LITMIR.BIZ

      Frank Fukuyama has said that “getting to Denmark” should be the goal of public policy.²⁴ That might seem an impossible dream, though, since Denmark is much more ethnically homogeneous, and societies where people are more alike have been shown to be generally more trusting²⁵ and less corrupt.²⁶ But we couldn’t turn America into Denmark, and we wouldn’t even want to do so. As a self-styled “nation of immigrants,” America prides itself on its diversity, and we’re not about to change that. Moreover, some countries that beat us in the CPI rankings are far more welcoming to immigrants. While 14 percent of American residents (legal and undocumented) are foreign-born, the figure is 20 percent in Canada and 26 percent in Australia, the true nation of immigrants. Canada scores 81 on the CPI, and Australia comes in at 80. Evidently, ethnic diversity isn’t an excuse to throw up our hands over corruption.

The Cost of Corruption

      Corruption is a silent killer of the U.S. economy, and it’s possible to put a number on this. The dots in Figure 1 represent 107 countries, with their 2014 CPI score on the horizontal axis and their 2015 per capita gross domestic product on the vertical axis.²⁷ Through a standard econometric estimation technique described in Appendix A, the diagonal straight line estimates how corruption affects a country’s wealth (per capita gross domestic product). From corrupt and poor Afghanistan up to honest and rich Luxembourg and Singapore, less corruption means a higher GDP.

      The model tells us that if America’s CPI score were to rise to Canada’s score of 81, its per capita GDP would increase from $54,629 to $59,914. Were the CPI score to increase, per impossibilia, to the level of Denmark at 92, per capita GDP would rise to $68,219. For America as a whole, that would amount to an 18 percent or $3.2 trillion increase in the country’s wealth. Think of that missing wealth as the tax that corrupt politicians, regulators and judges impose on all Americans.

      The results shown in Figure 1 are consistent with the many cross-country, empirical studies on how public corruption impoverishes people.²⁸ Within the United States as well, there’s a penalty for living in corrupt states. Measuring differences in corruption state by state is tricky: looking at the numbers of state prosecutions of government officials might not be very helpful, since fewer prosecutions could mean either that officials are more honest or that state prosecutors are themselves corrupt. The way around this problem is to look at prosecutions brought by the federal government, since the Justice Department can be presumed to employ uniform standards across the country. With federal prosecutions as a proxy for levels of corruption, it has been shown that corrupt states have significantly lower economic growth.²⁹ Another study found that corrupt states have lower bond ratings, which means they pay higher interest rates on their public debt, and these costs are passed on to taxpayers in those states.³⁰ As a matter of common observation, Louisiana and Mississippi (first and second, respectively, in federal corruption prosecutions per capita) aren’t exactly economic dynamos.

FIGURE 1

      More Corruption, More Poverty