The impact of public officials’ corruption on the size and allocation of U.S. state spending

 
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As humans are imperfect, so are societies. Of the 177 nations in the 2013 edition of Transparency International’s Corruptions Perception Index, not one achieved a perfect score of 100. The best were Denmark and New Zealand, both of which scored 91; the United States was rated 73, making it 19th in the global rankings, while countries as varied as Somalia, North Korea and Afghanistan all scored in the single digits.

Corruption plays out at all levels of society, from multinational firms to small companies, in both developing countries and long-established democracies. Factors that have been correlated with higher levels of corruption include isolated state capitals, legal systems with resource constraints and even countries with abundant natural resources, which can lead to worse social and political outcomes. Research has found living in a more corrupt society can even suppress voter turnout.

A 2014 study in Public Administration Review, The Impact of Public Officials’ Corruption on the Size and Allocation of U.S. State Spending,” looks at the impact of government corruption on states’ expenditures. The study was authored by Cheol Liu of the City University of Hong Kong and John L. Mikesell of Indiana University, Bloomington. Defining corruption as the “misuse of public office for private gain,” the authors note that public and private corruption can have a range of negative effects: lower-quality work, reduced economic productivity and higher levels of income inequality and poverty.

In their analysis, Liu and Mikesell examined more than 25,000 convictions of public officials for violating federal corruption laws. Factors weighed included states’ population, employment and income levels, as well as legal resources, degree of fiscal centralization, political structure and election cycle. The researchers explore two possible theories: First, higher levels of corruption should cause states’ spending levels to be higher than they would be otherwise. Second, corruption would distort states’ spending priorities in ways that favor bribes from private firms and others.

The study’s findings include:

  • Corruption and elevated state expenditures were found to be positively correlated. Over the period studied, if the 10 most corrupt states had been at the average level of corruption, they could have reduced their annual expenditures by $1,308 per capita, or 5.2% of the mean per-capita expenditure.
  • More-corrupt states tend to spend more on areas that are fertile ground for practices most conducive to corrupt practices such as bribery, kickbacks, extortion, nepotism and patronage. These include construction and highway projects, salaries and wages, borrowing, correction and police protection.
  • Construction projects find particular favor because they present a wealth of corruption opportunities: “First, construction involves large, complex, nonstandard activities, so the quality of construction can be very hard to assess. Second, domestic and international construction industries are dominated by a few monopolistic firms. Third, the industry is closely linked to the government. Governments have major roles as ‘clients, regulators, and owners’ of construction companies. It is very common to bribe government officials to gain or alter contracts and to circumvent regulations related to construction.” (As an example, in 2008 Bechtel/Parsons Brinckerhoff and other construction firms paid $450 million to resolve a series of criminal and civil liabilities related to Boston’s “Big Dig” highway expansion.)
  • Given that highways make up a large part of U.S. infrastructure spending, states with higher levels of corruption tend to spend more on roads. The authors cite Census Bureau data indicating that in 2008, states spent $92 billion on construction projects, including highways. This constituted 81% of their total capital outlay that year, $113 billion. States with higher degrees of corruption also tend to borrow more, frequently for the capital, construction and highway projects that provide the greatest opportunity for private gain.
  • More-corrupt states tend to spend more on corrections and police protection in a self-reinforcing cycle: Government officials can advance their personal interests by maximizing state budgets for correctional facilities and services. Citizens are then more exposed to corruption, and this can increase their demand for prisons and police.
  • Government services not seen as potential sources of private gain tend to be neglected by corrupt officials, including elementary and secondary education, health services and hospitals. They suffer not only because favored projects divert scarce resources, but also when officials and private firms siphon off additional funds. “The harmful impact of corruption on education persists even after expenditures on education is divided into subcategories: elementary and secondary education and higher education. These results imply that public officials’ corruption reduces states’ investment in education overall.”

“The results of this article suggest that preventing public officials’ corruption and restraining spending induced by public corruption should accompany other efforts at fiscal constraint,” the researchers conclude. “Increases in states’ expenditures on capital, construction, highways and borrowing are not problematic in themselves…. However, policy makers should pay close attention that public resources are not used for private gains of the few but rather distributed effectively and fairly.”

Related research: A 2011 paper for the National Bureau of Economic Research, “Who Offers Tax-Based Business Development Incentives?” looked at the correlation between measures of corruption and patterns of tax-based business incentives offered by counties and cities. The study found that an increase of federal corruption crimes by 1 per 100,000 residents is associated with a 2.9% greater chance that a community offers any form of business incentives. In addition, an increase in the rate at which government officials are convicted of federal corruption of 1 per 100,000 residents is associated with a 5.9% greater probability that a community will offer direct tax reductions rather than tax increment financing.

 

Keywords: corruption, bribery, infrastructure, highways, cars, driving, prisons, crime, policing, local finance, lobbying, sprawl

    Writer: | Last updated: May 16, 2014

    Citation: Liu, Cheol; Mikesell, John L. “The Impact of Public Officials' Corruption on the Size and Allocation of U.S. State Spending,” Public Administration Review, May/June 2014, Vol. 74, Issue 3, 346-359. doi: 10.1111/puar.12212.
     

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