Does political corruption affect the economy? That is a particularly relevant question given recent news. The answer is that corruption matters economically, but the effects vary depending on the circumstances. Consider the following recent cases:
Last week: Rep. Bob Ney, R-Ohio, pleaded guilty to corruption charges in the bribery scandal tied to lobbyist Jack Abramoff. It appears likely that more members of Congress will plead guilty or be convicted in the same affair.
Monday: The FBI raided the home of Pennsylvania Republican Curt Weldon’s daughter looking for evidence that the congressman used his influence to win her lucrative contracts.
Tuesday: A U.S. House of Representatives report detailed how Randy Cunningham, a California Republican who resigned earlier this year, accepted millions of dollars in bribes for steering $70 million to two contractors.
Meanwhile, House Speaker Dennis Hastert, R-Ill., remained in the hot seat for alleged failures in the scandal involving Rep. Mark Foley’s inappropriate e-mails to teenage pages. Last spring, Hastert also was criticized on Web logs and in Illinois media for a quick $1.5 million gain on land he had purchased near the planned Prairie Parkway. This is a major highway to be built with federal money personally earmarked by Hastert. The national media didn’t pay much attention to that case.
Senate Minority Leader Harry Reid, D-Nev., is under the spotlight for failing to disclose a $1.1 million sale of land in Nevada.
Political malfeasance is not a U.S. monopoly. Earlier this month Brazil’s incumbent president, Luis Ignacio da Silva, failed to win a first-round re-election victory after waves of bribery scandals in his party. Even squeaky-clean Sweden is tainted. One Cabinet minister resigned for failure to remit withholding taxes for a nanny, and another resigned over not paying a $200 TV tax.
There is an economic component to most, but not all, political corruption.
The Ney and Cunningham cases are straightforward. Both received payments to use their positions to pass legislation that benefited some private party. The Weldon case is similar. All of these are classic “principal-agent problems” in which some agent — an elected official — faces incentives to take an action contrary to the good of the principals they represent, in this case the citizens in their district.
The economic effect is waste of resources because public funds go to uses determined by a private payment rather than an open political process. The funds are likely to produce less benefit to society than if they had been allocated legally. Economists see this as an efficiency loss.
Hastert’s land deal probably is less harmful. Indeed, there is no official investigation of any illegality on his part. Hastert argues that he supported large federal appropriations for the Prairie Parkway on the project’s merits. He just happened to buy some land that would increase in value just as land in Burnsville did when I-35 was constructed. Hastert maintains that everybody had access to similar information about the likelihood of the road funding and could have bought land in the same area to make similar profits.
If true, the House speaker did something ethically questionable but with little direct harm to the economy. If he was motivated even in part by his own financial interest when he earmarked the appropriation, then once again public funds are allocated in a way that is less productive for our society.
Reid apparently did not use his office to increase the value of his property as Hastert may have. He simply circumvented the law requiring members of Congress to disclose their financial affairs. Concealing relevant information from citizens subverts the political process but does not directly hurt the economy.
It can hurt indirectly, however. Our economy needs goods and services that government is best equipped to provide. These include defense, transportation and education. When citizens hear that someone in Congress benefited from a particular defense contract or highway project, it undermines confidence in the democratic process. Such public suspicion might lead to underinvestment in public goods and services, and economic output may suffer. So, even peccadilloes have negative economic effects.
Brazil is a case in point. Corruption in public contracting is deeply embedded in its political culture. It is not that Brazil under-spends on health, education or infrastructure, it is that such spending is highly inefficient in what it does for society. That inefficiency becomes a personal justification for tax evasion that further distorts the economy. (In fairness, there was just as much corruption in our country during much of the 19th century.)
The flap in Sweden makes a similar point. We might chuckle about a culture minister stiffing the government on a mandatory public TV fee. That country has remarkably clean politics, however, and Sweden’s public spending is much more effective than other European Union countries with a history of graft.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.