Regulatory Seeds of Corruption

More laws = more corruption.

In the runup to the Nov. 2 election, we described how the corrupt Democrats of Tammany Hall ruled New York City politics for more than a century based on various forms of vote-rigging, electoral fraud, and other means of swamping their opponents.

Their purpose wasn't just to amass power for its own sake, they wanted to become wealthy, too.  In those times, as in the present, political power brought wealth with it.

Harry Golden grew up on the Lower East Side of New York City and experienced government corruption first-hand.  His newsletter essay "How Tammany Did It" was republished in his book Only in America in 1958.

The Methodology of Corruption

Big Tim Sullivan was the Tammany Hall power on the Bowery in New York.  He was a tremendous man, physically, and a tremendous man, politically.  He made a fortune out of his position as a Tammany district leader - principally from "concessions" to gambling houses and "Raines Law" hotels.

What was a "Raines Law" hotel?  John Raines, a member of the New York State Legislature, was a strict prohibitionist who unwittingly established hundreds of brothels in New York.

Raines tried, and tried, in the State Legislature, to restrict the use of Demon Rum.  Finally, he succeeded in putting across a bill prohibiting the sale of intoxicating liquors on Sunday throughout the State, except in hotels.  So what happened?  Every saloon became a "hotel."  The saloonkeeper knocked out a few walls upstairs and advertised rooms for rent.  And what decent family would occupy rooms above a saloon?  So pretty soon the rooms were rented out to prostitutes and the money just rolled in for everybody concerned (according to the Lexow and Mazlet investigations).

The police got their share, the politician his cut; the saloonkeeper was able to buy a five-thousand dollar pew in his church, and good old Mr. Raines had his "Prohibition" on Sunday.

John Raines was both a victim of the law of unintended consequences and an illustration of the invidious and evil effects of passing well-intentioned regulations without thinking them through.  Instead of reducing liquor consumption in saloons, his law gave the saloons another product to offer which increased traffic through the saloon proper.

Since prostitution was already against the law, opening a brothel upstairs forced the saloon keeper to pay off the police and the local political powers, much as today's mall operators pay politicians to earmark funds for road improvements near their malls.  Saloons would have had no reason to diversify into either the "hotel" or brothel business without Mr. Raines' law.

As well-intended as his efforts were, Raines' governmental meddling resulted in the exact opposite of anything he or his religious supporters would have wished, yet it continued in force for many years.  Either Mr. Raines was too stupid to realize the counter-productiveness of his efforts or it was all a dumb-show to gull his supporters in the first place.

The Lessons Not learned

The lessons of the "Raines Hotels" were lost on the people who supported the 1919 Volstead Act which forbade the consumption of intoxicating beverages anywhere in the United States.  This created a market opportunity to sell liquor to people who were willing to violate the law.  Not only did this vault the American mafia into the big leagues by creating a widespread need for extra-legal services of all sorts, the fortunes to be made from bootlegging gave Joseph P. Kennedy the money and connections he used to make his family a center of American political power for a generation or two.

We see similar effects with our prohibition on the consumption of various high-demand drugs.  The modern-day prohibitionists who started our "war on drugs" may have had good intentions, but they've ended up funding bandit gangs which are destabilizing the Mexican government by murdering thousands of Mexican civilians and police whom they find it inconvenient to pay off.  Was this what the prohibitionists had in mind?

If Mr. Raines had sincerely wanted to reduce drinking on Sunday instead of gaining talking points with his supporters, he'd have tried to educate drinkers to cut back, one souse at a time.  Changing behavior through education and conviction is a lot slower and a lot less satisfying than passing a law that'll learn 'em, but it works better in the long term.

As Mr. Raines' law increased saloon traffic by giving saloonkeepers another market segment to pursue and increased corruption because they had to bribe officials to ignore their new line of business, laws requiring people to use toilets that don't flush properly led to homeowners importing toilets from Canada or refurbishing old-style ones past their original design lifetimes.

Persuading people to reduce energy consumption voluntarily works better than coercion, but passing laws gives bureaucrats more opportunities to write and enforce laws and gives politicians more opportunities to collect campaign contributions in return for favors.  Could that have been what Mr. Raines had in mind?

Regulations Create Corruption and Higher Costs

We see modern regulatory efforts creating corruption on every side.  When a crane fell off a building in New York City, the building department took the opportunity to rush out new regulations before anyone had had time to even look for the cause of the accident.

While investigating the building department as a result of the accident, The New York Times reported that the head of the city building department had been arrested for taking bribes to help people pass examinations and... to help cranes pass inspections.  In a shocking revelation, the department claimed that none of his crimes had caused accidents.

What can we conclude from this admission?  It's nothing less than confirmation that safety inspections are useless - if falsifying inspections doesn't lead to accidents, why have the regulations in the first place?

The answer's simple - without regulations, the bureaucrats wouldn't have as many opportunities to take bribes, whether legally in the form of permits and fines or illegally under the table to themselves.

The New York Daily News took the opportunity to look further into the subject of permit corruption, and found systemic abuses.  Leading politicians were accepting bribes in exchange for granting building permits and zoning waivers.  This is, of course, illegal, and the News viewed the situation with alarm; but they missed the whole point.

The corruption was possible only because the law forbade people from building on their own property without government permission.  This is tyranny, nothing more, and nothing less.  Restore traditional property rights, and corruption will die out: the fewer powers government has, the fewer the opportunities for corruption.

We recently saw exactly the same effect with the oil regulators, in which their relationships with the oil companies were incestuous in every way.  Since the regulators were unable or unwilling to prevent the oil spill by cracking down on their benefactors and/or lovers, the only effect of the regulations was to push up costs and waste taxpayer dollars.  Similarly, the bureaucracies in charge of mining safety have been shown to be ineffective despite adding their piece to what we pay for coal.

In addition to imposing vast unnecessary costs, excessive regulations choke off innovation.  We used to have a significant lead in exploring for mineral resources under the water, but we're falling behind the Chinese in that as well.

Cut All Government-Imposed Costs, Not Just Taxes

It's well understood how excessive taxation makes it uneconomical to manufacture most goods here in the United States.  This has led to the loss of many high-paying American jobs that once were the foundation of the American lower-middle class.

Thanks to the Tea Party, most Americans are all too aware of the mammoth tax bills that they are paying now and which their children will pay in the future for our monstrous government debt.

It's not as easy to quantify nor as obvious, but the costs of our over-regulations are every bit as large and every bit as destructive.   The Wall Street Journal investigated the total cost of regulatory compliance in the US; "The Regulation Tax Keeps Growing" says:

The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income. This cost is in addition to the federal tax burden of 21%, for a combined cost of 35% of national income. One out of every three dollars earned in the U.S. goes to pay for or comply with federal laws and regulations, and new policies enacted in 2010 for health care and financial services will increase this burden.  [emphasis added]

One third of our national income is spent coping with government regulations and taxes!

We haven't read about government pension debts until very recently because they were not counted as "official" debts, but they're no less real and have every bit as much power to bankrupt us as "official" government debts.  The same is true of the costs of regulation - a business not created or which dies because of over-regulation is just as dead as a business killed off by high taxes.

Will the Tea Party, in its quest to reduce taxes and debt, also tear apart red tape and regulation?  Here's hoping.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Bureaucracy.
Reader Comments

You missed one, Will. The Economist describes a World Bank study which shows how badly government costs, regulation, and corruption hurt the economy.

If there are too many rules, businesses operate off the radar, fill in no forms, and pay no taxes. If the regulations are workable, businesses grow and pay more taxes. Paying taxes is a fair cost of being legal because you can borrow money to grow bigger so you can pay more tax.

Bad regulations benefit only the bureaucrats who enforce them.

The report does not try to assess broader questions of governance, such as macroeconomic policy or overall levels of corruption, even though these have a big effect on how easy it is to do business. What it does measure are the petty bureaucracy and onerous rules that can make life a nightmare for firms. But the findings correlate well with those of wider studies of national competitiveness, such as those by the OECD and the World Economic Forum. Familiar names lead the “Doing Business” league: Singapore, Hong Kong, New Zealand. At the bottom are the usual sub-Saharan suspects, plus Venezuela, whose socialist leader, Hugo Chávez, has continued to harry private industry.

Since the World Bank’s studies began, businesspeople globally have experienced a slight loosening of the red tape. The top reformer over the past year was Kazakhstan, which leapt 15 places to 59th after making it quicker and cheaper to start a firm, and simplifying construction permits. But for most businesspeople in most developing countries (and a few rich ones), trying to keep a firm going and provide jobs and economic growth is still a soul-destroying task. The bank notes that whereas the most dynamic and fastest-growing countries continually improve and update their regulatory systems, the poorest ones plod along under business rules dating from the late 19th century. While they do, they will stay poor.

The remaining differences between the most and least efficient countries on each measure are so extreme that there can be no justification for them. In New Zealand it takes one day to create a new company; in Suriname it takes almost two years. The charge for registering a change of property ownership in Syria amounts to more than a quarter of the building’s entire value. Despite Kazakhstan’s other improvements, it still takes ten documents and 81 days to export goods from there, compared with three documents and five days in Estonia.

According to Dahlia Khalifa, one of the World Bank report’s authors, an important way in which Mexico and other reformers have cut the burden on business is to shift bureaucratic tasks online. Mexican firms can file their taxes on the web, which is still impossible in most Latin American countries. This, along with a drastic reduction in the number of annual payments needed, has cut the time spent grappling with the taxman by 148 hours per year compared with 2004. In Brazil this still takes an astonishing 2,600 hours (see chart on previous page). Beatriz González, who runs Rojo Bistro, a busy French restaurant in Mexico City, confirms that online filing has made her life far easier. Businesses such as hers now make just six payments a year, one of the fewest in the world (in Ukraine, for example, firms must make 135).

India is another country where businesses can increasingly circumvent bothersome bureaucrats by filing their taxes and conducting other official procedures online. The birthplace of the supposedly abolished “Licence Raj” still has a lowly 134th position in the “Doing Business” league, well behind China (79th). But its national average disguises a huge variation between states. Ms Khalifa says that if all the best practices seen in various parts of India were adopted across the whole country, it would leap 55 places in the league. Even India’s poorest state, Bihar, is now making a great play of its efforts to become business-friendly, though its talk is still ahead of reality.

November 11, 2010 11:26 AM
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