McCloskey’s First “Cheer for Corruption” is also a Cheer for Fraud

By William K. Black
Quito: March 5, 2015

In my first column in this series I discussed the gaping contradiction in Deirdre McCloskey’s book review of two books on corruption. The title of her article captures the immorality of her proposed “sermons” on corruption: “Two Cheers for Corruption.” McCloskey urges us to embrace many forms of corruption because she asserts that they add to economic efficiency and justice.

“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.”

McCloskey’s first of three “cheers for corruption” is inherently a cheer not only for corruption, i.e., bribery and extortion, but also a cheer for four types of felonies by elite white-collar criminals. The first crime is deliberately violating the building safety codes. The second crime is covering up that underlying crime through corruption – the bribery and/or extortion of the building safety code inspectors.

McCloskey does not discuss the third type of elite white-collar crime that she “cheers,” but it is required by her “logic.” The third type of crime is defrauding the public by deceiving them to cause them to believe that the building complies with the safety codes. In the case of large commercial, industrial, or multi-family construction the fraud victims would number in the thousands.

The fourth type of elite white-collar crime is also required by McCloskey’s logic. If it is “just” and “efficient” for CEOs to violate “bad” laws such as building safety codes, then it must be “unjust” for the government, when it learns of such crimes, to prosecute the CEO for violating a “bad” law. It follows logically, under McCloskey’s “logic,” that it must be “just” and “efficient” for the CEO to bribe and/or extort those involved in the criminal justice system (the police, FBI, witnesses, prosecutors, judges, and jurors) to ensure that the CEO is not successfully prosecuted for violating any law that he personally considers “bad.”

McCloskey’s first “cheer for corruption” is also under her “logic” a cheer for a Gresham’s dynamic. The most unethical CEOs will gain a competitive advantage over their honest rivals because their willingness to commit the four types of felonies I have just described will create a powerful competitive advantage (lower costs) over their honest rivals. When felons prosper, market forces become perverse and produce a classic “Gresham’s dynamic” in which fraud can become endemic as “bad ethics drive good ethics out of the marketplace.”

McCloskey’s first cheer for elite white-collar crime must produce the opposite result of what she claims to favor in her article’s concluding paragraphs. Instead of teaching “ethical” “sermons” crafted to ensure that “indignation” against corruption becoming “pervasive” – which she assures here readers “stops corruption,” McCloskey actually advocates pervasive elite-white collar crime with impunity for the CEOs from sanctions. Under her unethical system our most unethical CEOs will prevail and our honest business people will fail.

McCloskey’s modern intellectual heroes are anarcho-capitalists. They despise democratic government as inherently a “thief” and as a threat to “natural liberty.” Her first “cheer for corruption” exemplifies this ideology. The owner of the buildings to be constructed should personally choose which laws he considers “bad.” Because complying with the building safety codes could reduce his profits, he has a powerful incentive to see the building safety codes as “bad.” For the reasons I have explained, anarcho-capitalists promote policies that inherently create an intensely criminogenic environment in which elite white-collar crimes can be committed with immunity from the law. This requires gutting and rendering illegitimate the very concept of democratic government and the rule of law. One can see why their elite corporate criminal patrons in the C-suites adore the anarcho-capitalists. The corrupt CEOs could care less that the anarcho-capitalists also add a clause to their works opposing “corporate welfare.” The corrupt CEOs’ priority is the ability to lead their “control” frauds with impunity from effective regulators and prosecutors.

The corrupt and fraudulent CEOs to whom McCloskey gives her first cheer maximize their profits through a multi-part strategy. They do not, of course, openly violate the building safety laws. Doing so would expose them to imprisonment and reduce the value of their property dramatically. Their optimal strategy is to pretend to comply with the building safety codes. They do so by (1) bribing and/or extorting the building inspectors to falsely certify that the CEO’s construction complies with the building safety codes and (2) by defrauding the public as to their compliance with the building safety codes. If the CEO admitted that his commercial building did not comply with the building safety codes (much less that it failed to comply because he deliberately violated the safety codes and bribed and/or extorted the inspectors to cover-up his violations) he could not get insurance for the building and could not attract any reputable tenants. Reputable tenants pay considerably higher rents than do unethical tenants (firms) that are unconcerned that the building’s failure to comply with the safety codes puts their worker’s and customer’s lives at risk.

The CEOs’ frauds transfer the safety risk to us – the honest firms renting space in the building that are unaware that it does not comply with building safety codes, the workers, the customers, and people in nearby buildings that can be injured or killed when the large commercial building that does not comply with the safety codes suffers catastrophic damage such as a fire or collapse in an earthquake that it should have survived. In economics jargon, buildings that do not comply with the safety codes create negative externalities.

CEOs that (secretly, via corruption and fraud) do not comply with the building safety codes will gain a significant competitive advantage over ethical rivals. The unethical CEOs can construct a building more cheaply, particularly in areas of high seismic risk, by not complying with the safety codes. Severe earthquakes are very unusual even in areas subject to high seismic risk, so the corrupt and fraudulent CEO will likely get away with his crimes for decades. Better yet, because frauds such as not properly installing adequate high-quality rebar are not visible after construction, the corrupt and fraudulent CEO can sell the building long before there is any material probability of a severe earthquake causing the building to suffer a catastrophic failure. These are ideal circumstances for creating a Gresham’s dynamic in which the unethical real estate CEOs drive their ethical rivals from the marketplace.

If the CEO’s elite white-collar crimes are detected, he will then seek to suborn the regulatory and criminal justice system to avoid any meaningful personal sanction. McCloskey’s “logic” tells us that the best way to suborn is through fraud, bribery, and extortion.

Contrary to McCloskey’s claims, secretly violating building safety codes through corruption and fraud is unethical, criminal, inefficient, and unjust. Given McCloskey’s concluding odes to the need for clerics, teachers, mothers, judges, and the media to consistently preach “sermons” that will produce “pervasive” “indignation” against “corruption” by stressing the need for the highest “ethical” behavior it is baffling that she “cheers” for fraud and corruption that would enrich the most unethical CEOs who secretly endanger our lives and our children’s lives for the sole purpose of making themselves even wealthier.

Building safety codes cover a broad range of topics (which is part of what distresses McCloskey). There are a very large number of specialized codes, not generally referred to as “building codes” that are also essential to the safety of residential and commercial structures and occupants, including many specialized safety codes for high risk activities and structures (such as hospitals, nursing homes, and facilities with large electrical equipment or flammables within or adjacent to the structure). Many of these safety codes are designed to protect construction workers.   The National Association of Home Builders (NAHB) is a strong supporter of these codes to protect workers rather than complaining about their cost. The NAHB recognizes that allowing builders to bribe their way out of complying with safety building codes would create a “Gresham’s” dynamic in which cheaters would gain a competitive advantage. This turns market forces perverse and can lead to bad ethics driving good ethics out of the markets.

Here are some prime examples of things included in conventional building safety codes.

• The Field Act. I’ve written several times in blogs and published academic articles about the fact that corruption kills and that one of the important ways by which it kills is poor building standards, or the non-enforcement of good standards due to corruption. California’s Field Act is an example of a seismic safety code (for school buildings) that, particularly as expanded over time, has been exceptionally effective in preventing the loss of life and serious injury. The most recent severe earthquakes in Turkey and Sichuan (2008) and the factory collapse in Bangladesh show the severe loss of life that comes from corruption that prevents the enforcement of building safety codes.
• Smoke detectors and fire suppression systems. There are many portions of building safety codes that reduce fire danger such as wiring, grounding, fuse, and circuit breaker requirements, requirements that aid egress in the event of a fire, and fire-resistant roofing materials. Commercial building safety codes have far more stringent requirements for fire prevention, delaying the spread of fire, making it possible to exit the building even in intense fire, and fire suppression. Strengthening building safety codes to require the installation of fire suppression sprinkler systems in new homes would dramatically reduce injuries and deaths to residents and firefighters.

Our efforts against fires are working. The U.S. Fire Administration reports that fires, deaths, injuries, and property damage (in real terms) are all falling despite our population and number of buildings expanding.

The National Fire Prevention Association reports that the downward trend has generally continued since 1980

• Stronger buildings suffer significantly less damage in hurricanes with a highly positive benefit-cost analysis in areas most prone to earthquakes. FEMA has found that “safe rooms” can allow most families to survive even extreme tornadoes and hurricanes that destroy the home.
• Guardrails and handrails. There are safety code requirement that the rails be high enough to prevent falls, that the rails be strong enough to not fail when someone falls into them, and requirements that the rails be sufficiently close together that children cannot put their heads through the rails, which can result in strangulation, or fall between the rails.

“Guardrail balusters improperly spaced – too far apart, falling hazard or head trap – this is a very common defect found on older exterior decks and porches, and on older-model steel circular stair kits and stair landings.” 

Conclusion

McCloskey claims that it is “just” when white-collar elites in a democratic state are able (secretly, through bribery and extortion) to violate any law with impunity that they personally decide is “bad” even when it (unknown to us due to their fraudulent misrepresentations) puts our lives and the lives of our children in jeopardy. McCloskey’s own examples and “logic” show the quadruple types of elite white-collar crimes that she cheers: (1) the underlying substantive crime of violating the building safety codes, (2) the crime of extortion or bribery of the inspectors or their superiors to cover-up the safety code violations, (3) the copious frauds in deceiving the public into believing that the building complies with the safety codes, and (4) if the elite crimes are detected, the subsequent bribery and/or extortion of law enforcement or judicial personnel, witnesses, and jurors to ensure that elite white-collar criminals can commit these underlying crimes with impunity. Her “logic” requires here to claim that the ability of elite white-collar criminals to commit these four types of felonies with impunity from the laws, for the purpose of increasing their profits by deceiving us in a manner designed to cause us to put our lives and the lives of our children at risk would make our Nation more “just.”

The infamous Supreme Court decisions, Plessy v Ferguson, 163 U.S. 537 (1896), upheld racial segregation under the rationale of “separate but equal.” The Court upheld Louisiana’s law segregating rail cars against the claim that the law violated the equal protection clause. The two sentences from Justice Brown’s opinion for the Court that have haunted Supreme Court Justices of conscience for over a century read:

“We consider the underlying fallacy of the plaintiff’s argument to consist in the assumption that the enforced separation of the two races stamps the colored race with a badge of inferiority. If this be so, it is not by reason of anything found in the act, but solely because the colored race chooses to put that construction upon it.”

Richard Kluger quotes this passage from Plessy in Simple Justice (1976) and then comments:

“Of all the words ever written in assessment of the Plessy opinion, none have been more withering than those … [of] Yale law professor Charles L. Black, Jr., who [said that in] … the two sentences… ‘The curves of callousness and stupidity intersect at their respective maxima.’”

McCloskey’s claim that we would make America more “just” by allowing elite white-collar criminals to engage in fraud and corruption with impunity even when their crimes endanger the public has found that same “intersect.”