McCloskey Wants the U.S. to Repeal the Foreign Corrupt Practices Act

By William K. Black
Quito: March 8, 2015

This is the fourth column in my series of articles critiquing Deirdre McCloskey’s book review in the Wall Street Journal entitled “Two Cheers for Corruption.”  McCloskey has subsequently written to New Economic Perspectives – but apparently not the WSJ – to complain that the title was authored by the WSJ and is contrary to her views.  As I mentioned, in my third column, the title is also innumerate in that McCloskey’s book review actually endorsed three types of corruption – and corruption is inherently a composite of bribery, extortion, and fraud.  She claimed that these three types of corruption exemplified why corruption can be desirable because it makes society more “efficient and just.”  I addressed in my second column in this series the first form of corruption that she endorsed – secret bribery, fraud, and corruption by firms in order to violate building safety codes with impunity.

McCloskey’s second example of “efficient and just” corruption is bribery by U.S. military contractors of Egyptian governmental officials in order to “smooth” the sale of weapons to the Egyptian military.

“But corruption can be efficient and just, too. It can be good for efficiency if, say, bribes are paid to get around bad laws (such as most of the building codes in American cities) or to smooth the course of sales by U.S. businesses to the Egyptian military. And the turkey at Christmas supplied by Tammany Hall justly helped the poor—if they voted right.”

The bribery or extortion of foreign public officials by, or at the direction, of U.S. persons has been a crime since the enactment of the Foreign Corrupt Practices Act of 1977.  Amendments to the FCPA in 1998 extended the Act’s scope.

“With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.”

It was the bribery of Japan’s political leaders by a U.S. military supplier, Lockheed, in order to corruptly secure Japanese purchasing contracts that prompted the passage of the FCPA.  The United States, therefore, eventually followed by the entire membership of the OECD, concluded that allowing procurement fraud through bribery and extortion was “[in]efficient and [un]just.”  McCloskey, however, thinks foreign bribery and extortion by U.S. military contractors in order to maximize their sales of weapons to nations like Egypt should be encouraged.  That has to mean that she believes the U.S. needs to repeal the FCPA.  That would, of course, likely lead the OECD to remove its requirement that member nations adopt similar anti-corruption laws.  The ethical race to the bottom – a Gresham’s dynamic – would be greatly intensified.  Only the least ethical corporations can prevail in this setting and they will enrich the most unethical senior government officials, providing them through bribery with the funds to be political kingmakers in their nations.  McCloskey asserts that this rampant bribery, extortion, and fraud will make the world more “just.”  She does not offer the reader any rationale for her assertion.

Procurement fraud leads to poorer goods and services being purchased at a higher price (plus the implicit loss of any bribes paid, which should have gone to reduce the purchase price).  This is the opposite of efficiency, which is why honest, competent private firms make stringent efforts against procurement fraud when they buy goods and services.  The inefficiency danger of procurement fraud is probably at its greatest in the sale of weapons to developing nations.  The corrupt government officials can be induced to buy big ticket items that the military contractors are most eager to sell (for reasons of inventory and profit margins).  U.S. military contractors have been involved in the sale of over 1,000 M1A1 main battle tanks (MBT) to Egypt and are eager to sell more.  Indeed, U.S. military contractors co-produce the M1A1 with Egypt.  Only the U.S. has more M1A1 tanks than Egypt.  The U.S. no longer produces or purchases the M1A1 for the U.S. military, so U.S. military contractors are particularly eager to sell M1A1’s to the Egyptian army.

Egypt has the fifth largest force of MBTs and seventh largest number of fighter aircraft in the world.  U.S. defense contractors are eager to sell highly advanced F-16s to Egypt.  Egypt needs far fewer MBTs and fighter aircraft and far more and better schools, medical facilities, and infrastructure.  The only obvious entity that Egypt could use its vast MBT and modern fighters and fighter bombers against is Israel.  U.S. military firms also make large weapon sales to Israel.

The resumption of bribery, extortion, and fraud in the sale of U.S. weapons to Egypt and other nations as the norm, through the repeal of the FCPA and the allowance of foreign bribes as a deductible “business expense” for U.S. corporations (a logical implication of McCloskey’s pro-corruption views), would immediately reduce efficiency and justice.  It would also kick-off a Gresham’s dynamic in which the mot unethical firms in the word would compete as to who could most successfully bribe and extort the most unethical government officials in the world to “smooth” the sale of the most grotesquely inefficient, wasteful, and dangerous weapons in the world to some of the poorest nations in the world at the most excessive prices.  Those weapons would be used in many cases to impose and keep in power military dictatorships by killing and maiming the citizenry.  McCloskey wants to bring back the ugly American, and his Western counterparts, and allow him to bribe, extort, and defraud the [fill in the bigoted term for the citizens of the nation we are selling our weapons to here] with impunity.

Of course, the arms dealers of the world (aka “the merchants of death”) are only one example of the corrupt epidemics of bribery, extortion, and procurement fraud that McCloskey’s calls for unleashing on developing nations.  Her same logic applies to all foreign corruption and procurement fraud.  (If it makes the world more “efficient and just” when our elite CEOs and their leadership teams can bribe, extort, and defraud foreign government officials with impunity, it must do the same when they corrupt U.S. officials to “smooth” the sale of goods and services to the United States.  McCloskey’s “logic” implies that we should eliminate or create vast loopholes in laws against domestic bribery, extortion, and fraud. ) Want to “smooth” the sale of your drugs that failed FDA safety and efficacy tests to another nation that would ordinarily have rejected purchasing those drugs – then bribe and/or extort the purchasing officials or their political masters.  Want to “smooth” your foreign sales by forming a cartel to engage in bid rigging to commit procurement fraud in a foreign nation – that too is fine under McCloskey’s “ethical” “logic.”  Any unethical act that will “smooth” the sale of inferior quality U.S. goods at inflated prices to developing nations, particularly bribery, extortion, and fraud, is to be applauded (but not “cheer[ed]”) because it will make America more “efficient and just.”

Conclusion

It is time for McCloskey to stop blaming the admittedly pro-elite white-collar crime WSJ opinion page ideologues for crafting the risible “Two Cheers for Corruption” title for her article.  If she reads what she wrote in the paragraph I quoted above, she will see that she did say that elite white-collar criminals should be encouraged to commit bribery, extortion, and fraud in at least three huge areas of economic and political life.  Her “logic” implies that there are many more such examples and that the key is the CEOs should be immune from prosecution for these felonies.  I hope she will decide that she made a mistake, retract her piece, and begin to write the “sermons” on the vital need for greatly enhanced ethical behavior among our elite economic and political actors that her book review said were essential to “stop” “corruption.”  The WSJ will not publish those sermons, but we will be happy to do so.