Minnesotans don’t have much experience with political corruption. That may be to our credit, but it also hampers our understanding of the effects of corruption when it occurs elsewhere. Two recent cases illustrate how corruption can occur in different guises and have different economic effects.
The first is the ongoing matter of lobbyists Jack Abramoff and Mike Scanlon. Close friends and political associates of House Majority Leader Tom DeLay, the two apparently ran a modern version of the old Mafia “protection racket.” Lobbyist Scanlon represented Native American tribes with casinos. He and Abramoff would get another friend, Ralph Reed, then head of the Christian Coalition, to stoke that group’s opposition to gambling.
Stressing his clout with DeLay and other influential Republican members of Congress, Scanlon would then go to the tribes and point out how the new anti-gambling campaigns threatened their casinos. The tribes would pay him money, reportedly in excess of $66 million, to head such threats off at the pass.
Some of the money would then funnel back to Abramoff. From him, at least $4.2 million reportedly flowed to various organizations connected to Reed. The amount that may have gone to political campaign chests is the subject of ongoing criminal investigations. There is no direct evidence DeLay was involved in or necessarily even aware of the scam.
A second ongoing case is that of the PT, Brazil’s Worker’s Party. The party of President Luis Ignacio da Silva (popularly nicknamed Lula), but with a minority of seats in the Brazilian Congress, the PT paid large monthly stipends to members of other parties to secure their support for bills President da Silva and the PT were trying to pass.
Collectively, the sums were substantial and far beyond what a labor-based party in a poor country can accumulate from dues and donations. The funds apparently came from padding of government contracts let by agencies, such as Brazil’s post office, controlled by PT party honchos.
These two recent cases of corruption may involve unjust, illegal or immoral activity. The issue for economists is how they affect the economies of the United States and Brazil.
Economists make a distinction between actions that affect efficiency and those that affect equity. Efficiency involves how many goods and services society as a whole gets from using a given set of resources. Equity, or fairness, deals with whom within society as a whole gets what share of these goods and services. Or, to put it another way, efficiency deals with the size of the pie and equity with the relative sizes of different pieces of the pie.
Some economists argue that corrupt acts, though illegal or offensive, need not affect total output or how efficiently resources are used. Perhaps only the distribution of what is produced changes.
For example, the argument would go, shaking down Native American tribes for protection money need not lower U.S. national output. At the end of the day, the Native Americans have less money to spend while the lobbyists — and the organizations to which they passed much of the money — have more to spend. But the country as a whole is not poorer. One piece of pie got bigger and another smaller, but the pie is still the same size. This might also be the case in Brazil.
But many observers see an efficiency outcome. Like the Communist parties in Italy, the PT was long thought to be less corrupt than various center-right parties that had long held power. Until this recent news, da Silva’s administration had a reputation for honesty, and it is pursuing about as orthodox and investment-friendly economic policies as any in South America.
International investors viewed da Silva favorably, and a great deal of foreign money has flowed into Brazil in the last two years. But the corruption scandal has shaken foreign confidence. If foreign investment in Brazil slackens because of political instability engendered by the PT’s ongoing corruption scandal, capital will become more expensive, and there will be less investment in new factories, housing and so forth.
The same might be true in the U.S. case. If the $66 million or more extorted from the tribes would be plowed into productive investments on the reservations rather than channeled to political campaigns and lobbying organizations, output would rise. As in Brazil, if corruption diverts funds from productive investment to ordinary consumption, the output of goods and services to meet peoples’ needs will grow more slowly.
In Minnesota, where a “corruption scandal” usually involves little more than a legislator shoplifting a suede jacket or a councilman’s mother getting some free plumbing, we need not worry too much about this particular problem. But distortions induced by corruption can hurt global society as a whole.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.