Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:
The news regarding President Donald Trump appointments and nominations, and the increase in foreign governments’ business at Trump properties, has caused considerable concern regarding possible conflicts of interest, nepotism, insider trading, and other types of grand corruption. Many are worried about what this means—if President Trump’s tendencies toward crony capitalism, or quasi-kleptocracy, are as serious as his critics fear, what can we expect will happen over the next four or eight years?
While grand corruption among the political elite may be new for US citizens, this challenge is all too familiar in many other parts of the world. As a long-time resident of Mexico and corruption scholar, I have some insight regarding life in a relatively corrupt environment, which might be relevant to what the US is about to face:
First: life goes on. Even when grand corruption, influence peddling, and conflicts of interest are rampant at the highest levels of government, for the vast majority of the populace the daily routine goes unchanged. People will continue to work at the same jobs, pay their bills, and pay their taxes. Petty corruption will probably not increase, so bribe-paying will still be a rare occurrence. At least for a while.
Over time, however, the malfeasance at the top may spread downward: instead of “trickle-down economics” there will be “trickle-down corruption.” Several studies have shown that those lower down in a hierarchy look to those at the top to set ethical standards. When those standards are low, or when the higher-ups enjoy impunity, the incentives to engage in corruption increase at all levels. The malfeasance also spreads outward, beyond the bureaucracy, and encourages unethical “cheating” behavior among the populace. For example, the aggrandizement of tax evasion or avoidance (“That makes me smart.”) may lead others to imitate the practice. Unless the IRS is expanded, it will be difficult to keep up with the necessary new audits. As a result of both diversion or mis-allocation of government resources by venal political officials, and lower tax collection caused by increased evasion/avoidance, the government will be squeezed on new projects, especially if any attempt is made to keep budget deficits under control.
Thus, as time passes, the corruption will start to affect government spending. Of course, not all government spending was created equal. Those projects that can generate kickbacks or social capital for those in charge will be favored over transfer programs designed to benefit individuals. Thus, we can expect funding for health, education, poverty, old age, and disability to suffer. Watch for the funding for major construction projects (think Boston’s “Big Dig”) but not for basic maintenance. There will be beautiful new bridges and government buildings where they may not be needed, while the roads are full of potholes. The purchase of new equipment (like police vehicles) will be on the budget, while the last administration’s equipment sits and rusts, or is parked simply because gasoline is not on the budget.
Kleptocracies also sell off or lease government property, and grant concessions, at sub-market prices. Watch for large-scale privatizations of government activities. Such privatizations and concessions are often used to curry favor with businessmen. In a Trump administration, monetary kickbacks are unlikely, but exchanges of favors (possibly to be delivered after Trump leaves office) are quite possible.
A hallmark of more corrupt administrations is that such favors take the form of work performed on private property. Mexico’s president, Enrique Peña Nieto, was embroiled in a scandal involving a real estate development firm that has won very large construction contracts with the federal government, and also sold properties to the president and first lady on questionable terms. Watch for firms that win government contracts and also work on Trump properties—maybe providing landscaping, furniture, or other improvements. Also watch for federal and state laws against politicians receiving lavish gifts to be relaxed.
Perhaps the biggest danger is that practices that are currently considered corrupt may be legalized. Washington is about to become the biggest “revolving door” in history, as Wall Street executives take over regulation and work to change the nation’s laws. (It won’t be the first time that appointments have been used to change laws in favor of big business. For example, under George W. Bush, Assistant Treasury Secretary for Tax Policy Mark Winberger made it possible for firms to make deductions for research and development without actually engaging in research and development, and then he returned to his previous job at Ernst & Young.) The nomination of Walter J. Clayton to head the S.E.C. is an indication. If confirmed, Clayton’s time in office will very likely be dedicated to gutting or eliminating the FCPA, allowing not only U.S. firms, but all firms listed on U.S. markets, free rein when it comes to foreign bribery. (More on that here and here.) As a 2014 OECD report demonstrates, the United States has historically investigated five times as many cases of foreign bribery as the next highest country (Germany) and over 60% of the total number of cases. Without the United States as a watchdog (and despite the UK’s even stronger anti-bribery law), bribery and other types of corruption around the world will flourish. Jeff Sessions, nominated to become Attorney General, stated in his appearance before the Judiciary Committee that under current law waterboarding is illegal—but that doesn’t necessarily mean that he would oppose changing the law if a case were brought before the Supreme Court. Changing the law will be important in the United States because, by and large, and in contrast with countries where corruption is endemic, the judicial system will continue to work properly. In this sense, much of what we may witness is only a “ratcheting up” of the kinds of corruption that have permeated U.S. politics for years. Some analysts, among them Charles McPherson and Stephen MacSearraigh and Oguzhan Dincer and Michael Johnston refer to this type of corruption as “legal corruption”.
The Trump Administration may also seek legal changes that protect Trump himself, as well as his businesses. We’ve certainly seen this in other settings. For example, when Silvio Berlusconi was Prime Minister of Italy, he oversaw modifications of the legal code that reduced the statute of limitations on corrupt acts, reduced sentences for those over the age of 65, and granted prosecutorial immunity to the highest members of government. The last was passed twice, and both times found to be unconstitutional. These laws protected him from the numerous lawsuits brought against him, on charges ranging from corruption to paying an underage prostitute. In the end, he was sentenced to community service for accounting fraud. Donald Trump has a team of lawyers on retainer who help him stay within the law and advise him regarding how far he can go without crossing the legal line. Like Berlusconi, he has incentives to try to use his office to change those laws. It is telling, for example, that all the anti-globalization rhetoric is against manufacturing abroad, with no mention of offshore banking or other services. Watch for laws that make it easier to set up shell companies and for laws that benefit real estate and other Trump interests. Watch for laws that reduce taxes on capital returns. In the end, it doesn’t matter if Trump does not control his companies while in office: the long-term returns to changing the legal environment will pay off long after he has left office.
Finally, we must recognize this common tactic that corrupt political elites often deploy, and that President Trump seems to have mastered: make sure something more interesting makes the news, so people won’t pay attention to what Congress, the Senate, the Executive, or the Judiciary are doing. In Mexico, for example, while the rest of the country was swooning over the news of the H1N1 flu, a discriminatory media law, which essentially ensured that only two companies would dominate broadcasting, was passed on a fast track. Journalists and the public: keep your eye on what really matters, not what makes great headlines and sells newspapers. Hold the Trump administration, including your Representatives and Senators, to account. A free and independent press is the best defense against corruption.