Tuesday, May 31, 2011

The economic value of trust in a society

Vijay K. Mathur

Published in Standard-Examiner, May 28, 2011

Trust (confidence), is an implicit contract between entities -- private and public -- including governments and nations. Even explicit contracts are facilitated by trust. As argued below, trust has economic value in a society. Corruption and fraud in any society inflict the most damage to trust.  Almost every day we hear about corrupt practices of politicians, financial brokers and advisers, law enforcement officers, bankers, hedge fund managers and many others groups of people and institutions. Politicians' activities, guided by contributions from deep-pocketed lobbyists, do not create trust among voters who elected them to do the common good.

Those contributions amount to legalized bribery. In fact an International Monetary Fund study by Deniz Igan, Prachi Misra and Thierry Tressel in 2009, found a significant positive relationship between lobbying by financial institutions for special favors from policy makers and the recent financial crisis.  Department of Justice data show that during 2001-2006, 6,899 individuals were charged with public corruption offences and the Justice Department obtained 5,876 convictions nationwide. In 2010, Consumer Sentinel Network of Federal Trade Commission received 725,087 consumer complaints for fraud costing $1.7 billion.  In recent years, Utah has witnessed the rise of "affinity fraud" where LDS Church members abused the trust of fellow members by enticing them to participate in bogus investment schemes.

Corruption and bribery (a hidden price) feed upon each other and lead to dysfunction of markets, private and public institutions, and ultimately loss of confidence and trust in democracy. Kenneth Newton and Pipe Norris, in their working paper at the Kennedy School of Government of Harvard University, would argue that loss of public confidence in institutions representing pillars of the society poses a major threat to democracy. The clear example of this loss of trust in government and its institutions can be found in the recent bailout of the financial institutions during the current severe recession of 2008-09, even though the bailout was necessary to save the economy from the brink of another depression.  In fact, this lack of trust has also spread to our financial institutions. We can see the damaging effects of bribery and corruption on the economies of India, many countries in Africa, Asia, Middle East and Eastern Europe.

How is corruption related to trust in people and institutions? Professor Eric M. Uslaner, of the University of Maryland, states that, "Corruption flouts rules of fairness and gives people advantages others don't have." Since corruption often accompanies bribery either in kind or money, it gives advantage to rich people over people with modest means in the allocation of resources.  Thus, loss of fairness in the allocation of resources and/or income fosters distrust. Economic inequality, according to Professor Uslaner, is the source of corruption, because "corruption and inequality wreak havoc with our moral sense."

The loss of trust in people, institutions and governments imposes high costs on a society. For example, besides the psychological cost to victims of fraud and corruption, people have to spend time and money in drawing up contracts for minor transactions; businesses have to spend more resources to monitor shirking by employees, thus affecting production and quality control; quality of health care will be costly to implement and administer. In the political arena, loss of trust in politicians may be short-lived, but each time corrupt practices and/or political favors to rich lobbyists come into the limelight it undermines confidence in the political process and institutions. In fact, many surveys find that majority of voters lack confidence in Congress.

The loss of trust in government institutions encourages many to engage in the misuse of resources allocated for government programs. Corruption, fraud, bribery and politics motivated by rich influence-peddlers end up in a self-reinforcing vicious circle that ultimately poses grave threats to democratic institutions at all levels of government.

Reviving trust in ethnically diverse and increasingly unequal-income societies like the U.S. poses a greater challenge than in homogenous and more income-equal societies. A recent study for States in the U.S., by Oguzhan C. Dincer in the April 2011 issue of Contemporary Economic Policy, found that after controlling for many other factors' effect on trust, an increase in ethnic polarization and income inequality significantly decreases trust. The finding on the effect of income inequality on trust is especially revealing.  As Professor Raghuram Rajan cogently argues in his book, "Fault Lines," "the most important example of the first kind of fault line, ... is rising income inequality in the United States, and the political pressure it has created for easy credit."

Building trust has to start with the leaders in business and government who recognize the fault lines. We have to move away from easy credit as the path of least resistance, as Professor Rajan argues, to the path of opportunities in education and jobs with a future to Americans.  Short-lived episodes of distrust must not be allowed to become the norm, because distrust is contagious. Loss of trust will impose a high price to free markets and democratic institutions.

Mathur is former chair of the economics department and professor of economics, Cleveland State University, Cleveland, Ohio. He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.

Monday, May 9, 2011

Guns are efficient killing machines requiring stricter regulation


Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, May 9, 2011


The late Milton Friedman, a Nobel Laureate in economics and the strongest defender of freedom to choose and free enterprise, once remarked, "Every friend of freedom ... must be as revolted as I am by the prospect of turning the United States into an armed camp, by the vision of jails filled with casual drug users and an army of enforcers to invade the liberty of citizens on slight evidence."

Guns, especially handguns, in the hands of people, are the most efficient killing machines ever invented. Like any other machines in industry, they are very productive, if one intends to use it to kill or commit violent acts.

Let me first lay out the facts about the productive power of guns. The National Institute of Justice's data show that in 2005 there were 8,478 homicides by handguns; three times higher than for guns and for other weapons, four times higher than for knifes, and 12 times higher than for blunt objects. The institute's data also show that from 1975 to 2005, 77 percent of homicide victims who died from gun violence were between the ages of 15 and 17. This data not only shows that guns are more efficient killing machines than other weapons, but also are used to kill those who will become the most productive members of society.

What about gun ownership and violence? Data from the Violence Policy Center, a non-profit educational foundation, shows that five states (Louisiana, Alabama, Alaska, Mississippi, and Nevada) which had the highest gun ownership rates (ranging from 31.5 percent in Nevada to 60.6 percent in Alaska), and lax gun laws, also had the highest per-capita gun death rates as compared to the national rate. The states with the lowest gun death rates also had much lower gun ownership rates. The policy center characterizes lax gun laws as those that "add little or nothing to federal restrictions and have permissive concealed carry laws allowing citizens to carry concealed handguns."

A major study by Harvard School of Public Health in 2007 also revealed higher homicide rates among children, women and men of all ages in states where more households had guns. A statistically sophisticated and detailed study by Professor Mark Duggan, published in the Journal of Political Economy in October 2001, also found that, both at the state and county levels, and controlling for other effects on homicides, gun ownership has a significant positive effect on homicide rates. In addition, carrying concealed weapons laws in counties -- where states passed such laws and had the highest pre-CCW gun ownership rates -- had an imperceptible deterrent effect on violent crimes; therefore, "...suggesting either that existing gun ownership did not increase the frequency with which they carried their guns or that this carrying had a negligible impact on the behavior of criminals."

The data indisputably shows that prevalence of guns significantly increases violent crimes. The constitutional protection under the Second Amendment "...to keep and bear Arms..." in the context of "...A well regulated Militia..." does not deny states and/or federal government the right to regulate this right. The question is why are gun lobbies, including the NRA, always fighting stricter handgun control regulations? Why are gun rights different than other rights specified in the Constitution? Like freedom of speech, gun rights are not an absolute right. It stops where it impinges on others' rights for safety and security.

The usual argument that carrying a gun adds more security from crime is not supported by evidence. In addition, if this argument is carried to its logical extreme, it implies that each person is responsible for his or her own security; the role of collective security provided by the police force becomes redundant. It is the responsibility and gun lobby's self-interest to promote stricter handgun laws to keep guns out of the hands of untrained, and violent and/or crime-prone people, and to disrupt legal and/or illegal supply chains that feed criminal elements of the society. One can see the effect of uncontrolled guns-supply chain on the violence in Mexico.

The emphasis on the right to keep and carry guns without sensible regulations to prevent present and future monetary and human costs associated with gun violence does not serve the broad interests of the society, including the gun lobby. In 2001, Professors Philip Cook and Jens Ludwig estimated the cost of gun-related violence, injuries (intentional or unintentional) and suicides to be around $100 billion per year. To put this cost in perspective, the authors stated that $100 billion could cover health care costs of two-thirds of uninsured people or pay college tuition for 27 million people in good public universities. A freedom-loving and democratic society, which focuses only on the right to bear arms, and ignores huge human and financial costs, and loss of freedom from internal safety and security threats to the civilian population, ignores them at its own peril.

Mathur is former chair of the economics department and professor emeritus of economics, Cleveland Sate University, Cleveland, Ohio. He also posts original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc /