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The Main Driver of GDP Growth: A Strong Rule of Law

George Washington's picture




 

 

Economist Woody Brock says that a nation's GDP growth is based mainly on whether or not it follows the rule of law. 

Economist and investment adviser John Mauldin notes:

I had dinner with Dr. Woody Brock this evening in Rockport. We were discussing this issue and he mentioned that he had done a study based on analysis by an institution that looks at all sorts of “fuzzy” data, like how easy it is to start a business in a country, corporate taxes and business structures, levels of free trade and free markets, and the legal system. It turned out that the trait that was most positively correlated with GDP growth was strength of the rule of law. It is also one of the major factors that Niall Ferguson cites in his book Civilization as a reason for the ascendency of the West in the last 500 years, and a factor that helps explain why China is rising again as it emerges from chaos.

 

One of the very real problems we face is the growing feeling that the system is rigged against regular people in favor of “the bankers” or the 1%. And if we are honest with ourselves, we have to admit there is reason for that feeling. Things like LIBOR are structured with a very real potential for manipulation. When the facts come out, there is just one more reason not to trust the system. And if there is no trust, there is no system.

Dr. Brock is not alone.  Economists have thoroughly documented that failure to enforce the rule of law leads to a loss of trust ... which destroys economies. This is true whether it is in the West, in Nigeria or any other country.

We're Number ... What?

Economic historian Niall Ferguson notes:

The World Economic Forum’s annual Global Competitiveness Index and, in particular, the Executive Opinion Survey on which it’s partly based ... includes 15 measures of the rule of law, ranging from the protection of private property rights to the policing of corruption and the control of organised crime.

 

It’s an astonishing yet scarcely acknowledged fact that on no fewer than 15 out of 15, the United States now fares markedly worse than Hong Kong. In the Heritage Foundation’s Freedom Index, too, the U.S. ranks 21st in the world in terms of freedom from corruption, a considerable distance behind Hong Kong and Singapore. [Transparency International puts the U.S. at 24th.]

 

Perhaps the most compelling evidence of all comes from the World Bank’s Indicators on World Governance, which suggest that, since 1996, the United States has suffered a decline in the quality of its governance in three different dimensions: government effectiveness, regulatory quality and the control of corruption.

 

Compared with Germany or Hong Kong, the U.S. is manifestly slipping behind.

Indeed - as we've extensively documented - the rule of law is now as weak in the U.S. and UK as many countries which we would consider "rogue nations".    See this, this, this, this, this, this, this, this, this, this and this.

This is a sudden change.  As famed Peruvian economist Hernando de Soto notes:

In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

How Did We Slip So Fast?

Of course, the repeal of the basic laws which enforced the rule of law among financial players is a part of the problem. Virtually everyone - other than those currently working for the big banks or on their payroll - is calling for reinstatement of the separation between banks and speculative gambling.

Free market libertarians - like everyone else - are demanding prosecution of criminal fraud using basic fraud laws.  Yet the government has made it official policy not to prosecute fraud.

People have lost trust in the system, because government corruption is as widespread as Wall Street corruption ... and those in power in D.C. have the same sociopathic traits as those they supposedly regulate on Wall Street.

And as Professor Ferguson notes, draconian national security laws are one of the main things undermining the rule of law:

We must pose the familiar question about how far our civil liberties have been eroded by the national security state – a process that in fact dates back almost a hundred years to the outbreak of the First World War and the passage of the 1914 Defence of the Realm Act. Recent debates about the protracted detention of terrorist suspects are in no way new. Somehow it’s always a choice between habeas corpus and hundreds of corpses.

Of course, many of this decades' national security measures have not been taken to keep us safe in the "post-9/11 world": many of them started before 9/11.

And America has been in a continuous declared state of national emergency since 9/11, and we are in a literally never-ending state of perpetual war. See this, this, this and this.

In fact, government has blown terrorism fears way out of proportion for political purposes, and  "national security" powers have been used in many ways to exempt big Wall Street players from the rule of law rather than to do anything to protect us.

Is it any wonder that we're still in an economic crisis?

 
 

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Tue, 07/31/2012 - 13:23 | 2665567 ddtuttle
ddtuttle's picture

Civilization can be defined as the equal application of the rule of law.

If a King can do whatever he wants, the society rapidly devolves into an uncivilized society, where the King's thugs (aka aristrocracy) can rape and pilliage to their heart's content.

This is true for presidents, the super wealthy, bankers, cops, soldiers and the mafia.  If they can get away with murder, they will, both figuratively and literally.

We clearly are trying to cross this fatal divide, the so-called elites are playing for invulnerability, the ability to take whatever they want without consequence.  And our "leaders" don't even have the chops to understand what's going on.  

Or maybe the last president to think he was in charge was JFK? No president has made that msitake since.

Tue, 07/31/2012 - 13:04 | 2665477 hidingfromhelis
hidingfromhelis's picture

As the rule of law continues to deteriorate, we always have currency devaluation to drive nominal GDP growth.

Tue, 07/31/2012 - 12:57 | 2665451 coltek
coltek's picture

English Common Law.

 

"Do unto others as you would NOT have them do unto you".

 

There is no need for any other law, statute or rule.

 

You guys in the US and we in the UK are supposed to be subject to this simple premise. 

 

 

 

 

Tue, 07/31/2012 - 12:54 | 2665445 ejmoosa
ejmoosa's picture

There's one helluva difference between the "Rule of Law" which treats all equally, and the laws we have which are under constant reconstruction to pick winners and losers.

Tue, 07/31/2012 - 11:15 | 2665151 Everybodys All ...
Everybodys All American's picture

Well said ... the economy will continue to suffer as long as the rule of law is not adhered to by our government

Tue, 07/31/2012 - 11:39 | 2665247 rwe2late
rwe2late's picture

 It is is an overgeneralization to simply say "the rule of law".

There is also a question of justice and fairness.

Laws written and enforced by bankster swindlers, weapons merchant profiteers, prison industry Prohibitionists, oil company polluters, global sweatshop outsourcers, and self-serving corrupted politicians won't exactly improve the human condition either.

Tue, 07/31/2012 - 10:40 | 2665025 shovelhead
shovelhead's picture

Guess that Rule of Law stuff means the dope dealers are starving because they need tort reform.

The only way they can sell bad quality with impugnity is if they establish a monopoly by force.

Sound familiar?

Tue, 07/31/2012 - 10:25 | 2664973 Wakanda
Wakanda's picture

The main driver of "GDP" is soil quality, fisheries, and climate.  'Most everything else is ponzinomics.

Tue, 07/31/2012 - 10:31 | 2664995 AnAnonymous
AnAnonymous's picture

And the capacity to capture.

Theft increases mechanically the amount of inputs available and therefore drives growth.

US citizen economics...

Tue, 07/31/2012 - 10:34 | 2665003 Wakanda
Wakanda's picture

"capture" might be a subset of ponzinomics - dishonest wealth or resource aquisition

Tue, 07/31/2012 - 10:12 | 2664918 jayman21
jayman21's picture

Thanks George for the reminder that counterparty risk extends to everyday transactions.  When things are bad, everyone starts to pay attention.

Tue, 07/31/2012 - 08:47 | 2664615 Snakeeyes
Snakeeyes's picture

You mean government on behalf of cronies seizing private property through eminent domain isn't a good thing for the economy???/

http://confoundedinterest.wordpress.com/2012/07/25/wsj-seizing-mortgages...

Tue, 07/31/2012 - 08:09 | 2664520 Watauga
Watauga's picture

I am beginning to think that the most interesting theme in American history is the financial history--the history of the National Bank, money printing, stock markets, and gold.  I used to think that military history and political history were the keys, but it has become clear that they and everything else turn entirely upon what happens in the financial world. 

Clauswitz may have been right that "war is policy by other means," but it has become terribly clear that "policy is finance by other means."

Tue, 07/31/2012 - 08:26 | 2664557 Zero Govt
Zero Govt's picture

the bwankers like the politicians are grabbing all the headlines because bad news travels faster than good and we like to watch hysterical deranged lunatics for entertainment

the real economy is suffering (quietly) under the combined weight of those 2 bags of human puss

the real economy goes un-noticed while the clowns put on a show

Tue, 07/31/2012 - 08:33 | 2664509 Zero Govt
Zero Govt's picture

Economist Woody Brock says that a nation's GDP growth is based mainly on whether or not it follows the rule of law.

Complete and utter bollocks.

Commerce is led by individuals building relationships with others on a human trust basis. The Law is for societies arseholes, not productive people

See intertnational trade, built for centuries on relationships with no law/lawyers even in the picture (they know nothing about trade)

Columbus didn't have a lawyer or judge aboard, he just wanted productive people on his ship

"..As famed Peruvian economist Hernando de Soto notesIn a few short decades the West undercut 150 years of legal reforms that made the global economy possible."

Trade develops because of traders, nothing whatsoever even remotely to do with lawyers. Find a freeport (no lawyers in situ) and you'll find trade flourish just as every nation that collapses trade is collapsed in laws, rules and regs

the Law is the biggest failure in human history next to Govt itself. No coincidence these 2 total and abject failures are joined at the hip

the State cannot award you anything, it can only restrict (natural) freedom. No lawyer (or regulator or accountant) in history has ever added to the economy, he has only sucked (a State speciality)

rule-based morons are idiots, they never learn rules have never worked and will never work... the mountains of abject failures (and corruption) of a (monopoly) institution called 'Law' is there for all to see, steaming/stinking in the sunlight of reality

a momentous reality-check of total failure, not that intoxicated brainless rule-based morons have anything to do with reality... dream on failures

".. Economists have thoroughly documented that failure to enforce the rule of law leads to a loss of trust ."

I can thoroughly document the rise of any business and trade has no lawyers involved. I can also thoruoghly document the death of commerce and GDP is directly related to the amount of Law and red tape as has happened in Greece, as kicked off the revolution in equally Govt mangled/meddled Egypt.

Economists, like lawyers, accountants and regulators, are another complete failure zone. The only thing they're "thorough" about is being thoroughly wrong on everything... human trust is not based on pieces of paper and a firm of charlatans writing a contract.

Contracts are worthless. Bringing in lawyers into a business relationship is the beginning of the end (for that relationship)

GW you're a shill peddling this garbage

Tue, 07/31/2012 - 10:29 | 2664987 AnAnonymous
AnAnonymous's picture

Columbus didn't have a lawyer or judge aboard, he just wanted productive people on his ship

________________________

Ships were the home of very strict laws.

Tue, 07/31/2012 - 10:26 | 2664978 lunaticfringe
lunaticfringe's picture

Are you kidding me Zero? Did you have a complete comprehension fail here?

Let me make this simple. If you know the regulating bodies that have power over you...are going to tax you to death and allow competing and rogue interests to steal and extort from you with impunity...you will not start a business nor will you have any confidence in a system that fails to enforce the law.

That is hard for you to believe? Bollocks, seriously? Geezus, are you a banker?

Tue, 07/31/2012 - 09:19 | 2664712 De minimus
De minimus's picture

Thank you for mentioning the actual driver of GDP....   Freedom.

Nothing like having government in your back pocket to get what you want. Problem is that it screws everyone else.

Do it enough and you wind up with a bunch of radical Marxists in power and then you can pack your bags. But hey! What a great run.....!

Tue, 07/31/2012 - 10:26 | 2664981 AnAnonymous
AnAnonymous's picture

Thank you for mentioning the actual driver of GDP.... Freedom.

________________________________

In US citizen economics, the actual driver of GDP is theft.

It is likely that the lack of freedom US citizens feel is directly connected to the lack of theft opportunities, the increasing normal state of US world order.

Tue, 07/31/2012 - 12:02 | 2665313 n8dawg84
n8dawg84's picture

AnAnonymous,

I disagree.  The lack of freedom I feel is not connected to lack of theft opportunities since I do not seek theft.  Nor do many others that I know.  You will probably respond with some bullshit about theft is in my US citizen nature whether I acknowledge it or not, but that is irrelevant.  The lack of freedom I feel comes from the rules and regulations imposed upon me by those who seek to control me in every aspect of life.  I've read your posts and and thought on them to see if there is any possibility of truth.  There is none.  The lies and propaganda you regurgitate here is almost as vulgar as publicly shitting by the side of the road.  Let whatever hatred you feel consume you. 

Tue, 07/31/2012 - 07:14 | 2664399 carbon
carbon's picture

best country in the world, only in usa, Glenn Beck monetize the 


Main Driver of GDP Growt

manage to get new 5 year talk show contract up to 100 Million 


Tue, 07/31/2012 - 07:36 | 2664444 Watauga
Watauga's picture

WTFO?

Tue, 07/31/2012 - 06:49 | 2664365 disabledvet
disabledvet's picture

So many squares to circle...withered crop circles instead. the irony of less government meaning more "law" should be lost on no one. I sum it up with the saying "police: always there when you don't need them...never there when you do." the fact of the matter is without a day off on Sunday...preferably in prayer or whatever passes for it today...is the most needed thing in the Worn Out USA right now. This country has completely broken down. "Permanent vacation" probably isn't all that bad of a start to "get things moving again."

Tue, 07/31/2012 - 04:33 | 2664314 silverdragon
silverdragon's picture

The problems is that almost all politicians and banksters are all crooks in the US. Why not add to that spending a couple of trillion more than you take in.

The BRICS have done fine on the GDP front with minimal laws, not that GDP is a relevant metric anyway.

Nice attempt at smoke and mirrors George.

 

 

 

 

 

Tue, 07/31/2012 - 03:08 | 2664268 AnAnonymous
AnAnonymous's picture

US citizen nations show not a strong rule of law but an arbitrary rule of law, a selective application of the rule of law that is connected to growth of US citizen nations.

When looking at the US, the mecca of US citizenism, it is straightforward and once again, requires submission to the fallacy to agree with it.

The US, it is that country that stole so much Indian land while giving a judgement that was against their own rule of law.

How it is strong rule of law when you override that kind of legal decision?

US citizen propagandist author is once again boiling it up, unable to pinpoint the huge fallacy when speaking to one of the claimer.
The question would have been simple: what about the US?

The facts are mere: competition calls for manipulation of rules. The one who bends the rules to one's own benefits give oneself a fantastic competition edge. This is how competition works.

Secondly, US citizens are expansionists.

In a finite environment, expansion always reach a stage known as saturation which signals the end of the good old days.

Usually, expansionists as they want to keep the good old days, refuse to admit it and prefer to cry over the supposed loss of

-cultural features: their culture has weathered and it should explain why expansion no longer bring boons as it used to

-biological features: their gene stock has weathered and it should explain why expansion no longer bring gifts as it used to

Of course, none is relevant. The explanation is that expansion reachs saturation stage and that is all.

But expansionists (and thus US citizens) do not want to hear it as they want to cling to the good old days of expansion.

Holy cow, too many US citizens, not enough Indians...

Tue, 07/31/2012 - 07:39 | 2664448 Watauga
Watauga's picture

Please, take a deep breath, and try again.  Nothing you wrote is intelligible.  Please try to think hard, and write slowly, so that we can try to understand what you are trying to say.

Tue, 07/31/2012 - 10:29 | 2664954 AnAnonymous
AnAnonymous's picture

It does not need to be intelligible. All that is required is a proper observation of US citizens. It will give the same as told in the previous comment.

Tue, 07/31/2012 - 12:42 | 2665428 TheFourthStooge-ing
TheFourthStooge-ing's picture

.

It does not need to be intelligible.

...something which you've tirelessly demonstrated to everyone, many times over.

Chinese citizenism at work.

Tue, 07/31/2012 - 02:59 | 2664260 Uncle Keith
Uncle Keith's picture

I hear from a Friend-O-Mine that the "endictments are writing themselves" - specific to LIBOR/Traders/U.S. Treasury.

 

Can anyone else say "October Surprise"? Say "Good Night" now, Mit-ten's...

 

Peace, Ya'll. Election 2012 has been put to rest.

Tue, 07/31/2012 - 07:40 | 2664454 Watauga
Watauga's picture

What the heck is an "endictment"?

And, Uncle, can you tell us who will be elected in November?

Tue, 07/31/2012 - 12:55 | 2665447 hidingfromhelis
Mon, 07/30/2012 - 23:25 | 2664099 JOYFUL
JOYFUL's picture

The specious reasoning behind using an inherently faulty tool of measurement such as "GDP" to guage the health of a society can only by outdone by the shady supposition that any kind of rule by law[yers] can somehow result in anything but a tyrannical and inherently unjust netherworld of statist oppresession.

George, yu continue to outdo yurself. Must be the result of hangin with 'top' economists and other 'bottom' feeders.

 

Tue, 07/31/2012 - 07:42 | 2664460 Watauga
Watauga's picture

Perhaps I misunderstand you, but are you saying that you prefer that a society not be governed under the Rule of Law?  If that is a correct understanding, please explain whether you wish for society to be ordered and, if so, by what, or by whom?

Tue, 07/31/2012 - 08:28 | 2664561 JOYFUL
JOYFUL's picture

I have made no statement of preference regarding the organization of human societies...which, like any other mammalian society, are inherently self-organizing. Ours has evolved to reflect several improvements, which work to moderate aggression and accentuate mutual advantage. We have merely to allow them to be applied. That is governance.

If yur question carries an implication that further organizing is required, I have addressed that in the short contents of my comment - it is specious reasoning to suppose that what is already perfect in it's imperfection can be re-arranged to increase or augment it's value...

Such argument is meant to deceive us into giving up our inner balance, by means of which we are always in accord with the nature of things outside of ourselves, and able to allow them to operate tru to that nature. "Societies" are aggregations of individuals, whose innate capacity to work in harmony is abrogated by acceptance of the [false]belief that something other than that is required to maintain the workings of the cosmos.

Human beings, to prosper, must be able under all circumstances to give themselves out for what they are. A man must be something, not appear something; he must be able to stride through life with head erect-to speak the truth without incurring the risk Of hardship or injury. Sincerity must not remain the privilege of heroes. The economic order must be so framed that a man may combine sincerity with the highest degree of economic success. Silvio Gesell\Tha Natural Economic Order.

Were those conditions allowed to pertain to our daily lives, there would be no necessity of further "ordering," and an entire echelon of parastical pontificators currently roosting on top of the food chain would drop dead from hunger and exhaustion.

Tue, 07/31/2012 - 10:02 | 2664872 Watauga
Watauga's picture

Hmmm. . . .  Thanks for trying.  I suppose I am simply not smart enough to understand.

Mon, 07/30/2012 - 23:02 | 2664073 LawsofPhysics
LawsofPhysics's picture

Rule of law is subject to those making the laws. Fascists love this. Try this instead; real fucking consequences for bad behavior. Bloody sheep.

Mon, 07/30/2012 - 19:37 | 2663761 Tsunami Wave
Tsunami Wave's picture

Ahhhh. I always thought these tangental reasons like strong rule of law, efficent infrastructure, or an educated population (depending on your point of view whether the state or private education works best) leads to a strong and durable economy.

Mon, 07/30/2012 - 18:20 | 2663637 New_Meat
New_Meat's picture

"Economists have thoroughly documented that failure to enforce the rule of law leads to a loss of trust ... which destroys economies."

well, actually destroys societies, therefore their economies.  But, then again, economists wouldn't know about that.  Try John Locke, e.g.:

http://en.wikipedia.org/wiki/John_locke

don't cha' know.

- Ned

Tue, 07/31/2012 - 12:30 | 2665406 The Navigator
The Navigator's picture

Ned - please modify your post, delete the blank 1st line - I and many others want to up/green you but can't.

;-)

Mon, 07/30/2012 - 19:13 | 2663715 sgt_doom
sgt_doom's picture

Excellent points, New_Meat.

Niall Ferguson, I dunno, that's the guy who claimed the economic meltdown was an "epiphenomena" and who BSes about everything else as well.

His two volume work on the Rothschild family, which he claims to be a scholarly work, is profoundly crappy!

He'll mention something most important, such as Rothschilds having hired Alfred Hartmann, without filling us in about the scandals surrounding Hartmann and the BCCI connections, Hartmann's background in the Swiss Military Intelligence, etc., etc., etc., and Ferguson attacks David Ickes as a "conspiracy theorist" in the intro to one of those volumes --- what the bloody Eff is that in a so-called scholarly work.

Also, there was mention of "free markets" and "free trade" --- what planet are they talking about exactly?

With LIBOR manipulation, trillions and trillions of worthless credit derivatives, with their underlying securitizations, re-securitizations, re-re-resecuritizations, etc., ad infinitum, and all the other BS entailed, hedge funds collusion, and vice versa, leveraged buyouts to enrich all those debt queens like Rockefeller's Peter G. Peterson, Schwarzman and Mitt Romney, I'm really perplexed whenever suspicous types throw those valueless terms around.

Now the studies and article below might be equally important as to causality:

http://www.economicpopulist.org/content/job-study-tells-terrible-tale-us-workers

http://www.bls.gov/news.release/pdf/nlsoy.pdf

Mon, 07/30/2012 - 23:44 | 2664118 otto skorzeny
otto skorzeny's picture

Niall is a Rothschild goy apologist/tool

Mon, 07/30/2012 - 18:19 | 2663634 lordbyroniv
lordbyroniv's picture

ObamaCare being deemed Constitutional was the final nail in the coffin for LAW in the USA.

 

Its all a relativist, positivist nightmare now.

Tue, 07/31/2012 - 08:10 | 2664524 overmedicatedun...
overmedicatedundersexed's picture

scalia, a strong originalist on the constitution and constantly a target of the left's distain. He has come out in defence of the obuma care ( re written now as a tax) ruling..a stunning reversal of years of his written and spoken views. in the end he is protecting the court's integrety and his other lawyers on this court from the conservative back lash..once in power the goal is to expand and maintain your power. he is a prostitute nothing more. sad.

Tue, 07/31/2012 - 08:03 | 2664510 Watauga
Watauga's picture

GW--Come on.  The headline is misleading.  It is an attempt to pique interest.  Scalia would in no way further scale back our 2nd A rights. 

Tue, 07/31/2012 - 12:27 | 2665396 The Navigator
The Navigator's picture

I have no confidence in ANY predication about what SCOTUS will or will not do in the future about laws - Just look at how Chief Roberts ruled recently.

Mon, 07/30/2012 - 23:44 | 2664117 Uncle Remus
Uncle Remus's picture

Tactical gavel...

Mon, 07/30/2012 - 19:15 | 2663719 sgt_doom
sgt_doom's picture

That's only to be expected, since Scalia occupied that law faculty position at University of Chicago before Obama.

Mon, 07/30/2012 - 17:47 | 2663596 jimmyjames
jimmyjames's picture
How Did We Slip So Fast?

**************

They missed the big one-

The shredding of gold standard and giving the government power to create money was the start and its effects are now starting to pop up everywhere-including the lawlessness of the lawmakers that continues in broad daylight-

Tue, 07/31/2012 - 06:26 | 2664355 purplefrog
purplefrog's picture

Precisely!  Well said.  It is so easy to focus on symptoms and overlook causes. Without honest money everything become dis-honest.

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