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The Cost of Corruption

You’re actually paying for that parade of handcuffed, perp-walking politicians

 

Nowak
Nowak

As the FBI hauled away boxes of files related to public contracts from the City Halls of Reading and Allentown, the former Mayor of Harrisburg was being indicted on corruption charges going back more than a decade.

Former Harrisburg Mayor Stephen Reed built a regime from 1981 until 2009. He is charged with the misuse of public money for personal gain. He argues that he is innocent as the goods were collected for public museums he sponsored for the city.

But there will likely be other charges related to his many years of absolute control over every aspect of public contracting and public finance. Harrisburg was ultimately financially undone by too much debt and poor public management, including the famous Harrisburg incinerator. It happened under his watch.

Studies show that, if Pennsylvania were just at an average corruption level, it would result in savings of about $1,300 per resident per year. That’s a big deal.

If you have never read the saga of the incinerator read Governing Magazine’s review. It is a fascinating story.

On the southwest corner of the new Dilworth Park by Philadelphia’s City Hall is a quote from Richardson Dilworth that sums up the Harrisburg mess: Our lack of capacity for public indignation is due to the length of time we have lived under the domination of one political machine.   

This 1947 quote, which preceded the Clark-Dilworth movement to dislodge a long term and corrupt Republican political machine, is a reminder that political competition is an important antidote to corruption.

Is Pennsylvania more corrupt than most other states? And if so, why does it matter? There are two reasons that corruption matters: political legitimacy and economic burden. Corruption is corrosive to democracy and our pocketbooks.

First let’s look at what we know about corruption in the Keystone State. Pennsylvania appears to be more corrupt than most states, although measuring the level of corruption is an inexact science. If you measured it by the total number of public officials convicted of crimes we are fifth but, adjusted by population, we are 13th.

Even those indicators can be a bit tricky. What if some states just have more effective investigative reporting and more motivated prosecutorial capacity? Maybe some are better at getting the bad guys and others are more lax.

There are other indicators that some use, including impression data from journalists that cover state and local politics and the quality of state laws regarding conflict of interest, administrative controls, and transparency.

The 538 blog does a nice job of organizing state-by-state corruption along the various indicators.  Based on available data we are certainly not the most corrupt, but we are holding our own.

Secondly, how about the cost of corruption or, as some would say, the corruption tax? Most data on the cost of corruption come from global studies, particularly having to do with developing economies. Estimates show that corruption costs amount to about 5 percent of world GDP (about $1 trillion based on a World Bank estimate), although depending on how it is defined the estimated costs can be higher or lower.

The USA does relatively well by most global corruption and transparency standards but there are still lots of issues. In the U.S. there are a few interesting recent studies on the cost of government corruption.

Just a few years ago a well-traveled study from researchers at Indiana University and the City University of Hong Kong looked at corruption levels state by state and compared them to public expenditure levels.

The authors showed that if states such as Pennsylvania were just at an average corruption level, it would result in savings of about $1300 per resident per year. That’s a big deal. Moreover, the study showed a correlation between corruption and public spending, particularly on items that are most prone to corruption: large capital expenditures and debt financing.

While the state budget is around $30 billion, total state and local public spending in Pennsylvania is about $128 billion or about $10,000 per resident. If this study is correct, it is saying that we could reduce that $10,000 cost to something closer to $9,000 based on bringing the corruption tax to the national average.

Another study looks at municipal finance and asks whether corruption results in a premium for bond financing costs. They find that capital markets price in the cost of corruption sometimes, which often results in the purchase of credit enhancements.

What we mostly know about the cost of corruption comes either from high-level econometric analyses such as those or high profile scandals. The view of taking out boxes of files from Harrisburg or from the Philadelphia Sheriff’s Office or Traffic Court makes for great television drama.

Sometimes people with their hand in the cookie jar are open about their motives. I first got interested in corruption during the Savings and Loan debacle in the 1980’s. Charles Keating, the poster child for the S&L crisis, when asked if his campaign contributions to a group of Senators was intended to influence their opinions regarding the regulation of his company, said, “I certainly hope so”.

I loved his honesty. He had given $1.3 million in support of five influential senators, not because he woke up one day and decided he loved their policies, but because he wanted something. He got it and we all eventually paid.

Keating’s Lincoln and Loan Association received a clean report from regulators when it should not have, which eventually resulted in bankruptcy and a cost to American taxpayers of $3.4 billion.

The best safeguard against corruption is an insistence on political transparency; something at which Pennsylvania and Philadelphia are slowly improving. But more than that, we need high quality investigative journalism (not the snarky name-calling genre of media that substitutes innuendo for fact) and non-partisan public interest research capacity to help establish a culture of disclosure.

Moreover that culture of disclosure cannot only be about the public sector. Corruption involves private, public, and civic actors, often in collusion.  When I was President of The Reinvestment Fund, I remember the yeoman’s work that Ira Goldstein did when he uncovered the private sector corruption of predatory lending in places like Monroe County, Pennsylvania. It took time and painstaking efforts, which resulted in some significant changes in state regulations.

Changes in the structure of media make it less likely than ever that major media companies will invest in long-term investigations. And Philadelphia does not have much capacity in non-partisan research, outside of the center that Pew established which puts out high quality periodic reports on issues of public interest. (Here at The Citizen, we’ve been crunching the numbers as to corruption’s budgetary impact. It sure would be nice to get a sense of the degree to which public malfeasance affects us all.)

The advantage of the Pew center over others is that they do not have to work on a pay for hire or contract basis. Philadelphia does not have any other center for urban affairs with anything like a basic endowment that would insulate it from influence.

Otherwise we rely on investigative arms of government: the District Attorney, the US Attorney, and the State Attorney General’s Office and the various government auditing departments. The problem is that many people have become cynical regarding their capacity for political independence.

The current interest and practice of making public sector data and some contracts available is important but it does not mean very much if there are no people dedicated to understanding the data within the context of comparative economic costs and political relationships.

Public rules of disclosure and data are a first step. But a real culture of disclosure will require much more. And that is the only way we will finally get a handle on the cost and culture of local corruption.

The Philadelphia Citizen will only publish thoughtful, civil posts. We want to be a communal space. But that doesn’t mean you have a First Amendment right to be an idiot. Send us an insulting, offensive and/or wildly off-topic comment and not only will we refrain from posting it -- we will laugh at you before we hit delete.

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