In an interesting new paper, David de la Croix and Clara Delavallade argue that “the most corrupt countries, since they are also the poorest, receive higher amounts of foreign aid.”
Despite the official claim of multilateral organizations to be conditioning foreign aid on institutional reforms of the recipient country, aid is not negatively correlated with corruption across countries. This correlation is, if anything, positive. In this note we provide a rationale for this fact, which can a priori be viewed as irrational.
The rationality for giving more aid to more corrupt countries arises because corruption is itself endogenous, and negatively related to productivity. Since it is optimal for donors to give more aid to countries with low productivity, it turns out that aid and corruption are positively correlated at equilibrium, at least as long as productivity is the main source of differences across countries.
We have evaluated this prediction by estimating the effect of productivity and quality of institutions on both corruption and foreign aid. The positive correlation between aid and corruption due to differences in productivity levels is significant and stronger than the negative correlation arising from differences in governance quality. This result is highly robust to changes in time period, in the way institution quality is measured and in the use of alternate model specifications. References
The graph below, from Cato @ Liberty, illustrates how three measures of government size have changed over time. While government production has remained relatively stable as a share of the economy, total government spending has swelled. The growing gap between these two lines, according to Chris Edwards, mainly represents the massive growth in transfer (or subsidy) programs, such as Social Security.”
Research finds more evidence for the efficacy of monetary as opposed to fiscal policy in ending recessions. And the studies on fiscal stimulus have shown more impact from tax cuts than from spending increases.
We also do not know whether the positive G.D.P. growth resulted partially or mainly from natural equilibrating mechanisms, rather than from monetary or fiscal policy. Much discussion of the recession presumes it will end only because government comes to the rescue.
In fact, the U.S. economy recovered from significant recessions before 1914, when monetary and fiscal policy had not even been invented. Economies can and do recover on their own, and intervention might make things worse by generating uncertainty and distorting the economy’s allocation of resources.
I once thought that spending money was the government’s strong suit. But as of October 20, only $120 billion of the $290 billion available so far from the stimulus package has been spent. Despite the early rhetorical emphasis on shovel-ready projects, the Department of Health and Human Services, the Department of Labor, and the Department of Education accounted for two-thirds of the total spent.
The Department of Transportation, a source of spending that is likely to be rich in shovels, has $30 billion available but has only managed to spend $4 billion. So perhaps it is not surprising that construction workers and manufacturing workers (who make up half of the job losses since the beginning of the recession) are struggling to find jobs.
I think the Keynesian narrative is right about one thing — consumers lack confidence. The crucial question is whether a large increase in government spending financed with borrowed money that swells the deficit to $1.4 trillion is good for confidence or bad for it. No one knows the answer.
The arguments against the stimulus are rooted in basic economics. Unfortunately, basic economics rarely make for an inspiring campaign speech.
Gerald Prante of the Tax Foundation has an interesting take on what TABOR means for the foundations of the American political system.
TABOR, for those unfamiliar with the term, refers to Colorado’s Taxpayer Bill of Rights provision that imposes exogenous limits on the amount state and local government spending can grow in a state. Similar provisions are being proposed in those two states. But is it necessary?
If government always acted in the best interest of society, TABOR would never be needed. Therefore, the supposed need for TABOR is derived from a lack of trust of the representative democratic system. TABOR is kind of like the Bill of Rights in the U.S. Constitution: the Founding Fathers imposed restrictions on Congress (representatives of the people) from passing laws that restrict speech, establish religion, etc. If the Founding Fathers thought that Congress would always do what’s in society’s best interest, we wouldn’t have needed a 1st Amendment that starts with the phrase “Congress shall make no law…” The Bill of Rights is inherently anti-democratic.
Maybe as a first-best solution (in a world of a purely benevolent government), the First Amendment isn’t the best policy. But it’s probably a second-best solution given that Congress isn’t to be trusted when it comes to actively regulating speech, religion, etc.
And that’s the ultimate question with TABOR. If government was purely benevolent, the first-best solution would be some optimal tax-spending mix. But if government is pre-disposed to get larger and larger (when left to its own devices) and be at a size that is far above optimal, a TABOR has the potential to improve societal well-being. It’s likely not to lead to a perfect outcome, but it shouldn’t be compared to what a perfect, purely benevolent government would do. It should be compared to what an imperfect government is actually doing (and likely to do in the future).
That being said, for TABOR to be successful at improving social well-being, it must be the case that there is a significant amount of waste in the state’s spending. If politicians aren’t interested in maximizing social well-being (which is the necessary condition for TABOR in the first place), then who is to say that the spending cuts they make in response to TABOR are going to be right ones?
If the politicians decide to cut funding for some wasteful project as a result of TABOR, then society wins. Resources that were being wasted are now being put to better use (via lower taxes). But if those politicians, in response to TABOR, cut spending that actually has a high marginal social value (higher than the total marginal cost from taxation), social well-being could be made worse off as a result of TABOR. (Just saying that because government spending / GDP fell that such a policy change is good is nonsense. It depends on what type of spending was cut.)
In summary, TABOR would undoubtedly improve social well-being if politicians cut the least valuable government service in response to TABOR’s enactment. But given that TABOR is necessary because we can’t trust the politicians in the first place to do what is right for society, what is the probability that they are going to cut spending in response to TABOR that has a value to society less than the taxes that TABOR would be cutting? That’s the second-best question for both TABOR opponents and TABOR supporters that is most important, yet rarely asked.
The main point here is one that is rarely brought up but extremely important. All government spending is not created equal. Some government spending is absolutely necessary (i.e. police, fire protection, and military spending), some is beneficial but not critical (education spending), and some is no better than putting money into a pile and burning it (subsidies for failing industries). Unfortunately, it seems that the more useless – or even harmful – the type of spending, the more effective a tool it is for politicians to buy votes from various groups (rather than representing the interests of the individual).
This brings us to the issue of TABOR as an “anti-democratic” measure – which it absolutely is, as is the Bill of Rights. But this anti-democratic nature is by no means a negative. Democracy, by its very nature, is anti-freedom. Democracy is rule by the majority, and if history has taught us anything, it is that a majority will frequently find cause to violate the rights of the minority. Freedom can only mean one thing: individual liberty. The concept of “collective rights” is an absurdity. No group of people, no matter the number, can possess rights. Only individuals possess rights. And when we are dealing with questions of government spending and taxes, we are dealing with one of the most sacred category of rights: property rights. Any legislative body that has any control over its citizens property (i.e., any legislative body that levies taxes) must be subject to severe anti-democratic measures.
Accroding to new Gallup data, Americans believe the federal government wastes about half of ever dollar it spends. State and local government is considered slightly less wasteful:
Earlier this week, The Economist released a report card on “child welfare in rich countries.” The report points out that governments often believe that the path to societal happiness lies with increased spending on the welfare of children. But according to an OECD report, this has not been the case. OECD researchers ranked countries based on six categories: material well-being, housing and environment, educational well-being, health and safety, risky behavior and quality of school life. According to the report, “Government spending per child varies a lot, as do outcomes; but the correlation is not strong.”
According to The Economist,
No country gets it all right, though some, like the Nordic ones, do better in general than others, notably America. America spends more than the average of $126,000 per child (excluding health) but its children fare worse than their European peers in areas like health, education and living standard, in part because the poorest American children are considerably more likely than are their European counterparts to stay poor.
The Cato Institute‘s Center for Freedom and Prosperity Foundation has produced a short video outlining the negative consequences of Keynesian economic policies.
RT @ArielGoldring: The left wants the economy to grow yet is infuriates when businesses earn profits. What the hell. 2 years ago
RT @ArielGoldring: Wisdom from an economic maven. @Reuters: FLASH: Obama says will take "several years" for U.S. economy to get back whe ... 2 years ago
RT @ArielGoldring: "Only 45.4% of Americans had jobs in 2010, the lowest rate since 1983 and down from a peak of 49.3% in 2000." http:// ... 2 years ago
Posted by Ariel Goldring 
