More Rules, Smaller Economy

For John, BLUF:  Too many rules = too many lawyers = a slower economy.  Nothing to see here; just move along.

Over at The Wall Street Journal is a self promoting article by Harvard History Professor Niall Ferguson about his new book, The Great Degeneration:  How Institutions Decay and Economies Die.  The article, an essay really, is titled "How America Lost Its Way".  The subtitle is "It is getting ever harder to do business in the United States, argues Niall Ferguson, and more stimulus won't help: Our institutions need fixing."  I am hoping MBA Student Greg Page will weigh in, but in the mean time, here are some comments from John J Meyer, Managing Director of Kermit's Key West Key Lime Shoppe.  (No, that is not Gary Francis in the masthead of the website.)

This article looks at the underpinnings of our economic instrument of power.  While there has been much discussion about government stimulus, or the lack thereof, this article looks at a hidden cost of doing business, which translates to higher costs for everyone, and the curtailment of people wishing to start a business.

The essay argues certain institutions are needed, but compares U.S. institutions with other countries, and finds the U.S. is losing ground.  There is a "By The Numbers" table of days and rankings that may be a bit misleading at first glance.  However, the numbers are explained in detail within the article, and they show the U.S. slipping in comparison to other countries.

From the essay:  "When poor countries improve their institutions, economic growth soon accelerates.  But what about rich countries? If poor countries can get rich by improving their institutions, is it not possible that rich countries can get poor by allowing their institutions to degenerate?  I want to suggest that it is."

While there has been a recent outcry of privacy rights, in relation to phone records, we seldom see discussion and comparison such as the following:

"Canada's Fraser Institute has been compiling an "Economic Freedom" index since 1980, one component of which is a measure of the quality of a country's legal system and property rights.  In the light of a case like the one described above (Southwest Airlines Voucher Litigation, No. 11-cv-8176), there is nothing surprising about the recent decline in U.S. performance.  In 2000 U.S. law scored 9.23 out of 10. The most recent score (for 2010) was 7.12.

Such indexes must be used with caution, but the Fraser index is not the only piece of evidence suggesting that the rule of law in the U.S. is not what it was.  The World Justice Project uses a completely separate methodology to assess countries' legal systems.  The latest WJP report ranks the U.S. 17th out of 97 countries for the extent to which the law limits the power of government, 18th for the absence of corruption, 19th for regulatory enforcement, 22nd for access to civil justice and the maintenance of order and security, 25th for fundamental rights, and 26th for the effectiveness of criminal justice.  Of all the former British colonies in the report, the U.S. ranks behind New Zealand, Australia, Singapore, Canada, Hong Kong and the United Kingdom—though it does beat Botswana."

And, "The decline of American institutions is no secret.  Yet it is one of those strange "unknown knowns" that is well documented but largely ignored.  Each year, the World Economic Forum publishes its Global Competitiveness Index. Since it introduced its current methodology in 2004, the U.S. score has declined by 6%.  (In the same period China's score has improved by 12%.)  An important component of the index is provided by 22 different measures of institutional quality, based on the WEF's Executive Opinion Survey.  Typical questions are "How would you characterize corporate governance by investors and boards of directors in your country?" and "In your country, how common is diversion of public funds to companies, individuals, or groups due to corruption?"  The startling thing about this exercise is how poorly the U.S. fares.

In only one category out of 22 is the U.S. ranked in the global top 20 (the strength of investor protection).  In seven categories it does not even make the top 50. For example, the WEF ranks the U.S. 87th in terms of the costs imposed on business by "organized crime (mafia-oriented racketeering, extortion)."  In every single category, Hong Kong does better.

At the same time, the U.S. has seen a marked deterioration in its World Governance Indicators.  In terms of "voice and accountability," "government effectiveness," "regulatory quality" and especially "control of corruption," the U.S. scores have all gone down since the WGI project began in the mid-1990s.  It would be tempting to say that America is turning Latin, were it not for the fact that a number of Latin American countries have been improving their governance scores over the same period."

The essay also covers a theory of government ("Mancur Olson had a modern version of such cyclical models, arguing that all political systems were bound to become the captives, over time, of special interests."), which I do not believe is inevitable.  However, I do believe that we, the People, must guard against the degeneration of our institutions, just as vigorously as we guard our other rights as citizens.

I wonder by Mancur Olson keeps popping up in these discussions. My thanks to John J Meyer for explaining the item from The Wall Street Journal.

If you are looking for an example of this, someone threw up the Empire State Building.  The plans, based on a couple of other buildings, were completed in two weeks.  The Excavation of the site began on January 22, 1930 and the building was officially opened on May 1, 1931.  Wikipedia has the project starting in 1929.  Any way you cut it, it is not likely it would be completed that quickly now.  Look at The Big Dig.  Incidentally, the many of the workers were immigrants or transients from Canada. Regards  —  Cliff