A sensible economic policy proposal

Vijay K. Mathur

Published in Standard-Examiner, September 1, 2011, Ogden, Utah

Professor Robert Barro, an economist at Harvard and the Hoover Institution, in his Aug. 8 column in the Wall Street Journal, made recommendations meant for stimulating the economy, solving the budget deficit and debt problems, and ultimately boosting the rating of U.S. government securities. Even though his recommendations are meant to improve the economy in the long run, they are relatively more balanced than most I have seen from the Hoover Institution and other conservative pundits.

Barro's five recommendations and add some of my own. First, he wants to change the entitlement programs, starting with the increase in the age of eligibility. Most likely he is referring to Social Security and Medicare. This is the same recommendation made by the Simpson-Bowles Commission. He also adds that an "economically appropriate indexing formula" be used to calculate benefits. I assume he is advocating a shift from the Consumers Price Index for Urban Wage and Salary Earners (CPI-W)) to the Consumers Price Index for all Urban Consumers (CPI-U). Since CPI-W has been increasing at a higher rate than CPI-U, Social Security benefits are increasing faster than the inflation rate measured by CPI-U.

In addition, I propose an increase in the Medicare tax, an increase in the income cap for the payroll tax, and a decrease in Medicare benefits on a sliding scale as inflation-indexed income rises above $1 million. The Urban Institute calculated that a man with an average wage of $43,000 in 2010 dollars would receive total Social Security and Medicare benefits of $417,000 while paying only $345,000 over his lifetime. The difference is even greater for women at that average wage. Such a mismatch between benefits received and revenues generated is unsustainable. If Americans want these benefits to continue, they have to pay for them.

Second, Professor Barro wants to change the structure of marginal tax rates in the federal income tax system. This is similar to the Simpson-Bowles Commission's recommendation of three income tax brackets, 12 percent, 22 percent and 28 percent. Third, he will pay for the reduction in marginal income tax rates by reducing tax deductions for home mortgage interest, employee fringe benefits and state and local taxes, and elimination of the ethanol subsidy. However, I would propose to limit the tax deduction for home mortgage interest to the first primary residence with the maximum market value of $2 million indexed to inflation rates, and continue tax relief for home equity from the primary residence. This will cover states with the highest average market values for housing. I would also recommend taking away subsidies to oil and gas industries, ranchers, agriculture, sugar and other mature industries.

Fourth, Professor Barro wants to eliminate corporate and estate taxes. I have also proposed reducing and even eliminating corporate taxes. In this age of globalization, the U.S. does not have to compete in corporate tax rates with the rest of the world when it is increasingly becoming relatively easy to outsource businesses in low-tax countries. It is about time that we take away the excuse of high corporate tax rates that many corporations use for not investing and doing business in the U.S. I am not inclined to eliminate estate taxes because its elimination will provide no economic incentive for entrepreneurial and investment activities.

Fifth, Professor Barro proposes a broad-based tax, such as the value-added tax (VAT) with a rate around 10 percent, but exempting commodities like food and housing. I have mentioned such a tax in my writings before, but I recommended that its revenue be used to pay for universal health care. Given all the tax credits, deductions and loopholes in the current income tax code, it is imperative that all Americans have a responsibility to pay taxes for the benefits they receive from the federal government.

It is appalling that, according to the Tax Policy Center, 46 percent of households pay no federal income tax and taxes paid by some of the wealthiest Americans are between 0 to 10 percent. If marginal tax rates are lowered, then there is no need to treat capital gains and dividends any differently than ordinary income. Income of hedge fund managers should be treated as ordinary income and not as capital gains. VAT or any such national sales tax will also be able to tap Internet sales with an appropriate formula for sharing revenues with the states. It will stop the haphazard approach followed by states to implement sales tax on Internet sales.

Professor Barro's recommendations provide a long-term solution for growth and reduction in budget deficits and debt, but they will not solve the short-term problem of unemployment. Since consumers and private investors are not spending enough to lift up the economy to provide enough jobs, the federal government has to spend on public investment projects, including education, which will not only provide jobs but also add to the productive capacity of the nation.

Mathur is former chair and professor of economics, Cleveland Sate University, Cleveland, Ohio. His articles can also be read in guest commentary at www.standard.net. He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.

Reviving the gold standard is of dubious value

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, August 8, 2011.  

Many who are unhappy with the decline in the value of the dollar against foreign currencies, and especially against Yuan (Chinese currency), and with the Federal Reserve Bank's monetary policy would like to bring back gold in the international monetary system. The brief history of the gold standard and its variant will show that bringing gold into international monetary arrangements is impractical and misguided. There are two types of arrangements that have prevailed in the past: the gold standard and the gold exchange standard.

Under the gold standard, all countries fixed the price of gold in terms of their currencies and made them convertible into gold at a fixed price. This system led to fixed exchange rates between currencies, as long as all countries kept the price of gold in terms of their currencies fixed. The need to finance World War I and reconstruction afterwards prompted countries involved, except the U.S., to abandon convertibility of their currencies into gold and dollars at fixed rates.

Professors Paul Krugman and Maurice Obstfeld argue that implementing the gold standard will put constraints on the use of monetary policy to fight unemployment and creates more volatility in prices of commodities. In addition, gold reserves will not meet demands of expanding economies and international trade unless more gold is discovered; gold standard also would give more economic power to gold rich countries like South Africa and Russia to influence macroeconomic policies of other countries.

Attempts were made to resuscitate the gold standard after WWI, but it collapsed again in the midst of the great depression of the 1930s. After World War II, the international monetary system was on life-support, and uncertainty about flexible exchange rates to regulate it led to the gold exchange standard with fixed exchange rates under the Bretton Woods Agreement.

The agreement also called for the establishment of the International Monetary Fund to monitor the system and provide short-term credit. All non-dollar currencies were convertible into dollars at fixed exchange rates (except under certain special conditions) and only dollar was convertible into gold for $35 per ounce.

Hence, the dollar became the key currency for international reserves. At that time, the U.S. had more gold reserves than its liabilities abroad. And other countries, especially European countries and Japan, with war-shattered economies, had large trade deficits and faced dollar shortages. Reconstruction of Europe and Japan required US economic aid. That led to the accumulation of dollar reserves in countries' central banks to conduct international transactions.

The gold exchange standard provided some flexibility in fiscal and monetary policies of countries, as long as the U.S. was willing to provide dollar reserves and convertibility of dollars into gold. But it did make other countries' monetary policy dependent upon the monetary policies of the U.S. Because all countries' central banks fixed prices of their currencies in terms of dollars, market forces with the assistance of central banks kept exchange rates between currencies fixed.

This system required that all central banks have sufficient dollar reserves to keep their currency prices fixed in terms of dollars. For example, if the British pound declined in terms of dollars due to the UK's large trade account deficit, then U.K. central bank had to intervene in the foreign exchange market to buy enough pounds and supply enough dollars to increase the dollar price of pounds at the predetermined fixed rate level. Just the reverse intervention was required if the pound appreciated against the dollar. The fixed price of gold and the quantity of US gold stocks constrained U.S. monetary policy to fight recessions.

The limited U.S. supply of gold was not keeping pace with dollar liabilities due to the growth of world trade and large capital movements. Around 1964, U.S. dollar liabilities were larger than its gold stock, and hence it could not meet all its commitments to convert dollars into gold. Therefore, the confidence in dollar started to decline. The option to increase the price of gold above $35 per ounce would have caused inflation and decreased the value of dollar reserves of other countries' central banks. Thus, the Bretton Woods System was showing strains.

In 1971, the U.S. announced that it would no longer convert dollars into gold at $35 dollars per ounce, and under the Smithsonian Agreement the price of gold increased at first to $38 and then to $42 per ounce. Finally the gold standard was replaced with a dollar standard with no convertibility of the dollar into gold. Fixed exchange rates were replaced with a managed float exchange rate system. Under this system all governments maintained their currencies' exchange rates within certain bounds.

This brief checkered history does not inspire confidence in the gold standard or the gold exchange standard. There is not enough gold to keep up with the growth of world trade and capital movements. Nostalgia with the shiny metal that is good for filling teeth, making jewelry and in other industrial uses, will not solve our or other countries' economic problems. The U.S. trade deficit will not disappear and the dollar will not recover its former value unless we become more competitive in the world market. That requires building up our manufacturing base, complemented by investment in human capital, renewable energy and new technologies.

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

Remedying organ transplant shortage requires financial incentives

Vijay K. Mathur

Published in Standard-Examiner, Ogden Utah, July 2, 2011

Organ transplants for organs like kidney, liver, heart have grown substantially since 1970 with the development of drugs to prevent rejection. However, the shortage of organs also continues to increase over time. In an academic paper in Contemporary Economic Policy, January 2011, Alison J. Wellington and Edward A. Sayre reported that in the winter of 2009, close to 100,000 people were on the waiting list for organ transplants, and most of those were waiting for kidney transplants.

In the private market for other commodities, where price mechanism is allowed to function, the shortage of anything will cause the price to rise until total quantity demanded is equal to quantity supplied. However, in the human organs' market the government does not allow the price mechanism to function, perhaps due to fear or moral guidance that it may lead to financial exploitation, especially of poor people. The National Organ Transplant Act of 1984 does not allow financial incentives for organ transplants. But faced with increasing shortages, even AMA is favorably inclined to consider financial incentives for families of cadaveric donors. Research on the estimated price from cadaveric donors, which tends to equate demand and supply, is spotty and finds very large differences in prices of organs. This could change once markets with appropriate regulations are allowed to function.

In a study in the Journal of Economic Perspectives, Summer 2007, Garry Becker and Julio Jorge Elias estimate that a large supply of live kidney donors would be available relative to the demand at the cost of $15,200 per donor; cost per liver donor is estimated to be $37,600. Perhaps Congress should allow pilot projects in different regions of the country where financial incentives are used to procure organs from cadavers. In fact we have a voluntary system now where we can indicate on our driver licenses, our willingness to donate organs at the time of death in a motor vehicle accident. Financial incentives could be given to those who would like to donate their organs at the time of death in an accident. Wellington and Sayre find that approximately "a quarter of the donated kidneys and one-third of donated hearts came from people who died in motor vehicle accidents..."

Another regulatory mechanism can be found for non-drivers and others who die in other fatal mishaps. The market price prevailing at the time of death will determine the compensation. Perhaps simple procedures and regulations could be implemented for people for drawing up the power of attorney on health matters, and denoting the party receiving the compensation. The compensation can only be paid after verification that organs are healthy and suitable for transplants.

Becker and Elias reason that organs from cadavers will not be enough to meet the demand for transplants. They favor financial incentives for live kidney donors, because they argue that lack of information on the health status of cadavers increases the chance of getting unhealthy organs and thus the failure rates in transplants.  But the failure rate can be minimized if compensation is paid after verification that organs are healthy enough for transplants. In addition, in pilot projects one can at least examine the successes and failures of financial incentives in procuring organs before extending it to kidney procurement from live persons, thus minimizing unwanted consequences.

Altruism has not solved the severe shortage problem, and until new technology is capable of producing kidneys in the lab, financial incentives will go a long way to remedy the shortage. Besides the morality of financial incentives, one has to consider the morality of saving some one's life and at the same time improving the economic well-being of donor's family after his/her death.

Wellington and Sayre report that currently many states, including Utah, have limited financial incentives for live donors of organs in the form of paid leave for government employees or tax deductions to live donors. But they did not find any significant effect of these limited incentives on kidney donations. The authors are of the view that limited financial incentives in states and lack of information to people about the existence of financial incentives for organ donations may be responsible for their weak results.

It seems that a well thought-out program, which compensates for organs from cadavers at full market price, is worth pursuing. It will draw people who are not altruistic and those who are altruistic at the margin.

Mathur is former chairmen of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio.  This article also appears at http://www.standard.net/topics/opinion/2011/07/01. He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/

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/.

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 /

Health insurance markets and health care

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, April, 3, 2011

This year, on March 23, was the first anniversary of the Affordable Care Act. Experts of different stripes from conservative think tanks, conservative politicians, media pundits and editorial writers of conservative media outlets are on the bandwagon of criticizing the law. The column on ACA by Wisconsin Republican Sen. Ron Johnson in the Wall Street Journal on March 23 caught my attention. He heaped praise on the medical care his daughter got. He had insurance through his employer. His praise was sprinkled by highly critical remarks on ACA.

According to Senator Johnson, ACA will destroy the quality of care and innovations in medical care, and implement bureaucrats' take over: I wonder where he got that information about ACA. He had nothing to say about the imperfections (concentration of economic power) in the insurance markets, lack of health insurance to almost 47 million people now and increasing rapidly over time, denial of insurance based on pre-existing conditions and other hardships people face in getting and continuing their health insurance coverage.  

Similarly, Sen. Orrin Hatch in columns, including one in the Standard-Examiner, on March 27, tried to make the case for repeal of the law. The ACA, according to him, will increase insurance premiums, increase unemployment, taxes and deficit. It was not clear where he got his data to make such unsubstantiated claims contrary to other analytical evidence. He praised Utah's health care system. However, if Utah has such a good system, why such a high growth in enrollment during 2009-2010 and in the expenditure, and why is Utah Health Exchange plagued with low enrollment and high premiums? Moreover, the claim that ACA is a government takeover overlooks the fact that UHE, as in some other states, is a government-organized market place, just like ACA requires.

The column by Doug Olson, a small business owner, in the March 24 Standard-Examiner, points out the problems he faced in getting insurance from varied insurance companies in covering his wife's surgery-related medical bills. His experience is indicative of the problems ordinary people face in getting insurance, especially those with preexisting conditions. Sometimes insurance companies refuse coverage on the pretense that the doctor-approved treatment is experimental. A former health insurance executive, Wendell Porter, describes such an incident in his book, "Deadly Spin," which resulted in the death of a child.

Utah politicians do not have to worry about their lifetime taxpayer-paid coverage after only 10 years of service in the Legislature. I am sure federal government employees and politicians will not willingly reduce or do away with their generous taxpayer-provided coverage. Why do the politicians think that other people have to fend for themselves and be deprived of the opportunity to obtain lower priced group coverage if their employers do not provide insurance?

I understand that medical care in the U.S. is among the best in the world for those who have access to it at an affordable price. But those who are priced out of the market for any reason do not even have the opportunity to access the second-best medical care. As Professor David Cutler at Kennedy School of Government at Harvard states in "The Economists Voice," "Substantial empirical evidence shows that the major issues influencing insurance take-up are price and accessibility." The subsidies to low- and middle-income persons under the ACA will go a long way for many Americans to afford insurance and hence adequate medical care.

The access to medical care and its cost not only depends upon insurance markets but also on the pharmaceutical drugs markets and medical care markets in various regions of the country. For example, if medical care industry increases prices, it tends to increase insurance premiums. The cost of drugs, profit motive, monopolistic practices and diversified insurance pools also affect premiums.

The study by Leemore S. Dafny in American Economic Review's September 2010 issue finds that controlling for other effects, health insurers charge higher premiums to more profitable firms, and within an insurance company premiums escalate in the most concentrated (indicative of market power) markets. This study challenges the notion prevalent among many faithful but misinformed supporters of free competitive markets that health insurance markets are highly competitive. The Wall Street Journal, March 26-27, reports that the Justice Department has opened its antitrust probe into the Blue Cross-Blue Shield insurance plans' anti-competitive behavior in several states.

It is hoped that cool heads will prevail in the health care debate. The debate should be guided by factual information and solid objective analysis of the consequences of ACA, rather than ideology. If the ACA has certain deficiencies, then the responsible action will be to remove those deficiencies and substitute them with policies, which assure adequate health care for all Americans.

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

Is lobbying to buy political influence bribery?

Vijay K. Mathur

Published in Standard-Examiner, March 19, 2011, Ogden, Utah

In governments, bribery is when someone pays, in kind or otherwise, for something of value from a politician or public official who willingly accepts or solicits payment (directly or indirectly) for public services and/or political favors. Bribery is mutually beneficial to both the giver and the receiver. Bribery breeds corruption and is a crime under the laws and 38 countries are parties to the Anti-Bribery Convention of OECD (Organization of Economic Cooperation and Development).

According to Wikipedia, Transparency International rated 22 countries in 2008 on the Bribery Payment Index on a scale from 1 to 10, where 1 means that bribery is an accepted norm and 10 means that "bribes are unknown." Even though the U.S. is one of the leaders in spearheading efforts to stamp out bribery and corruption around the world, its own rating on the bribery index is not very encouraging. The index for US was 8.1, and it ranked 9th where eight countries were less bribe-prone than U.S. The Foreign Corrupt Practices Act, enacted in 1977, prohibits businesses from bribing foreign officials to obtain business favors. However, the U.S. Chamber of Commerce is pushing to weaken the law, according to the website The Raw Story. On the annual Corruption Perception Index published by Transparency International, the U.S. is ranked 22 out of 91 countries; it is not an admirable showing.

Bribery is a hidden cost of doing business, and therefore it is passed on to the consumer in the form of higher prices. But it breeds inefficiencies because it directs resources to those who may not be able to compete in open market competition, and hence it adversely affects economic growth. Bribery results in general in the retention and enactment of regulations and laws contrary to the general welfare of most people, in corruption in governance, and it makes corruption contagious.

The question arises, is lobbying for favors from public officials and politicians the equivalent of bribery? Lobbyists are guided by their self-interest, just as in bribery. They represent business groups as well as non-business groups. Businesses lobby to gain contracts, secure market shares, tax breaks, subsidies and favorable regulations and laws. Non-businesses lobby to retain and/or pass laws and regulations, which may benefit only a selected group of people while imposing costs on the majority. But business lobbying dominates the total lobbying dollars. According to the Center for Responsive Politics, the top 20 lobbyists' spending ranged from $107.27 million (Pfizer Inc) to $738.8 million (U.S. Chamber of Commerce) during 1998-2010. In addition to spending on political campaigns, the total spending to lobby Congress and federal officials increased from $1.44 billion in 1998 to $3.49 billion in 2010. In 2010 there were 12,964 registered lobbyists spending on average $267,664 each, whereas the top 20 lobbyists spent an average of $26.23 million each.

Conceptually, lobbyists' spending on politicians and public officials is legally sanctioned bribery protected by increasingly stretched umbrella of the first Amendment of the Constitution; this protection is further stretched by the recent Supreme Court ruling in Citizens United v. Federal Election Commission. An outrageous example of lobbyist's influence is found in Utah where a legislator introduced bill SB231, which would have benefited his big donor at the expense of local zoning laws.

Congress has the power to regulate lobbyists' spending as well as legislators' and public officials' conduct at the receiving end, for example closing the revolving door between governmental services and lobbying. But so far lobbyists have the upper hand. Lobbyists argue that they perform valuable service to politicians and officials by providing issue-information. Even though their role in providing information is laudable, the corrupting influence of lavish spending by lobbyists overshadows their role as conveyers of information. For example the 2009 study by Deniz Igan, Prachi Misra and Thierry Tressel of the International Monetary Fund shows a significant link between spending on lobbying by financial institutions and high-risk lending and securitization practices. Such practices, motivated by financial gains, resulted in the most severe financial crisis and recession in recent memory.

The U.S. credibility in fighting a war on bribery and political corruption around the world is at stake if we do not "clean our own house." Perhaps an incentive system with penalties could focus more attention on receivers than on givers of financial favors; it is cost effective to monitor and discipline receivers. Like bribery, lavish uncontrolled spending by lobbyists to gain favors from politicians in the name of free speech has a corrupting influence on the politics and economics of free markets. It is more acute when there is lack of transparency in governance. Professors Jacob S. Hacker and Paul Pierson appropriately state in their book "Winner-Take-All Politics," "Markets are inevitably shaped and channeled by political forces, dependent on the rules that are created and enforced by those who control the coercive power of the state."

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