Corruption and the last rites of the technocrats

Airing one of my more unfashionable views for no other reason than because Chris Blattman echoes me.

The reasons that corruption should hurt growth are so persuasive that economists have been pretty surprised not to find much evidence.  One team reviewed 41 different cross-country studies of corruption and development. Two-thirds of the studies don’t even find a negative correlation. Cross-country studies have mostly bad data and empirics, so we should not rest here. But Jacob Svensson has a nice overview of the broader evidence and draws the same conclusion: there’s not much to show that corruption reduces growth on net.

I think Acemoglu and Robinson put it best…

Here is a conjecture: corruption is a way for many economists and policymakers to talk about bad political outcomes without talking about politics… Corruption is an attractive talking point for both politicians and many economists because it is fundamentally viewed as apolitical. But poverty, alas, is not.

This fear of politics ties into the technocratisation of policy making. Following the 1980s people began to think that economics was best left to economists. That they would work out clever answers to complicated questions and that clever people would implement them. Even if the electorate was stupid and didn’t want them, technocrats could win the battle of ideas.

The last fifteen years or so, at least since the Asian Financial Crisis, reality has been punching technocrats in the face again and again and again. Of course, most of the punches came from the developing world and could be safely ignored. Finally, in the face of massive suffering in the Eurozone and the US technocrats like Brad DeLong began to think again about politics and political economy.

Its the institutions, stupid. And it is stupid people who build institutions. They’re built by the stupid because we are all stupid. Everyday the worlds stock of knowledge expands more rapidly than you can learn. We are all progressively getting more stupid. If you want long term positive change then you have to force people towards your idea of it. The best organised and most convincing win because it is only in groups that we can overcome our innate ignorance.

Over a long enough time frame, humanity will return to the stone age or die trying. For a long time, people have accepted that ideas matter, but the old idea that putting lots and lots of people behind those ideas is coming back into fashion.


Smack Down Watch: Tim Worstall versus Brad DeLong

Much as it pains me to say, Timmy comes out on top. Brad DeLong lauds the Neville Champerlain that dragged Britain out of the Great Depression:

BERKELEY – Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.

Tim is confused and I share this confusion:

Our Neville became Chancellor in 1931.

Whereupon he got us off the gold standard and cut government expenditure.

It was a couple of years later, when the currency devaluation thing had done its stuff that he started to expand spending again.

I’ve not got the numbers for the deficit or national debt in those years. But the idea that Our Nev did “fiscal expansion” in 31, 32, seems very strange indeed. Anyone know?

So, was Neville Chamberlain to the left of Clegg and Co or is Timmy correct and Brad DeLong doing economic history wrong?

Luckily I don’t have to adjudicate this – I’ve brought the cavalry for Tim, someone even Brad will not snark at – Nick Crafts has the answer (via). There was fiscal stimulus from 1935 as rearmament kicked in, but from 1932 onwards taxes were raised, spending cut and debt stabilised:

Over fiscal years 1932/33 and 1933/34 the structural budget deficit was reduced by a total of nearly 2 per cent of GDP as public expenditure was cut and taxes increased, the public debt to GDP ratio stopped going up while short term interest rates stabilized at about 0.6 per cent. Yet, from 1933 to 1937 there was strong growth such that real GDP increased by nearly 20 per cent over that period…Fiscal stimulus was not a factor in the UK recovery until after 1935 when rearmament began.

The secret was no secret at all, and is alluded to by Tim. It was unconventional monetary stimulus to raise the price level back to pre depression trends. This raised inflation expectations, pushed down interest rates, and promoted consumption and investment, et voila, the UK grew 20% over 4 years in the face of fiscal contraction.

Something similar today from the Bank of England, like price level targeting or NGDP level targeting would get some life into the British economy, and save us all a lot of bother and suffering.

PS: Other quotations from this paper to warm the cockles of Timmy’s heart include…

A major way in which [easy money] stimulated the economy was through its favourable impact on housebuilding in an economy without strict planning rules; the private sector built 293000 houses in the year to March 1935.