crowd in Washington. And last but not least, here’s the motivational motto of the average politician.

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Since government officials have imposed severe restrictions on economic activity, I’m sympathetic to the notion that businesses should be compensated.

But, as I warn in this CNBC interview, I have major concerns about big government and big business getting in bed together.

As is so often the case with interviews on live TV, there are many issues that didn’t get appropriate attention (either because there was too little time or because I failed to address a key point).

  • A major risk of bailouts is that politicians will insist on having a say in how companies operate. Indeed, that’s what Christian Weller was calling for in the final part of the interview. I should have pointed out the huge economic downside of having government in the boardroom.
  • There’s a rationale for short-run emergency legislation, but we should be very concerned that self-interested politicians and power-hungry bureaucracies will use the coronavirus crisis as an excuse to permanently expand their power and control over the economy’s productive sector.

P.S. I usually try to avoid making predictions (economists are lousy forecasters), but I feel confident in asserting that my friends on the left – once the coronavirus crisis has ended – will be complaining about big businesses having too much power.

I’m not against large companies, per se. But I don’t want bigger firms to gain an advantage over small companies by getting in bed with government.

If we want fair and honest competition, we need separation of business and state. No bailouts, no cronyism, no subsidies, and no favoritism.

That’s the part folks on the left don’t understand.

P.S. If you want more information on the economic damage caused by bailouts, watch this video and this video.

P.P.S. Speaking of videos, here’s some satire about the toys that politicians get for their children.

P.P.P.S. I wish this was satire, but American taxpayers are helping to underwrite cronyism in other countries.

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Back in 2014, I shared a World Bank study that measured how tax complexity facilitates more corruption by government officials.

Not that anyone should have been surprised. Complex tax codes enable politicians to extort bribes when writing the law (a problem that definitely exists in Washington) and they makes it possible for bureaucrats to extort bribes when administering the system.

Now the World Bank has a new study showing how a larger regulatory burden enables and facilitates corruption.

The two authors, Mohammad Amin and Yew Chong Soh, wanted to use better types of data to get an accurate assessment of the problem.

Business regulations often create opportunities for public officials to collect bribes… If true, this simple insight provides a practical and powerful way for deregulation to combat corruption and its many harmful effects on the economy. …Regulation is often measured by laws on the books rather than the actual regulatory burden on the firms even though it is the latter that is the primary determinant of corruption… The present paper attempts to fill this gap in the literature by using firm-level survey data on the actual corruption and regulatory burden experienced by the firms. …the public choice theory, stresses that regulation is intended to create rents to be distributed between the industry incumbents and the corrupt public officials. In some cases, the main beneficiary of regulation is the industry (regulatory capture view) while in others, it is the politicians and public officials (tollbooth view). …The present paper contributes to the…literature in several ways. …most previous studies have used perceived corruption indices…we depart from the literature by using firms’ experience with corruption instead. … for regulation, we use the actual regulatory burden experienced by the firms rather than rules on the books. This is an important departure from the literature.

For those not familiar with the term, “public choice” refers to research on the self-interested behavior of people in government.

Anyhow, prior research already showed that red tape gave politicians and bureaucrats the ability to extort money from the private economy.

…several studies analyze the possible effects of regulation on corruption. Using macro-level data for a cross-section of 85 countries in 1999, Djankov et al. (2002) look at the relationship between entry regulations and the level of corruption. …Consistent with the tollbooth view, the study finds strong evidence of higher corruption associated with heavier regulation of businesses. Using data from three worldwide firm surveys, Kaufmann and Wei (2000) confirm that when bribe-extracting bureaucrats can endogenously choose regulatory burden and delay, the effective (not just nominal) red tape and bribery can be positively correlated across firms.

The results in the new World Bank study build on the earlier research and confirm (as I noted in a video more than 10 years ago) more power for government means more corruption by government.

Our results show a large positive impact of the regulatory burden on the level of overall corruption as well as petty corruption. For the baseline specification, the overall bribery rate (bribes as percentage of firms’ annual sales) rises by about 0.03 percentage point for each percentage point increase in the regulatory burden. …The results show that irrespective of the set of controls, there is a large positive relationship between Overall Corruption and Time Tax… That is, for each percentage point increase in the regulatory burden, the overall bribe rate increases by 0.028 percentage point. Alternatively, an increase in regulatory burden from its minimum to maximum level leads to 2.8 percentage points increase in the level of overall corruption. This is a large increase given that the mean level of overall corruption equals about 1.1 percent.

By the way, “time tax” is defined as “the average of the percentage of senior management’s time spent in dealing with business regulations”

Here’s a graphic from the study for those of you who like digging into the empirical details.

P.S. The World Bank also released a study last year showing how more regulation reduces business productivity. Needless to say, that ultimately translates into lower wages for workers.

P.P.S. I’ve been asked why the World Bank seems friendlier to good policy than either the International Monetary Fund or Organization for Economic Cooperation and Development. I point out that it’s not uncommon to see quality work from the professional economists at all international bureaucracies, even the IMF and OECD. But the World Bank seems to have a higher percentage of quality research. My guess it that this is a result of its focus on poverty alleviation.

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I wrote last October about how poor nations that followed the pro-market recipe of the “Washington Consensus” in the 1980s and 1990s got good results. Johan Norberg addresses the same topic in this video.

Sadly, international organizations are infamous nowadays for the bizarre argument that developing nations should try to boost prosperity by imposing higher taxes and bigger government. I’m not joking.

I was even a credentialed participant at a conference on precisely this topic at the United Nations. It was a strange experience to be surrounded by anti-empirical people, but at least I wasn’t threatened with arrest, as happened at an OECD event.

Needless to say, these folks also think it’s a good idea to use foreign aid to finance bigger fiscal burdens in poor nations.

I’ve previously explained why this is a bad idea, at least if we care about achieving more prosperity for people. Simply stated, there’s considerable evidence that foreign aid retards economic growth by subsidizing bad policy.

Today, though, let’s focus on a different adverse consequence of aid, which is that it erodes the quality of governance.

For instance, the Economist reports on some spiked research from the World Bank, which showed that foreign aid subsidizes corruption.

Their conclusion was dispiriting. World Bank payouts to 22 aid-dependent countries during 1990-2010 were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the bank’s aid to these countries. …The…working paper…passed an exacting internal review by other researchers in November. But, according to informed sources, publication was blocked by higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.

I’m a fan of “Swiss bank accounts” and “foreign financial havens,” but I want them available for taxpayers, not politicians and government insiders.

Sadly, foreign aid helps the wrong people get rich.

Jose Nino draws the most appropriate conclusion.

In 2019, a total of $39.2 billion was spent on foreign assistance, and at a quick glance it has left a lot to be desired. …Foreign aid is not a get-rich-quick scheme for developing countries. Instead of building wealth, it comes with some not-so-pleasant consequences for the recipient nation. …governments receiving aid no longer have to be accountable to their citizens. Knowing that US taxpayers will bail them out, some governments have no incentive whatsoever to innovate or keep corruption in check. …It is the height of naivete to believe that developing countries will magically become rich via wealth transfers from First World countries. It ignores many of the institutions of freedom—private property and federalism—that enabled countries like the US to become the most prosperous societies in human history.

Some folks may think Jose’s conclusion is too sweeping.

So let’s cite some more scholarly evidence.

Three economists, including one from the World Bank, found that foreign aid undermines democracy.

In this paper we investigate the relationship between aid and political institutions. One view of this relationship suggests that aid is needed to advance democratic institutions in developing countries. …A second view holds that foreign aid could leads politicians in power to engage in rent-seeking activities in order to appropriate these resources… By doing so political institutions are damaged because they became less democratic and less representative. Our findings support the second view. Foreign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions.

Here’s a graph from the study showing the negative relationship between aid and democracy.

The bottom line is that foreign aid doesn’t work. At least not if the goal is to improve the lives of the less fortunate.

If we want to help poor people in poor nations, the only practical answer is pro-capitalism policies such as small government, rule of law, and free trade.

P.S. Bigger government also enables corruption in rich nations.

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The Department of Agriculture should be abolished. Yesterday, if possible.

It’s basically a welfare scam for politically connected farmers and it undermines the efficiency of America’s agriculture sector.

Some of the specific handouts – such as those for milk, corn, sugar, and even cranberries – are unbelievably wasteful.

But the European Union’s system of subsidies may be even worse. As reported by the New York Times, it is a toxic brew of waste, fraud, sleaze, and corruption.

…children toil for new overlords, a group of oligarchs and political patrons…a feudal system…financed and emboldened by the European Union. Every year, the 28-country bloc pays out $65 billion in farm subsidies… But across…much of Central and Eastern Europe, the bulk goes to a connected and powerful few. The prime minister of the Czech Republic collected tens of millions of dollars in subsidies just last year. Subsidies have underwritten Mafia-style land grabs in Slovakia and Bulgaria. …a subsidy system that is deliberately opaque, grossly undermines the European Union’s environmental goals and is warped by corruption and self-dealing. …The program is the biggest item in the European Union’s central budget, accounting for 40 percent of expenditures. It’s one of the largest subsidy programs in the world. …The European Union spends three times as much as the United States on farm subsidies each year, but as the system has expanded, accountability has not kept up. …Even as the European Union champions the subsidy program as an essential safety net for hardworking farmers, studies have repeatedly shown that 80 percent of the money goes to the biggest 20 percent of recipients. …It is a type of modern feudalism, where small farmers live in the shadows of huge, politically powerful interests — and European Union subsidies help finance it.

Is anyone surprised that big government leads to big corruption?

By the way, the article focused on the sleaze in Eastern Europe.

The problem, however, is not regional. Here’s a nice visual showing how there’s also plenty of graft lining pockets in Western Europe.

P.S. I imagine British politicians will concoct their own system of foolish subsidies, but the CAP handouts are another reason why voters were smart to vote for Brexit.

P.P.S. The CAP subsidies are one of many reasons why the European Union has been a net negative for national economies.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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When I wrote last month about the Green New Deal, I warned that it was cronyism on steroids.

Simply stated, the proposal gives politicians massive new powers to intervene and this would be a recipe for staggering levels of Solyndra-style corruption.

Well, the World Bank has some new scholarly research that echoes my concerns. Two economists investigated the relationship with the regulatory burden and corruption.

Empirical studies such as Meon and Sekkat (2005) and De Rosa et al. (2010) show that corruption is more damaging for economic performance at higher levels of regulation or lower levels of governance quality. …Building on the above literature, in this paper, we use firm-level survey data on 39,732 firms in 111 countries collected by the World Bank’s Enterprise Surveys between 2009 and 2017 to test the hypothesis that corruption impedes firm productivity more at higher levels of regulation. …estimate the model using sample weighted OLS (Ordinary Least Squares) regression analysis.

And what did they discover?

We find that the negative relationship between corruption and productivity is amplified at high levels of regulation. In fact, at low levels of regulation, the relationship between corruption and productivity is insignificant. …we find that a 1 percent increase in bribes that firms pay to get things done, expressed as the share of annual sales, is significantly associated with about a 0.9 percent decrease in productivity of firms at the 75th percentile value of regulation (high regulation). In contrast, at the 25th percentile value of regulation (low regulation), the corresponding change is very small and statistically insignificant, though it is still negative. …after we control for investment, skills and raw materials, the coefficients of the interaction term between corruption and regulation became much larger… This provides support for the hypothesis that corruption is more damaging for productivity at higher levels of regulation.

Lord Acton famously wrote that “power corrupts, and absolute power corrupts absolutely.”

Based on the results from the World Bank study, we can say “regulation corrupts, and added regulation corrupts additionally.”

Not very poetic, but definitely accurate.

Figure 4 from the study shows this relationship.

Seems like we need separation of business and state, not just separation of church and state.

This gives me a good excuse to recycle this video I narrated more than 10 years ago.

P.S. Five years ago, I cited a World Bank study showing that tax complexity facilitates corruption. Which means a simple and fair flat tax isn’t merely a way of achieving more prosperity, it’s also a way of draining the swamp.

The moral of the story – whether we’re looking at red tape, taxes, spending, trade, or any other issue – is that smaller government is the most effective way of reducing sleaze and corruption.

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Even though I (correctly) doubted the Trump Administration’s sincerity, I applauded proposed reductions in foreign aid back in 2017.

I very much want to reduce poverty in poor nations, of course, but the evidence is very strong that government handouts don’t do a very good job.

Moreover, we also have lots of data showing poor nations can enjoy dramatic improvements in living standards so long as they adopt good policy.

Hong Kong, Singapore, Chile, and Botswana are very good examples.

Yet some people haven’t learned this lesson. Consider the current debate over Trump’s threat to end aid to Central America if illegal immigration isn’t reduced.

A column in Fortune makes the case that handouts to Central America are necessary to reduce human smuggling.

President Donald Trump ordered the State Department to cut funding for Guatemala, Honduras, and El Salvador this weekend in retaliation for the recent influx of migrants from these nations, reversing a longstanding policy that says aid helps abate immigration. …According to Liz Schrayer, president and CEO of the U.S. Global Leadership Coalition—a nonprofit coalition of businesses and NGOs dedicated to American development and diplomacy—pulling back aid “exasperates the exact root causes that are creating the migration numbers’ increase.” …“It will only result in more children and families being forced to make the dangerous journey north to the U.S.-Mexico border,” said the five Democratic lawmakers in a statement.

A piece in the New York Times makes the same argument.

The Trump administration’s decision to cut off aid to El Salvador, Guatemala and Honduras to punish their governments for failing to curb migration is a rash response to a real policy dilemma. …it will exacerbate migration from the region without twisting Central American politicians’ arms. …The decision to cut off aid is bound to drive up migration numbers.

Ironically, the author admits that aid is ineffective.

…we shouldn’t pretend that the aid itself was doing much good… it is mostly distributed inefficiently in large blocks by foreign contractors.

Though he seems to share the naive (and presumably self-interested) arguments of international bureaucrats about the potential efficacy of aid.

Central American governments and elites have gotten away with abdicating their fiduciary, social and legal responsibilities to their citizens. They have failed to collect tax revenue and to invest in social programs and job creation that alleviate the plight of their poor.

Even some small-government conservatives seem to think that more aid would make recipient nations more prosperous and thus reduce illegal immigration.

What President Trump is doing now — cutting aid — is wrong. …As former White House Chief of Staff and SOUTHCOM Commander, General John Kelly, has noted, “If we can improve the conditions, the lot in life of Hondurans, Guatemalans, Central Americans, we can do an awful lot to protect the southwest border.” …We risk undermining our longterm national interests by cutting foreign aid. We should, instead, spend it wisely in those countries to ensure stable governments that view us as allies and work with them to root out crime, corruption, and cartels. The present policy to cut foreign aid cuts off our national nose to spite our face.

This is not an impossible prescription.

But it’s also the triumph of hope over experience.

In the real world, we have mountains of evidence that foreign aid weakens recipient economies by subsidizing corruption and larger burdens of government.

Let’s look at some analysis on this issue.

In a piece published by CapX, Matt Warner recommends less redistribution rather than more.

…the poor know how to get themselves out of poverty. They just need more opportunity to do it. The question we must ask ourselves is: to what degree are our current development aid strategies aligned with this insight? …If the intervention itself is part of the problem, what can outsiders really do to help? Today there are at least 481 research and advocacy organisations in 92 countries pushing reform agendas to provide more economic opportunity and prosperity for all. The “Doing Business” report provides a blueprint for change. Local reform organisations, supported by private philanthropy, provide the leadership to achieve it and the world’s poor will show us their own paths to prosperity if we will all just learn to get out of their way.

Writing for Barron’s, Paul Theroux notes that Africa regressed when it was showered with aid.

Africa receives roughly $50 billion in aid annually from foreign governments, and perhaps $13 billion more from private philanthropic institutions… Africa is much worse off than when I first went there 50 years ago to teach English: poorer, sicker, less educated, and more badly governed. It seems that much of the aid has made things worse. …Zambian-born economist Dambisa Moyo calls aid a “debilitating drug,” arguing that “real per-capita income [in Africa] today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades.” The Kenyan economist James Shikwati takes this same line on aid, famously telling the German magazine Der Spiegel, “For God’s sake, please stop.”

Brad Lips of the Atlas Network explains why aid often is counterproductive.

The international community has donated more than $1.8 trillion to poor countries since 2000 – but this development aid hasn’t lifted many people out of poverty. Arguably, it has made some recipient nations poorer. …the aid has bred corruption, fostered dependence and impeded reforms that deliver sustainable economic growth. …Between 1970 and 2000 – a period in which aid to Africa skyrocketed – annual gross domestic product growth per capita on the continent fell from about 2 percent to zero growth, according to a study by an economist at New York University.

A column in the U.K.-based Times is very blunt about what all this means.

…the international development secretary should have abolished her department as soon as she was appointed to it… We kid ourselves that this aid works, to salve our consciences about being better off. But as we know, the money benefits charities, quangos, bureaucrats, tyrants and the predatory elite, and all these years later your average African is no better off.

Let’s close by looking at a thorough 2005 study from the International Policy Network. Authored by Fredrik Erixon, it documents the failure of foreign aid.

…the ‘gap theory’…assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that this savings/investment ‘gap’ exists in practice. As a result, aid has failed to ‘fill the gap’. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty. …The reason countries are poor is…because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government. … many studies point to the fact that government consumption in SubSaharan Africa has increased when aid has increased.

Here’s the evidence showing has more development assistance is associated with weaker economic performance.

By the way, the International Monetary Fund deserves unrestrained scorn for recommending higher tax burdens on Africans, thus making economic growth even harder to achieve.

Now let’s look at how two Asian regions have enjoyed growth as aid lessened.

Last but not least, here’s some very encouraging data from Africa.

I already mentioned that Botswana is an exception to the rule. As you can see, that nation’s success is definitely not the result of more handouts.

The bottom line is that President Trump is right, even if his motives are misguided.

Foreign aid is not the recipe for prosperity in Central America.

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Since I’m a proponent of tax reform, I don’t like special favors in the tax code.

Deductions, exemptions, credits, exclusions, and other preferences are back-door forms of cronyism and government intervention.

Indeed, they basically exist to lure people into making decisions that otherwise aren’t economically rational.

These distortionary provisions help to explain why we have a hopelessly convoluted and deeply corrupt tax code of more than 75,000 pages.

And they also encourage higher tax rates as greedy politicians seek alternative sources of revenue.

This current debate over “tax extenders” is a sad illustration of why the system is such a mess.

Writing for Reason, Veronique de Rugy explains how special interests work the system.

Tax extenders are temporary and narrowly targeted tax provisions for individuals and businesses. Examples include the deductibility of mortgage-insurance premiums and tax credits for coal produced from reserves owned by Native American tribes. …These tax provisions were last authorized as part of the Bipartisan Budget Act of 2018, which retroactively extended them through the end of 2017, after which they have thus far been left to remain expired. If Congress indeed takes up extenders during the current lame-duck session, any extended provisions are likely to once again apply retroactively through the end of 2018, or perhaps longer. There are several problems with this approach to tax policy. Frequently allowing tax provisions to expire before retroactively reauthorizing them creates uncertainty that undermines any potential benefits from incentivizing particular behaviors.

To make matters more complicated, a few of the extenders are good policy because they seek to limit double taxation (a pervasive problem in the U.S. tax system).

…not all tax extenders are a problem. Some are meant to avoid or limit the double taxation of income that’s common in our tax code. Those extenders should be preserved. Yet others are straightforward giveaways to special interests. Those should be eliminated.

Veronique suggests a sensible approach.

It’s time for a new approach under which tax extenders are evaluated and debated on their individual merits. The emphasis should be on eliminating special-interest handouts or provisions that otherwise represent bad policy. Conversely, any and all worthy provisions should be made permanent features of the tax code. …The dire need to fix the federal budget, along with the dysfunctional effects from extenders, should provide the additional motivation needed to end this practice once and for all.

Needless to say, Washington is very resistant to sensible policies.

In part, that’s for the typical “public choice” reasons (i.e., special interests getting into bed with politicians to manipulate the system).

But the debate over extenders is even sleazier than that.

As Howard Gleckman explained for Forbes, lobbyists, politicians, and other insiders relish temporary provisions because they offer more than one bite at the shakedown apple.

If you are a lobbyist, this history represents scalps on your belt (and client fees in your pocket). If you are a member of Congress, it is the gift that keeps on giving—countless Washington reps and their clients attending endless fundraisers, all filling your campaign coffers, election after election. An indelible image: It is pre-dawn in September, 1986. House and Senate tax writers have just completed their work on the Tax Reform Act.  A lobbyist friend sits forlornly in the corner of the majestic Ways & Means Committee hearing room. “What’s wrong,” I naively ask, “Did you lose some stuff?” Oh no, he replies, he got three client amendments in the bill. And that was the problem. After years of billable hours, his gravy train had abruptly derailed. The client got what it wanted. Permanently. And it no longer needed him. Few make that mistake now. Lawmakers, staffs, and lobbyists have figured out how to keep milking the cash cow. There are now five dozen temporary provisions, all of which need to be renewed every few years. To add to the drama, Congress often lets them expire so it can step in at the last minute to retroactively resurrect the seemingly lifeless subsidies.

In other words, the temporary nature of extenders is a feature, not a bug.

This is a perfect (albeit depressing) example of how the federal government is largely a racket. It enriches insiders (as I noted a few days ago) and the rest of us bear the cost.

All of which reinforces my wish that we could rip up the tax code and replace it with a simple and fair flat tax. Not only would we get more growth, we would eliminate a major avenue for D.C. corruption.

P.S. I focused today on the perverse process, but I can’t help but single out the special tax break for electric vehicles, which unquestionably is one of the most egregious tax extenders.

EV tax credits…subsidize the wealthy at the expense of the lower and middle classes. Recent research by Dr. Wayne Winegarden of the Pacific Research Institute shows that 79 percent of EV tax credits were claimed by households with adjusted gross incomes greater than $100,000. Asking struggling Americans to subsidize the lifestyles of America’s wealthiest is perverse… Voters also shouldn’t be fooled by the promise of large environmental benefits. Modern internal combustion engines emit very little pollution compared to older models. Electric vehicles are also only as clean as the electricity that powers them, which in the United States primarily comes from fossil fuels.

I was hoping that provisions such as the EV tax credit would get wiped out as part of tax reform. Alas, it survived.

I don’t like when politicians mistreat rich people, but I get far more upset when they do things that impose disproportionate costs on poor people. This is one of the reasons I especially dislike government flood insuranceSocial Security, government-run lotteries, the Export-Import Bank, the mortgage interest deduction, or the National Endowment for the Arts. Let’s add the EV tax credit to this shameful list.

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I periodically will make use of “most depressing” in the title of a column when sharing bad news.

And new data from the Census Bureau definitely qualifies as bad news. It confirms what I’ve written about how the Washington region has become the richest part of America.

But the D.C. area didn’t become wealthy by producing value. Instead, it’s rolling in money because of overpaid bureaucrats, fat-cat lobbyists, sleazy politicians, beltway-bandit contractors, and other grifters who have figured out how to hitch a ride on the federal gravy train.

Anyhow, here’s a tweet with the bad news (at least if you’re a serf elsewhere in America who is paying taxes to keep Washington fat and happy).

Most of my friends who work for the federal government privately will admit that they are very fortunate.

But when I run into someone who denies that bureaucrats get above-market compensation, I simply share this data from the Labor Department. That usually shuts them up.

By the way, there’s strong evidence from the European Central Bank that overpaid bureaucrats have a negative impact on macroeconomic performance.

And the World Bank has produced a study showing how bureaucrats manipulate the political process.

…public sector workers are not just simply implementers of policies designed by the politicians in charge of supervising them — so called agents and principals, respectively. Public sector workers can have the power to influence whether politicians are elected, thereby influencing whether policies to improve service delivery are adopted and how they are implemented, if at all. This has implications for the quality of public services: if the main purpose of the relationship between politicians and public servants is not to deliver quality public services, but rather to share rents accruing from public office, then service delivery outcomes are likely to be poor.

Here’s my video explaining how bureaucrats are overpaid. It was filmed in 2010, so many of the numbers are now out-dated, but the arguments are just as strong today as they were back then.

But keep in mind that the bureaucracy is only one piece of the puzzle.

The D.C. metropolitan region is unjustly rich because of everyone else who has figured out how to divert taxpayer money into their pockets. That includes disgusting examples of Democrat sleaze and Republican sleaze.

Simply stated, Washington is riddled with rampant corruption as insiders get rich at our expense. No wonder many of them object to my license plate!

P.S. Here’s some data comparing the size and cost of bureaucracy in various nations.

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I’m at the Capetown Airport, about to leave South Africa, so this is an opportune time to share some thoughts on what I learned in the past seven days.

1. Land Seizures – The number-one issue in the country is a plan by the government to impose Zimbabwe-style land confiscation. I already wrote about that issue, so I’ll cite today an editorial from the Wall Street Journal.

South Africa needs another enlightened leader like Nelson Mandela, but it keeps electing imitations of Robert Mugabe. President Cyril Ramaphosa confirmed recently that his government plans to expropriate private property without compensation, following the examples of Zimbabwe and Venezuela. …Supporters of expropriation claim black South Africans own less than 2% of rural land, and less than 7% of urban land… But the government’s 2017 land audit used questionable data… The Institute of Race Relations estimates black South Africans control 30% to 50% of the country’s land. …Mandela insisted that land reform is best achieved through a “willing buyer, willing seller” principle, as it is in other democracies with a strong rule of law. …snatching private property is about as destructive a policy as there is. The ANC was founded as a revolutionary party, and the tragedy is that it won’t let the revolution end.

To be sure, whites generally got the land illegitimately in the first place (something settlers also did to the Indians in America), so it’s not as if they are the angels in this conflict.

I’m simply saying that copying Zimbabwe-style policies would be catastrophically destructive to South Africa’s economy. Rich landowners obviously will be hurt, but poor black will be the biggest victims when the already-shaky economy goes under.

It’s unclear at this stage how far the government will push this policy. But since the nation already has suffered the biggest year-over-year decline in the International Property Rights Index, any additional steps in the wrong direction would be most unfortunate.

By the way, the news of property rights isn’t all bad. Here’s a video showing how poor people are getting titles to their homes.

2. Mandela’s Legacy – I remarked on my Facebook page that Nelson Mandela should be viewed as a great leader. I was one of many people who thought South Africa would descend into civil war between the races. Mandela deserves an immense amount of credit (along with unsung heroes in the South African community of classical liberals, such as Leon Louw of the Free Market Foundation) for ensuring the nation enjoyed a peaceful transition.

Did Mandela have some misguided views? Of course. He was a socialist, at least nominally. And he joined the South African Communist Party at one point.

But so what? Thomas Jefferson and George Washington were slaveowners, yet we recognize that they played key roles in the founding of America. Simply stated, people can do great things yet still be imperfect.

3. Race – Notwithstanding South Africa’s peaceful transition from apartheid to democracy, the nation faces some major race-related challenges. Simply stated, blacks are relatively poor and whites are relatively rich. And that’s what leads some politicians to pursue bad policy, such as class-warfare taxation and the aforementioned land confiscation.

To make matters even more complicated, there is also a significant – and very wealthy – Indian minority. Indeed, they are the ones who have benefited most from the end of apartheid, which has aroused some racial resentment.

Last but not least, there is also a significant mixed-race community that is culturally separate from native blacks (they speak Afrikaans, for instance).

4. Dependency – I wrote about this problem in 2014 and my visit has led me to conclude that I understated the problem. Simply stated, South Africa is not at the stage of development where it can afford a welfare state. Western nations didn’t travel down that path until the 1930s, after they already reached a certain level of development and could afford to hamstring their economies.

5. Labor law – Similarly, South Africa also has European-style labor protection laws, which discourage job creation. Such policies reduce employment in developed nations, but they cripple employment in developing nations.

By the way, if you want a great understanding of South Africa’s economic challenges, you should buy South Africa Can Work by Frans Rautenbach.

6. Corruption – In addition to the anti-market policies described above, South Africa also has a pervasive problem with political sleaze. Simply stated, politicians have been using government as a means of looting the public.

Here are some excerpts from a report in the New York Times.

…city officials drove across the black township’s dirt roads in a pickup truck, summoning residents to the town hall. …the visiting political boss, Mosebenzi Joseph Zwane, sold them on his latest deal: a government-backed dairy farm… The dairy farm turned out to be a classic South African fraud, prosecutors say: Millions of dollars from state coffers, meant to uplift the poor, vanished in a web of bank accounts controlled by politically connected companies and individuals. …In the generation since apartheid ended in 1994, tens of billions of dollars in public funds — intended to develop the economy and improve the lives of black South Africans — have been siphoned off by leaders of the A.N.C. …Corruption has enriched A.N.C. leaders and their business allies… that is just a small measure of the corruption that has whittled away at virtually every institution in the country, including schools, public housing, the police, the power utility, South African Airways and state enterprises overseeing everything from rail service to the defense industry.

That last sentence is key, though the reporter never made the right connection. The reason there is so much corruption is precisely because the government has some degree of power over “every institution in the country.”

Shrink the size and scope of the state and much of that problem automatically disappears.

Here’s another excerpt, which is noteworthy since it overlooks the fact that the government created laws requiring black shareholders and directors. Needless to say, that system wound up enriching politically connected blacks rather than ordinary citizens.

A smattering of influential figures, like the current president, Mr. Ramaphosa, amassed extraordinary wealth. They were allowed to buy shares of white-owned companies on extremely generous terms and invited to sit on corporate boards. They acted as conduits between the governing party and the white-dominated business world. Some of the A.N.C. leaders who were left out of that bonanza quickly found a new road to wealth: lucrative government contracts. The public tap became a legitimate source of wealth for the well connected, but also a wellspring of corruption and political patronage, much as it had been for the white minority during apartheid.

7. Crime – The biggest quality-of-life problem in South Africa is crime. The homes of successful people are often mini-fortresses, with big spiked walls topped by electrified wires. Large aggressive dogs and private security patrols also are ubiquitous. Sadly, the government doesn’t do a good job of policing, yet it also makes it difficult to legally own firearms.

8. Education – To be blunt, government schools in South Africa generally are a disaster. Reminds me of the mess in India, except there isn’t a similar network of private schools to give parents better options.

Much of the problem is the result of schools being run for the benefit of unionized teachers (sound familiar?) rather than students. There is some movement in the Cape province to allow charter schools, so hopefully that reform effort will bear fruit.

9. Concluding thoughts – I’ll close with a couple of random non-policy observations. First, South Africa still has some quasi-independent tribal kingdoms. Not exactly the Swiss model of federalism, but it’s better than nothing. Second, it is possible to have multiple wives (I thought of Oscar Wilde’s famous saying when I heard that). Third, everybody should visit South Africa for the scenery and wildlife. I spent a day at Kruger National Park and it was breathtaking even though I barely scratched the surface (by the way, Frans also wrote a great book about the Park).

P.S. Here’s my comparison of Botswana, South Africa, and Zimbabwe. Botswana is the obvious success story of the three.

P.P.S. The IMF predictably is pushing anti-growth policy on sub-Saharan Africa.

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I don’t like it when poor people receive handouts from government, though not because I think they’re being grifters. I mostly view them as victims who are vulnerable to getting trapped in the quicksand of government dependency.

The people I despise are the rich people who manipulate the levers of power to get undeserved goodies. These well-heeled sleazeballs generally have the brains and ability to earn money honestly, but they decide it’s more lucrative to steal money from ordinary people, using government as the middleman.

That’s the moral argument for separation of business and state. But there’s also an economic argument against government cronyism.

There’s a very interesting new study from the World Bank that estimates the impact of government favoritism in Ukraine. Here’s how the authors define the problem.

Rent seeking is the manipulation of public institutions to obtain…income…without the creation of new wealth. …Rent seeking is sometimes legal. …In Ukraine, rent seeking includes the award of public resources to companies through tax exemptions, direct subsidies and procurement contracts to connected companies that cannot be justified in terms of the economic benefits to society as a whole. The rent seeking activities provide a basis for the existence of so-called “crony capitalism” ….Crony capitalism allows politically connected businesses to enjoy benefits that other companies cannot access. It allows politically connected businesses to create barriers to entry in those sectors where they operate. As a result, crony capitalism allocates resources inefficiently, restricts competition, increases economic costs and limits economic opportunity. …This paper estimates the economic cost of crony capitalism in Ukraine.

They start with the challenge of trying to measure cronyism.

If we are to assess the impact of crony capitalism in Ukraine, we must first define political connection and distinguish politically-connected firms from non-connected firms. …We use two approaches to identify politically connected firms. The first approach is based on publicly available information on the ownership and control of businesses by politically exposed persons. …A PEP is a person who has been entrusted with prominent public functions, including senior politicians and party officials, senior government, judicial or military officials, and senior executives of state-owned corporations. …The second approach is…to include companies that are not formally controlled by PEPs, but enjoy a political connection through an oligarch or a business group they belong to. …Between half a percent and 2 percent of the total number of firms in Ukraine are politically connected. However, politically connected firms controlled over 20 percent of the total turnover of all Ukrainian companies.

Here are some of their empirical results.

The economic performance of politically-connected firms in Ukraine is significantly different from that of their non-connected peers. …Politically-connected firms are larger than their non-connected peers. …Politically-connected firms pay a lower effective tax rate. …Politically-connected firms are less productive. Politically-connected firms have a negative Total Factor Productivity (TFP) gap compared to non-connected firms. …This indicates that there could be a potentially large pay-off from policies that promote competition. …Politically-connected firms grow slower than non-connected firms. …Such firms tend to have better access to rents and less incentives to compete. …The politically-connected firms reap the benefits from preferential treatment when interacting with the state and limiting market competition.

The bottom line, as illustrated by this chart, is that cronyism promotes and protects inefficiency. And when an economy is less productive, that results in lower incomes and diminished living standards.

Sadly, this isn’t just a problem in developing and transition nations.

Cronyism exists wherever governments have a lot of power, and that includes the United States.

The federal government has myriad policies that tilt the playing field in favor of connected companies. The purpose of policies such as ethanol handouts, the Export-Import Bank, protectionism, tax favoritism, bailouts, subsidies, and green energy is to provide unearned wealth to the friends of politicians.

Here’s a recent example of how Obamacare is a vehicle for cronyism, as explained by the Wall Street Journal.

Big business feasts on big government, and ObamaCare has been a bonanza for companies that have figured out how to exploit it. …Ohio contracts with five managed-care organizations (MCOs) to administer Medicaid benefits, four of which outsource their drug benefits management to CVS Caremark… CVS appears to be billing the state for far more than what it is paying pharmacies, driving up taxpayer costs. …CVS is also attempting to drive independent pharmacists out of business and expand its retail market share. …Ohio’s Medicaid enrollment has swelled by more than half to 21.4% of the state population, driven in large part by ObamaCare’s expansion to people earning up to 133% of the poverty line. …In the last three years, Ohio has lost 164 independent pharmacies while CVS has added 68. …States ostensibly have an incentive to curb their Medicaid spending… Yet many may be turning a blind eye because they can pass on the bills to the federal government, which picks up 63% of the costs for Ohio’s pre-ObamaCare population and 94% for the expansion population.

But cronyism isn’t just enabled by bad policies from Washington.

State governments also are guilty of favoritism, even when the feds aren’t involved. Consider the oleaginous handouts for Foxconn in Wisconsin.

…the Foxconn deal is a condemnable example of corporate welfare in its most egregious form. …Wisconsin could end up delivering $3 billion in tax credits to Foxconn. …If the jobs target of 13,000 is met, Wisconsin taxpayers will pay $219,000 per job. If only 3,000 jobs are created, they will pay $587,000 per job in the form of a $1.7 billion tax credit. …Who wins? The politicians. Who loses? Fiscal sanity and those footing the bill for political pet projects.

And the goodies for Foxconn are just the tip of the iceberg.

States and cities dole out billions of dollars every year to attract businesses through cash grants, tax breaks, and new infrastructure. …The search for Amazon’s second headquarters (HQ2), for instance, has left around 230 state and local governments genuflecting before the altar of the Seattle-based tech deity, offering tributes amounting, in several cases, to billions of dollars. …The cost of these kind of incentives is astoundingly high — there is little research that points to their success.

As I’ve previously argued, the pro-growth way for governments to compete is having low tax rates for everyone.

…the most effective solution is the simplest. New Hampshire is a dark horse candidate to receive HQ2, and its pitch is entirely reasonable: Low tax rates for every business, across the board. That approach removes the incentive to attract businesses through what amounts to legal, nonsensical bribery.

Let’s close with this visual from libertarian Reddit. It’s simple, but a very accurate summary of how the real world operates.

P.S. Elizabeth Warren wants to turn all big companies into cronyist entities.

P.P.S. American taxpayers are subsidizing cronyism in Ukraine.

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During America’s early history, trade taxes were the major source of government revenue, but they were “revenue tariffs” rather than “protectionist tariffs.”

Lawmakers didn’t necessarily want to block imports. This was before America was plagued by an income tax and some source of revenue was needed to finance the government.

And since the central government back then was very small, as the Founders envisioned, the first tariff was only 5 percent and it applied equally to all imports.

Compared to what we have today, that was a pretty good system. But it seems inevitable that politicians – sooner or later – will manipulate and abuse any power they have.

It didn’t take long for that original tariff of just 5 percent to climb higher. And it also was just a matter of time before politicians begin imposing special tariffs on selected imports in response to pleading (and goodies) from various interest groups.

Today, government’s power over trade enables some utterly disgusting and oleaginous examples of insider dealing and rank corruption.

For instance, the Wall Street Journal is reporting about an odious example of unjust enrichment thanks to protectionism.

…tariffs on imports of newsprint…have been cause for celebration at private-equity firm One Rock Capital Partners LLC. Government records show that a team from the New York-based firm approached the Commerce Department, including one meeting with Secretary Wilbur Ross, saying Canadian newsprint imports were hurting One Rock’s investment in North Pacific Paper Co., a paper mill also known as Norpac. Commerce responded to One Rock’s appeal by setting tariffs on Canadian imports, causing newsprint prices to jump by as much as 30%, significantly lifting Norpac’s business prospects.

Yes, your read correctly.

Some bigwigs bought a paper mill and then used their connections to undermine competition from Canadian paper mills.

They get rich, but only by manipulating the levers of power, not because they provide value to consumers.

…the price surge threatens the viability of small-town papers across the country, forcing reduced publication days, layoffs and other cut backs. Canadian mills have historically supplied a large portion of U.S. newsprint. “This whole play by Norpac basically disrupted an entire industry,” said Paul Boyle, senior vice president at the News Media Alliance… The tariffs represent a remarkable success by a relatively little-known private-equity firm at pulling the levers of power in Washington for advantage. …Canadian Ambassador David MacNaughton called Norpac a “rogue actor seeks to game American trade laws for its own short-term advantage, while putting thousands of U.S. and Canadian jobs at risk.”

The obvious takeaway from this story is that protectionism is bad for the U.S. economy. Yes, a few rich insiders pocket some undeserved profits and there will be a few more workers at one plant, but those results will be easily offset by the loss of jobs and income elsewhere in the economy because of the adverse impact on newspapers, advertising, and related sectors.

But I want to highlight another negative effect. I wrote back in 2011 that there are many well-meaning folks on the left that support class-warfare policies because they assume that rich people got their money illegitimately.

Well, this story is sad confirmation that this is often true.

I tell all my statist friends that punitive and destructive taxation is not the right response to this kind of sleaze. Instead, we need to get rid of protectionism (and subsidies, cronyism, and other forms of special favoritism). Make sure we have a system where people instead get rich by satisfying the needs and wants of consumers.

And I tell my Republican friends that if they don’t want crazies like Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio-Cortez to wind up in charge of Washington, they need to stop playing footsie with special interests and instead fight for genuine free markets.

Sadly, neither group is taking my advice.

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Donald Trump wants to make protectionism great again. Bernie Sanders wants to make socialism great again.

And if we continue with sarcastic headlines, Elizabeth Warren wants to make cronyism great again.

She has a plan, which she explained in a column for the Wall Street Journal and also in this press release on her Senate website, that would give politicians and bureaucrats sweeping powers over large companies.

There’s a technical term for this system of private ownership/government control. It’s called fascism, though I prefer referring to it as corporatism or dirigisme to distinguish what Warren is doing from the racist and militaristic version of that ideology.

Or we can just call it crazy. Kevin Williamson summarizes this dangerous proposal for National Review.

Senator Elizabeth Warren of Massachusetts has one-upped socialists Bernie Sanders and Alexandria Ocasio-Cortez: She proposes to nationalize every major business in the United States of America. If successful, it would constitute the largest seizure of private property in human history. …Senator Warren’s proposal entails the wholesale expropriation of private enterprise in the United States, and nothing less. It is unconstitutional, unethical, immoral, irresponsible, and — not to put too fine a point on it — utterly bonkers. …To propose such a thing for sincere reasons would be ghastly stupidity. …Politicians such as Senator Warren lack the courage to go to the American electorate and say: “We wish to provide these benefits, and they will cost an extra $3 trillion a year, which we will pay for by doubling taxes.” …It treats the productive capacity of the United States as a herd of dairy cows to be milked by Senator Warren et al. at their convenience. And, of course, Senator Warren and her colleagues get to decide how the milk gets distributed, too. …Recep Tayyip Erdogan, Hugo Chávez, Huey Long: The rogues’ gallery of those who sought to fortify their political power by bullying businesses is long, and it is sickening. Senator Warren now nominates herself to that list

Professor Don Boudreaux of George Mason University exposes Warren’s economic illiteracy.

Sen. Elizabeth Warren (D-MA)…outlined her new bill that “would require corporations to answer to employees and other stakeholders as well.” …If this mandate is ever enacted, it would radically restructure corporate law, governance, and finance, which is especially frightening because seldom have I encountered so many fallacies…no company in a market economy can force anyone to buy its outputs or to supply it with labor and other inputs, every company, to survive, must continually make attractive offers to consumers, workers, and suppliers. The ability of consumers, workers, and suppliers to say no combines with the law of contract — which requires parties to honor whatever commitments they voluntarily make to each other — to guarantee that companies are fully accountable to everyone with whom they exchange. Companies therefore are fully accountable to their customers and to their workers… the senator offers absolutely no evidence — not even a single anecdote — that companies are unaccountable to consumers.

Not that we needed more evidence that she doesn’t understand economics.

Walter Olson points out that Warren’s legislation would expropriate wealth, presumably in violation of the Constitution’s taking clause.

Elizabeth Warren of Massachusetts has introduced legislation that would radically overhaul corporate governance in America, requiring that the largest (over $1 billion) companies obtain revocable charters from the federal government to do business, instituting rules reminiscent of German-style co-determination… Sen. Warren’s proposal would pull down three main pillars of U.S. corporate governance: shareholder primacy, director independence, and charter federalism. …Warren-style rules…would in effect confiscate at a stroke a large share of stockholder value, transferring it to some combination of worker and “community” interests. …This gigantic expropriation, of course, might be a Pyrrhic victory for many workers and retirees whose 401(k) values would take a huge hit… some early enthusiasts for the Warren plan are treating the collapse of shareholder value as a feature rather than a bug, arguing that it would reduce wealth inequality. …it would test the restraints the U.S. Constitution places on the taking of property without compensation.

Wow, it belies belief that some leftists support policies that will hurt everyone so long as rich people suffer the most. The ghost of Jonathan Swift is smiling.

Samuel Hammond of the Niskanen Center explains why Warren’s scheme would be devastating to fast-growing innovative companies.

The United States is home to 64 percent of the world’s billion-dollar privately held companies and a plurality of the world’s billion-dollar startups. Known in the industry as “unicorns,” they cover industries ranging from aerospace to biotechnology, and they are the reason America remains the engine of innovation for the entire world. Unless Elizabeth Warren gets her way. In a bill unveiled this week, the Massachusetts senator has put forward a proposal that threatens to force America’s unicorns into a corral and domesticate the American economy indefinitely. …the Accountable Capitalism Act is in many ways the most radical proposal advanced by a mainstream Democratic lawmaker to date. …Warren’s proposal is to fundamentally upend the way the most productive companies in the American economy work from the top down.

Writing for CapX, Oliver Wiseman wisely warns that Warren’s power-grab will undermine productivity.

…her federal charter system would make large firms accountable to politicians – not the people. And that, given the current occupant of the White House, it is surprising that someone from the left of the Democratic party cannot see how this isn’t just deeply illiberal but really rather dangerous. …much beyond the imposition of costly and inefficient box-ticking exercises. Firms will hold meetings with communities, conduct internal reviews and, in all likelihood, reach the same decision they would have reached anyway. Only more slowly and at greater expense. …If you are worried about stagnating wages, you should be preoccupied by one thing above all else: how to boost productivity. Warren’s vision for “accountable capitalism” not only has nothing to say on the issue, it would chip at way at the dynamism that has been the engine of America’s economic success. …The proposals in the Accountable Capitalism Act are drawn up by someone interested in how the pie is sliced up, not the size of the pie. …According to the economist William Nordhaus, innovators keep just 2 per cent of the social value of their innovations. The rest of us enjoy 98 per cent of the upside.

Amen. When there’s less innovation, investment, and productivity, that means lower wages for the rest of us.

Ryan Bourne highlights for the Weekly Standard how political meddling would create uncertainty and will harm both workers and shareholders.

While she might want businesses to notionally be private entities, the “Accountable Capitalism Act” she unveiled last week represents pure, unadulterated European corporatism… Warren’s proposal would establish in the Commerce Department an Office of United States Corporations to review and grant charters… This office is an almighty and arbitrary Damocles sword, with the politicians that control it able to hold companies in breach of charter for anything and everything they are thought not to have considered. …To say the Act would muddy the waters and create perverse incentives is an understatement. … A 1995-96 meta-analysis of 46 studies on worker participation by economist Chris Doucouliagos found that…co-determination laws were a drag. This all means lower wages for employed workers and huge losses for pension funds and other shareholders.

Last but not least, Barry Brownstein, in an article for FEE, is concerned about politicians holding the whip hand over the economy.

Senator Elizabeth Warren… Her ignorance is bold. …Under her proposed law, Warren and others in government will pretend to know much about that which they know nothing—running every large business in America. …In a few years, under a democratic socialist president—I almost wrote national socialist president—Warren’s dystopia could become a reality. …Imagine a major bear market and the resulting spike in fear. Then, it is not so hard to imagine a future president, with a mindset like that of Senator Warren, barnstorming the country dispensing field guidance. Is not President Trump managing trade via “bold ignorance” paving the way for more politicians like Senator Warren?

These seven articles do a great job of documenting the myriad flaws with Warren’s scheme.

So the only thing I’ll add is that we also need to realize that this plan, if ever enacted, would be a potent recipe for corruption.

We already have many examples of oleaginous interactions between big business and big government. Turbo-charging cronyism is hardly a step in the right direction.

Let’s wrap up. I used to have a schizophrenic view of Elizabeth Warren. Was she a laughable crank with a side order of sleazy ambition? Or was she a typical politician (i.e., a hypocrite and cronyist)?

Now I worry she’s something worse. Sort of a Kamala Harris on steroids.

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When I argue against tax increases, I generally rely on two compelling points.

  1. Higher taxes will undermine prosperity by penalizing productive behavior.
  2. More money for politicians will trigger more spending, so red ink will increase.

When I argue against centralization and urge Swiss-style federalism, I also rely on two very strong points.

  1. Local governments will be more responsible if they raise and spend their own funds.
  2. Competition among local jurisdictions will encourage better public policy.

Now let’s mix these issues together by looking at some academic research on what happens when politicians get a windfall of revenue from a  centralized source.

Well, according to new research from Italy’s central bank, bigger government means more corruption.

…large financial transfers from a central unit of government to lower levels of government…come with the risk of exacerbating the agency problem due to the fact that the funds are collected at a higher level and then managed locally with typically little transparency on the actual amount of resources received by each local area. This moral hazard problem may increase incentives for local administrators to extract rents from the funds received. …growing evidence suggests that illegal practices and rent seeking are still often associated with the receipt of transfers from a central government. …we investigate the relationship between financial transfers from a central level of government to local administrations and the coincident occurrence of white collar crimes at the same local level drawing from the case of EU funding to Southern Italy. …The South of Italy has been one of the largest recipients of EU funds: in the most recent programming period it received 25 billion euro out of the 35 billion total allocated to Italy and managed at the local level. The empirical analysis exploits a unique administrative dataset of criminal episodes in Italy and matches them to the records of all the transfers from the EU to each single municipality over the period 2007-2014. We find evidence of a significant positive relationship between EU funds and the occurrence of corruption and fraudulent behaviors in the recipient municipality in the same year. …the robustness analysis we performed provided evidence that the correlation between transfers and corruption that we estimate is likely not just spurious or due to confounding effects

As far as I’m concerned, these results belong in the “least surprising” category. Of course you get more corruption when government gets bigger.

Now let’s look at another study. A few years ago, academic scholars produced even more compelling research from Brazil.

The paper studies the effect of additional government revenues on political corruption and on the quality of politicians, both with theory and data. The theory is based on a version of the career concerns model of political agency with endogenous entry of political candidates. The evidence refers to municipalities in Brazil, where federal transfers to municipal governments change exogenously according to given population thresholds. We exploit a regression discontinuity design to test the implications of the theory and identify the causal effect of larger federal transfers on political corruption and the observed features of political candidates at the municipal level. In accordance with the predictions of the theory, we find that larger transfers increase political corruption and reduce the quality of candidates for mayor. …The empirical findings accord well with the implications of the theory. Specifically, an (exogenous) increase in federal transfers by 10% raises the incidence of a broad measure of corruption by 12 percentage points (about 17% with respect to the average incidence), and the incidence of a more restrictive measure—including only severe violation episodes—by 10.1 percentage points (about 24%).

By the way, this persuasive research isn’t just an argument for smaller government and fewer transfers.

It’s also why foreign aid generally has harmful effects on recipient countries. Handouts line the pockets of the political elite and enable a bigger burden of government.

It’s also one of the reasons why I’ve referred to the International Monetary Fund as a “dumpster fire.” That bureaucracy leverages its money (the U.S. is the biggest backer) to encourage higher tax burdens and more redistribution in countries that already are suffering from too much bad policy.

The two studies we’ve reviewed today are simply an exclamation point.

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I very much suspect Obama partisans and Trump partisans won’t like this column, but the sad reality is that both Obamacare and Trump’s protectionism have a lot in common.

  • In both cases, government is limiting the freedom of buyers and sellers to engage in unfettered exchange.
  • In both cases, the fiscal burden of government increases.
  • In both cases, politicians misuse statistics to expand the size and scope of government.

Today, let’s add another item to that list.

  • In both cases, the Washington swamp wins thanks to increased cronyism and corruption.

To see what I mean, let’s travel back in time to 2011. I wrote a column about Obamacare and cited some very persuasive arguments by Tim Carney that government-run healthcare (or, to be more accurate, expanded government control of healthcare) was creating a feeding frenzy for additional sleaze in Washington.

Congress imposes mandates on other entities, but gives bureaucrats the power to waive those mandates. To get such a waiver, you hire the people who used to administer or who helped craft the policies. So who’s the net winner? The politicians and bureaucrats who craft policies and wield power, because this combination of massive government power and wide bureaucratic discretion creates huge demand for revolving-door lobbyists.

I then pointed out that the sordid process of Obamacare waivers was eerily similar to a passage in Atlas Shrugged.

Wesley Mouch…issued another directive, which ruled that people could get their bonds “defrozen” upon a plea of “essential need”: the government would purchase the bonds, if it found proof of the need satisfactory. …One was not supposed to speak about the men who…possessed needs which, miraculously, made thirty-three frozen cents melt into a whole dollar, or about a new profession practiced by bright young boys just out of college, who called themselves “defreezers” and offered their services “to help you draft your application in the proper modern terms.” The boys had friends in Washington.

Well, the same thing is happening again. Only this time, as reported by the New York Times, protectionism is the policy that is creating opportunities for swamp creatures to line their pockets.

The Trump administration granted seven companies the first set of exclusions from its metal tariffs this week and rejected requests from 11 other companies, as the Commerce Department began slowly responding to the 20,000 applications that companies have filed for individual products. …several companies whose applications were denied faced objections from American steel makers. …companies that have applied for the exclusions criticized the exercise as both long and disorganized. “This is the most screwed-up process,” said Mark Mullen, president of Griggs Steel, a steel distributor in the Detroit area. “This is a disservice to our industry and the biggest insult to our intelligence that I have ever seen from the government.”

From an economic perspective, it certainly is true that this new system is “disorganized” and “a disservice” and an “insult to our intelligence.” Those same words could be used to describe the welfare state, the EEOC, farm subsidies, the tax code, and just about everything else the government does.

But there’s one group of people who are laughing all the way to the bank, The lobbyists, consultants, fixers, and other denizens of the swamp are getting rich. Whether they’re preparing the applications, lobbying for the applications, or lobbying against the applications, they are getting big paychecks.

And the longer this sordid protectionist process continues, we will see a repeat of what happened with Obamacare as senior-level people in government move through the revolving door so they can get lucrative contracts to help clients manipulate the system (yes, Republicans can be just as sleazy as Democrats).

Washington wins and we lose.

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Ordinary Americans have a low opinion of Washington, but they’re underestimating the extent of the problem.

The nation’s capital is basically a playpen for special interests. It’s now the richest region of the country, with lobbyists, bureaucrats, contractors, politicians, and other insiders and cronies getting fat and happy thanks to money that is taken from people in the productive sector of the economy.

Republicans play the game and Democrats play the game, with both sides getting undeserved wealth at our expense.

Let’s take an up-close look at how this sordid game is played.

Here are some excerpts from a column by Catherine Rampell in today’s Washington Post.

The GOP is no longer the Party of Reagan. It’s the Party of Michael Cohen. …the Cohen blueprint for achieving the American Dream: Work minimally, if you can, and leverage government connections whenever possible. …following Donald Trump’s unexpected presidential victory, Cohen cashed in. …Cohen told companies that he could provide valuable “insights” into the new administration. Huge multinational corporations lined up to purchase these “insights,” dumping millions into Essential Consultants LLC… Cohen is hardly the only prominent Trumpster invoking White House connections… Cabinet members and other senior government officials, too, have enjoyed a sweetheart apartment deal, lobbyist-arranged vacations and private jet rides. These are not amenities secured through brains, honesty and hard work, the virtues that Republicans traditionally say are required for upward mobility and financial comfort. They are the fruits of luck, cronyism and a loose approach to ethical lines.

This is disgusting. Republicans often come to Washington claiming they’re going to “drain the swamp.” Many of them, however, quickly decide it’s a hot tub.

But don’t forget that sleaze is a bipartisan activity in Washington.

Here are excerpts from a Wall Street Journal report about influence-peddling on the other side of the aisle.

Tony Podesta was in line to be king of K Street. His lobbying firm ended 2015 as the third largest in Washington, D.C., with nearly $30 million in revenue from more than 100 clients, spanning Alphabet Inc.’s Google to Wells Fargo & Co. With his longtime friend Hillary Clinton expected to win the White House, 2016 promised to be even better. Mr. Podesta…hosted lawmakers and power brokers at his flat in Venice during the Art Biennale. It was one of many homes around the globe, including the Washington mansion where he displayed a collection of museum-grade artwork. In early 2016, he was ready to buy a $7.4 million condo overlooking Madison Square Park in New York City. …At age 59, he married Heather Miller, a congressional staffer 26 years younger. …Mrs. Podesta started her own lobbying firm, Heather Podesta + Partners, and they emerged a Washington power couple. …Mr. Podesta drew an annual salary of more than $2 million and made millions more in commissions and bonuses. …The Podesta Group grew from the 20th largest lobbying firm to third in three years, in terms of domestic and foreign lobbying revenues, propelled by business during President Barack Obama’s first term.

But this story of graft and corruption has a happy ending.

Then he fell, a calamitous collapse… The Podesta Group lost its banker over news the firm did work for the U.S. subsidiary of a Russian bank under sanctions. …Mrs. Clinton’s…victory would go a long way to fixing many of his problems. She lost…and Mr. Podesta, like many who had banked on her victory, did too. Clients who had hired him for access to a new Clinton administration fell away. By the end of the year, the departures cost the firm more than $10 million in annual business… the Podesta Group did public relations work in 2015 for Raffaello Follieri, an Italian businessman who had pleaded guilty to swindling millions of dollars from an investment fund run partly by Mr. Clinton, one of Mr. Podesta’s early patrons. …Before closing the firm’s doors, Mr. Podesta gave himself an advance on his lobbying commissions.

The common theme, as explained by Karen Tumulty for the Washington Post, is that D.C. is an utterly corrupt place.

…the game in Washington never really changes. The only things that shift from election to election are the most sought-after players. …When Trump won, the traditional rosters of lobbyists — ex-congressmen, lawyers from white-shoe firms, former congressional staffers — were of little use in figuring out and gaining access to a band of outsiders who came to town vowing to demolish the old order. Cohen was not the only Trump insider to see a chance to cash in… The president’s former campaign manager, Corey Lewandowski, along with former Trump aide Barry Bennett, also opened a consulting firm, which quickly had more business than it could handle. “It was like shooting fish in the barrel,” Bennett told The Post. …Nor is Team Trump unique in seizing these opportunities. President Barack Obama had not been in office a month before his 2008 campaign manager, David Plouffe, was paid $50,000 to give a speech in Azerbaijan to a group with close ties to that repressive government. …Washington continues to have a most durable ecosystem: The swamp is never drained; it just gets taken over by different reptiles.

Utterly nauseating.

But allow me to point out that lobbying isn’t inherently bad. And neither are campaign contributions. It all depends on the reason.

If a company hires a lobbyist or give cash to a politician because it wants handouts or government intervention that will produce unearned profit, that’s wrong. Sort of like being a co-conspirator to a crime.

However, if a company hires a lobbyist and donates money because it is fighting tax hikes or new regulatory burdens, that’s noble and just. Sort of like engaging in an act of self-defense.

But wouldn’t it be wonderful if there wasn’t a need for either the bad type of lobbying or the good type of lobbying?

Richard Ebeling, a professor at the Citadel, offers a very good solution in a column for the Foundation for Economic Education. He starts by explaining that government and corruption have always been connected.

The corruption of government officials seems to be as old as recorded history. …the ancient Roman senate passed laws against such political corruption in the first century, B.C. …Emperor Constantine issued one of the strongest decrees against corruption during this time in A.D. 331. …Today, high levels of political corruption remain one of the major problems people confront around the world. …Political corruption, clearly, is found everywhere around the world… Why?

Richard answers his own question, pointing out that big government is a major enabler of corruption.

Part of the answer certainly…can be found in the relationship between the level of corruption in society and the degree of government intervention in the marketplace. In a generally free market society, …government officials have few regulatory or redistributive responsibilities, and therefore they have few special favors, privileges, benefits, or dispensations to “sell”… The smaller the range of government activities, therefore, the less politicians or bureaucrats have to sell to voters and special interest groups. And the smaller the incentive or need for citizens to have to bribe government officials to allow them to peacefully go about their private business and personal affairs. …On the other hand, the…interventionist state…taxes the public and has huge sums of money to disburse to various programs and projects. It imposes licensing and regulatory restrictions on free and open competition. It transfers great amounts of income and wealth to different groups through sundry “redistributive” schemes. …Those in the government who wield these powers hold the fate of virtually everyone in their decision-making hands. It is inevitable that those drawn to employment in the political arena often will see the potential for personal gain… The business of the interventionist state, therefore, is the buying and selling of favors and privileges. It must lead to corruption because by necessity it uses political power to harm some for the benefit of others, and those expecting to be either harmed or benefited will inevitably try to influence what those holding power do with it.

So what’s the bottom line?

Ending global political corruption in its various “petty” and “grand” forms, therefore, will only come with the removal of government from social and economic life. When government is limited to protecting our lives and property, there will be little left to buy and sell politically.

Amen. That’s the message I also shared in this video from the Center for Freedom and Prosperity.

Sadly, Donald Trump’s promises to “drain the swamp” don’t seem to have been very sincere. Earlier this year, he meekly acquiesced to a budget deal that produced a feeding frenzy among the swamp creatures.

How is that any different from what would have happened if Hillary Clinton was in the White House? Big government doesn’t magically become less harmful and corrupt just because Republicans are in charge.

Indeed, there’s some hard evidence the problem actually becomes worse.

As Ms. Tumulty wrote, “Same swamp, different reptiles.”

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I explained back in 2013 that there is a big difference between being pro-market and being pro-business.

Pro-market is a belief in genuine free enterprise, which means companies succeed of fail solely on the basis of whether they produce goods and services that consumers like.

Pro-business, by contrast, is a concept that opens the door to inefficient and corrupt cronyism, such as bailouts and subsidies.

It basically means big business and big government get in bed together. And that’s going to mean bad news for taxpayers and consumers.

Washington specializes in this kind of cronyism. The Export-Import Bank, ethanol handouts, TARP, and Obamacare bailouts for big insurance firms are a few of my least-favorite examples.

But state politicians also like giving money to rich insiders.

A report in the Washington Post reveals how states are engaged in a bidding war to attract Amazon’s big new facility, dubbed HQ2.

Maryland Gov. Larry Hogan (R) will offer more than $3 billion in tax breaks and grants and about $2 billion in transportation upgrades to persuade Amazon.com to bring its second headquarters and up to 50,000 jobs to Montgomery County. …It appears to be the second-most generous set of inducements among the 20 locations on Amazon’s shortlist. Of the offerings whose details have become public, either through government or local media accounts, only New Jersey’s is larger, at $7 billion.

Richard Florida, a professor at the University of Toronto, explains to CNN why this approach is troubling.

…there’s one part of Amazon’s HQ2 competition that is deeply disturbing — pitting city against city in a wasteful and economically unproductive bidding war for tax and other incentives. As one of the world’s most valuable companies, Amazon does not need — and should not be going after — taxpayer dollars… While Amazon may have the deck stacked in picking its HQ2 location, the mayors and elected leaders of these cities owe it to their tax payers and citizens to ensure they are not on the hook for hundreds of millions and in some cases as much as $7 billion in incentives to one of the world’s most valuable companies and richest men. …The truly progressive thing to do is to forge a pact to not give Amazon a penny in tax incentives or other handouts, thereby forcing the company to make its decision based on merit.

It’s not just a problem with Amazon.

Here’s are excerpts from a column in the L.A. Times on crony capitalism for Apple and other large firms.

State and local officials in Iowa have been working hard to rationalize their handout of more than $208 million in tax benefits to Apple, one of the world’s richest companies, for a data facility that will host 50 permanent jobs. …the Apple deal shows the shortcomings of all such corporate handouts, nationwide. State and local governments seldom perform cost-benefit studies to determine their value — except in retrospect, when the money already has been paid out. They seldom explain why some industries should be favored over others — think about the film production incentives offered by Michigan, Louisiana, Georgia and, yes, Iowa, which never panned out as profit-makers for the states. …the handouts allow big companies to pit state against state and city against city in a competition that benefits corporate shareholders almost exclusively. Bizarrely, this process has been explicitly endorsed by Donald Trump. …politicians continue to shovel out the benefits, hoping to steer their economies in new directions and perhaps acquire a reputation for vision. Nevada was so eager to land a big battery factory from Tesla Motors’ Elon Musk that it offered him twice what Musk was seeking from the five states competing for the project. (In Las Vegas, this is known as “leaving money on the table.”) Wisconsin Gov. Scott Walker gave a big incentive deal to a furniture factory even though it was laying off half its workforce. He followed up last month with an astronomical $3-billion handout to electronics manufacturer Foxconn for a factory likely to employ a fraction of the workforce it forecasts.

And here’s an editorial from Wisconsin about a bit of cronyism from the land of cheese.

The Foxconn deal…should be opposed by Democrats and Republicans, liberals and conservatives. There are no partisan nor ideological “sides” in this debate. The division is between those who want to create jobs in a smart and responsible way that yields long-term benefits and those who propose to throw money at corporations that play states and nations against one another. The Foxconn deal represents the worst form of crony capitalism — an agreement to transfer billions of dollars in taxpayer funds to a foreign corporation. …Walker offered the company a massive giveaway — discussions included a commitment to hand the Taiwanese corporation nearly $3 billion in taxpayer funds (if it meets hazy investment and employment goals), at least $150 million in sales tax exemptions…the Legislative Fiscal Bureau, which analyzes bills with budget implications…pointed out that Foxconn would receive at least $1.35 billion and possibly as much as $2.9 billion in tax incentive payments even if it didn’t owe any Wisconsin tax… This is a horrible deal.

Let’s now circle back to Amazon and consider how it gets preferential treatment from the Post Office.

I don’t feel guilty ordering most of my family’s household goods on Amazon. …But when a mail truck pulls up filled to the top with Amazon boxes for my neighbors and me, I do feel some guilt. Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon. …First-class mail effectively subsidizes the national network, and the packages get a free ride. An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip—a gift card from Uncle Sam. Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor. …around two-thirds of Amazon’s domestic deliveries are made by the Postal Service. It’s as if Amazon gets a subsidized space on every mail truck.

In this last example, the real problem is that we’ve fallen behind other nations and still have a government-run postal system.

The way to avoid perverse subsidies is privatization. That way Amazon deliveries will be based on market prices and we won’t have to worry about a tilted playing field.

And that last point is critical.

Yes, cronyism and corporate welfare is an economic issue. It is bad for long-run growth when political favors distort the allocation of capital.

But an unlevel playing field is also a moral issue. It’s simply not fair or not right for politicians to give their buddies special advantages.

And it’s both economically harmful and morally harmful to create a system where the business community views Washington as a handy source of unearned wealth.

For what it’s worth, I also think it should be a legal issue. For those of us who believe in the rule of law, a key principle is that everyone should be treated equally. Heck, that principle is enshrined in the Constitution.

So I’ve always wondered why courts haven’t rejected special deals for specific companies because of the equal-protection clause?

Then again, maybe I shouldn’t wonder. After all, the Supreme Court twisted itself into a pretzel to miraculously rationalize Obamacare.

But none of this changes the fact that it’s time to wean big business off corporate welfare.

P.S. Just in case you harbor unwarranted sympathy for big companies, remember that these are the folks who are often keen to undermine support for the entire capitalist system.

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This is depressing.

Republicans botched the repeal of Obamacare. They’ve already sold out (twice!) on the spending caps in the Budget Control Act, and they’re about to do it again.

And now they want to bring back earmarks.

In this interview with Neil Cavuto, I explain why this is a very troubling development.

One thing I didn’t mention in the interview is that earmarks are inherently corrupt. Indeed, there’s a near-universal four-step process that – in a just world – would result in politicians getting arrested (see 18 U.S. Code § 203) for bribery, graft, and conflicts of interest.

  1. An interest group decides it wants other people’s money and decides to use government as a middleman.
  2. The interest group hires lobbyists, most of whom are former members of Congress or former staff members.
  3. The interest group and the lobbyists direct campaign contributions to one or more politicians.
  4. In exchange for those contributions, one or more earmarks are inserted in a spending bill.

That’s a great deal for Washington insiders, but not so good for taxpayers or honest government.

And if you don’t believe me, read about the oleaginous behavior of Senator Tom Harkin and Representative Jim Moran.

Now let’s consider an argument in favor of earmarks. Writing for Bloomberg, Professor Tyler Cowen of George Mason University argues that the system needs a bit of grease to work better.

…think of earmarks as local benefits inserted into bills to buy more votes in Congress. …Recalcitrant representatives can be swayed by the promise of a perk for their district. That eases gridlock…whether we like it or not, there is something inherently transactional about being governed.

As I stated in the interview, I don’t think this assertion is persuasive. Most legislation is bad for liberty, so I agree with America’s Founders that gridlock is good.

That being said, Tyler makes a couple of compelling arguments. First, he points out that we may need some pork to get good legislation through the process.

Advocates of smaller government should keep in mind that reforming spending and regulation requires some activism from Congress. Gridlock today is not the friend of fiscal responsibility, coherent policy, or a free, well-functioning capitalist economy.

I agree with the first sentence and said the same thing in my talk with Neil. We will need congressional action to reform entitlements and save the country. And if that means bribing a few members to get votes, so be it.

However, I think his second sentence is too optimistic. Good reform is not very likely with Trump in the White House. It’s a judgement call, to be sure, but I believe gridlock will be a good thing for the next few years.

Second, Tyler acknowledges that politicians try to buy votes, but he suggests that earmarks are cheap compared to potential alternatives (such as new entitlements, presumably).

…virtually every member of Congress looks to support government spending that will boost his or her re-election prospects. It is often the case that directly targeted local spending — which may take the form of earmarks — buys support for a relatively low dollar price per vote. If earmarks are removed, representatives are still going to pursue votes, but the total amount of electorally motivated, wasteful government spending may be higher.

This is a potentially persuasive point, but I’ll be skeptical until I see some supporting evidence.

In a gridlock environment, I suspect enacting non-earmark spending is not that easy (though I admit an Obamacare-level budget buster every 10 years would completely wipe out in just one year the money that might be saved over several decades with an earmark ban).

In addition to what Tyler wrote, another pro-earmark argument is that there will always be a person who decides how money is spent. And I’ve had members of Congress tell me that they’d rather make those decisions that have a bunch of left-wing bureaucrats allocate money.

That’s a perfectly reasonable argument, but it doesn’t address my fundamental concern that the existence of earmarks will seduce members into supporting higher overall levels of spending.

Which brings me to my final point. I’m willing to cut a deal.

I’m willing to let politicians allocate 100 percent of spending with earmarks if they’ll agree to a comprehensive spending cap that complies with the Golden Rule and slowly but surely shrinks the overall burden of federal spending.

If the crowd in Washington is serious about the argument that earmarks are needed to grease the skids for desirable legislation, it’s time for them to put their votes where their mouths are.

Given the track records of most of the politicians who support earmarks, I’m not holding my breath.

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It’s not easy being a libertarian in the policy world of Washington. I view the flat tax as a timid intermediate step, with the real goal being a tiny federal government (like the Founding Fathers envisioned) that can be financed without any broad-based tax.

Yet even my timid intermediate step is considered radical and impractical by DC standards. There’s no discussion of fundamental tax reform. Instead, the  debate revolves around whether we can reduce a couple of tax rates in one part of the code and “pay for” those changes by altering some provisions in another part of the code.

This is very frustrating, which is why I joked with Neil Cavuto that we could kill two birds with one stone by trading Trump, Hillary, Manafort, and Podesta to Russia in exchange for that country’s 13 percent flat tax.

But I want to address a couple of serious points in the interview.

To conclude, most people assume that something will pass simply because GOPers desperately need some sort of victory to compensate for their failure to repeal (or even just tinker with) Obamacare.

That’s true, but that doesn’t change the fact that any bill can be defeated if Democrats are unified in opposition and a small handful of Republicans decide to vote no.

By the way, I’m not completely unsympathetic to some of the Republicans who are wavering on whether to vote for a reform bill. Consider their predicament: If there’s a bill that cuts the corporate tax rate and gets rid of the deduction for state and local income taxes (to my chagrin, I’m assuming property taxes will still be deductible), that will be a net plus for the economy. But, depending on other provisions in the legislation, it may mean that a non-trivial number of voters (especially from high-tax states) will be hit with a tax increase.

Members of Congress who want good policy can explain to those voters that the economy will grow faster. They can tell those voters that their state politicians now will be more likely to reduce state income tax burdens. I think those assertions are true, but voters looking at higher tax burdens probably won’t care about those long-run effects.

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