Corruption, 2016

Transparency International is a non-governmental organization, headquartered in Berlin, with a mission to document and root out public corruption worldwide. The organization defines corruption as “the abuse of entrusted power for private gain. It can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.”

For more than two decades Transparency International has produced an annual Corruption Perceptions Index. The most recent edition of the index (here) ranks 176 countries from the least corrupt to the most corrupt. The index ranges from a scale of 0 to 100, “where a 0 equals the highest level of perceived corruption and 100 equals the lowest level of perceived corruption.” The Index  “aggregates data from a number of different sources that provide perceptions of business people and country experts of the level of corruption in the public sector.”

CPI2016_Map_web

The least corrupt countries are Denmark, New Zealand, Finland and Sweden. They always stay at the top of the list. The most corrupt countries are Syria, North Korea, South Sudan and Somalia. Denmark’s score is 90 while Somalia’s is 10. The United States is number 18 on the list, with a score of 74, below Canada, Germany and the UK. That’s alarming. Not that the US is below other countries but that the US is more than halfway to the midpoint of the CPI scale (Slovakia and Croatia have scores of 51 and 49 respectively).

Corruption matters because it erodes public trust in government and business, and trust is very important for promoting economic growth and well-being. For example, note the following figure I produced showing the correlation between corruption and per capita gross domestic product. Of course, correlation does not mean causation. And we can debate whether corruption produces low growth or whether low growth invites corruption, but the correlation is stark. Highly corrupt countries are very poor. Moreover, for every 10 point improvement in a country’s perceived corruption, GDP per capita increases by more than $7,000 (that’s what the equation in the figure shows).

CPI-GDP2016

Transparency International also draws a connection between corruption and social inequality. As noted on their website (here): “it’s timely to look at the links between populism, socio-economic malaise and the anti-corruption agenda. Indeed, [US President] Trump and many other populist leaders regularly make a connection between a ‘corrupt elite’  interested only in enriching themselves and their (rich) supporters and the marginalisation of ‘working people’. Is there evidence to back this up? Yes. Corruption and social inequality are indeed closely related and provide a source for popular discontent. Yet, the track record of populist leaders in tackling this problem is dismal; they use the corruption-inequality message to drum up support but have no intention of tackling the problem seriously.”

In other words, we preach virtues but don’t practice them ourselves.

Which reminds me. After discussing these ideas in my applied ethics class I suggested that students can obtain an automatic A in the class if they leave me a $100 bill with their name written on it in pencil. Some students laughed while others wanted to negotiate the price. Apparently they didn’t learn anything.

Are we better off today than our grandparents were in the 1950s?

I finished reading Robert Gordon’s massive book, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War. And it is massive, topping 750 pages including notes and references.

Gordon’s thesis is simple: American growth and the improvement in the standard of living for people living between 1920 and 1970 was better than the improvement in growth and living standards for people living between 1870 and 1920 and for those living between 1970 and today. Stated differently, while my grandparents had it better than their grandparents, the improvements that my grandparents experienced were more substantial than the improvements I have seen.

The reason is that the inventions and innovations that occurred between 1920 and 1950 were more significant and had a greater impact on labor productivity and personal well-being than the inventions and innovations that occurred before and after that time period. Gordon systematically reviews “all” of them (hence the long book). He considers improvements in food, housing, transportation, communication, health, working conditions, financial services.

Here are simple examples: Going from no cars in the late 19th century to cars available to most households in the early 20th century had a greater impact on people and businesses than going from cars then to cars with airbags and rearview cameras today. Similarly, going from no electric lighting to electric lighting had a greater impact than going from electric lighting to more efficient electric lighting. Going from no penicillin to penicillin was more profound than going from penicillin to more powerful penicillin. Going from no telephones to telephones was more important than going from telephones to mobile phones today. The list goes on and on. People living between 1920 and 1970 saw more radical changes in their lives than people living since the 1970s.

What made the book fun was the presentation of stories and historical examples he gave. Even if you are not interested in the economics behind his thesis, you can read the chapters and gain insights about how life improved for people during the early half of the 20th century.

Gordon raises some warnings. It is not likely that we will see the kind of growth that the economy and people experienced from 1920 to 1950–what he refers to as the “Great Leap Forward”–anytime soon. And worse, the widening level of inequality we are seeing will only make things worse. The growth rate of real income for the top 10 percent and for the bottom 90 percent of persons in the U.S. was about the same in the mid 20th century–about 2.5 percent per year. But since the 1970s the top 10 percent of wage earners has seen real wages increase more than 1.4 percent annually while real wages for the bottom 90 percent of workers have decreased during the same time period. This is not good for a healthy, growing and productive economy.