How lawyers increase government deficits, trade deficits and current account deficits: theory and cross-national evidence

Abstract

We find that rent seeking as measured by lawyers significantly increases country trade deficits, country current account deficits and government budget deficits. Rent seeking thus increases the international borrowing of countries. A GDP identity linking government deficits with external current account deficits means that increased lawyers in an economy makes it borrow more internationally, thereby lowering the country’s net worth. This paper constructs a dynamic intertemporal model of an open macro economy with lawyer-based redistribution. Countries with high lawyer densities have larger government deficits. Countries with higher percentages of lawyers in their national parliaments have larger government budget deficits. But with only 16 observations, we cannot assert that with statistical significance. Theoretically, our intuition is that increased redistributions of wealth convert the capital stock into income for both the lawyers and their redistributees. Ironically, short-term increases in lawyer rent seeking provide an illusory short run increase in competitiveness because country GDP rises but in the long run, the capital stock, income and the country’s trade balance all decline. Three-stage least-squares estimates across data sets containing 22 and 47 countries confirm the theory. Our cross-national data shows that increased redistributive activity proxied by lawyers has no effect on the private savings gap relative to investment. Thus, the mechanism by which greater redistributive activity reduces a country’s international current account may be directly through greater government budget deficits. ( q* ))  ' ( q* ) +  r( R ) k - k* q - q* Phase diagram tests corresponding to (20) show that dk/dt = 0 locus is effectively horizontal at q = q*: the dq/dt = 0 locus is downward sloping. The tests indicate a unique path converging to the steady state on a downward-sloping path SS. The dynamics of investment are implied by a saddle point path SS. Given an initial capital stock k0, which is below k*, the initial value of q, q0, can be read off of SS and the associated level of investment follows from (16). Since q 0 exceeds q* in this case, capital accumulates over time. Output increases and so