Professor Zephyr Teachout (Daedalus, Summer 2018, American Academy of Arts and Sciences) defines corruption as the “exercise of public power for private, selfish ends.” Transparency International’s definition of corruption is almost the same as Teachout’s definition. Bruce M. Owen argues in Sieper Policy Brief (Stanford University, May 2012) that there is Type 1 corruption, such as bribery and extortion, and Type 2 corruption, where politicians solicit campaign contributions from interest groups who in turn demand political favors.

Corruption of politicians, government bureaucrats and the judicial system is destructive to democracy and free markets if they primarily serve their own interests, lobbyists and influential rich people, and not all Americans. Crony capitalism, money laundering by businesses and deep-pocketed elites, including high-ranking executives trying to gain political favors, also undermine confidence in free markets and in the democratic system. Public and private institutions must resolve the conflict posed by what economists call the Principal Agent Problem. Politicians, who are agents of voters, must primarily serve voters’ interests and not their self-interest, and business executives, as agents of shareholders, must watch shareholders’ economic interests and not their own. Many other institutions, such as health care, face the same problem. Voters, shareholders or health care patients have no easy way to verify the actions of their agents if information flow is imperfect. Private media, as an agent of the public, is often not very helpful in providing accurate information.

Recent examples of corruption are insolvency of the Silicon Valley Bank (SVB) and the First Republic Bank (FRB). News reports show that CEO Greg Becker of SVB sold all his shares in the bank close to 11 days before the insolvency. Becker lobbied congressional politicians to repeal part of the Dodd-Frank legislation, passed after the severe recession of 2018, to water-down scrutiny of midsize banks such as SVB. Similarly, cashing activities by executives were reported before the insolvency of FRB. Criminal conduct examples are the recent guilty plea by a former senior executive of Wells Fargo Bank and the conviction of Bernie Madoff for his Ponzi investment scheme. The Consumer Financial Protection Bureau has charged and fined major U.S. financial institutions such as Citigroup, J.P. Morgan and American Express several times.

Hundreds of corruption episodes and guilty verdicts are reported in Wikipedia against state representatives and local officials in most states, including Utah, and for many in the U.S. Congress. The recent corruption scandal has not escaped Supreme Court Justice Clarence Thomas either. The Center for Public Integrity gave Utah a D in 2015 for integrity. More recent corruption examples in the U.S. Congress are Rep. Steve Stockman (R-TX) for conviction of fraud, guilty pleas by Chris Collins (R-NY) for insider trading and Duncan Hunter (R-CA) for misuse of campaign funds. Former President Trump’s possible criminal violation (not yet decided) in sabotaging the election of President Joe Biden in the 2020 presidential election, and now a criminal indictment by the New York grand jury, are prime examples of corruption in the election process. It poses a severe threat to democracy.

Definitions of corruption also include corruption episodes (Type 2 corruption) that escape the legal threshold, such as the involvement of financial institutions in the insolvency of some major financial institutions such as Bear Sterns and Lehman Brothers. It caused the severe financial crisis and recession in 2008. Taxpayers’ money prevented the financial meltdown. As Transparency International (TI) states, many times corruption happens in the shadows. The Corruption Perception Index (CPI) published by TI for 180 countries ranks the U.S. 23rd in the world from the top and reports its CPI of 69, even below Uruguay. The maximum CPI of 100 means very clean and 0 is highly corrupt. Denmark and New Zealand top the list. Corruption evades trust in public and private institutions and is damaging to democracy and the free enterprise system.

Free markets depend upon trust in the private sector. Past and recent insolvencies of SVB, FRB and Credit Suisse are examples of the loss of trust in these financial institutions. Untrustworthy behavior could also be found among many investment managers’ activities, treatment cost in health care institutions, monopoly pricing in pharmaceutical industry and poor workmanship in construction industry. Corruption also adversely affects activities such as capital investment, innovation, productivity, financial transactions, income distribution and, therefore, ultimately economic growth.

Preservation of democracy and free markets requires voters’ vigilance of politicians, government institutions and private institutions; insistence on truthful information; and accountability to regulations and laws. Delia Ferreira, chair of TI, states, “People’s indifference is the best breeding ground for corruption to grow.”

Vijay Mathur is former chair and professor in the Economics Department and now emeritus professor at Cleveland State University, Cleveland, Ohio, He resides in Ogden.

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