How corruption can distort your state's budget and economy

By David Sirota , written on June 19, 2014

From The News Desk

As regular Pando readers know, I’ve spent the last few months digging through financial documents and political disclosures from some of the most notoriously corrupt political arenas in America. From Kentucky to New Jersey to Chicago, these are places known in the political world as the lowest of the low.

It's hard to find a state that isn't affected by the blight of political corruption. My journey to Southland last week, for example, took prompted me to take a look at the state of Tennessee. Surprisingly, a 2010 Daily Beast analysis compiling data about convictions on charges of public corruption, racketeering, extortion, forgery, counterfeiting, fraud, and embezzlement, ranked the Volunteer State as America’s most corrupt. And while it is true that other studies have shown different rankings for Tennessee, there’s little debate that the state has had its share of serious corruption troubles.

The questions is this: does political corruption affect a region’s ability to realize that potential? A new study suggests the answer is yes, assuming you believe in the “brain hub” theory about a connection between a community’s commitment to education and its likelihood of becoming a center of innovation.

The analysis (first flagged by Governing) comes from researchers at Indiana University and University of Hong Kong. They compared data from 25,000 convictions in public corruption cases with state spending data. The conclusion: in the most "corrupt" states, more money is directed into potentially "bribe-generating" stuff like construction and highway projects, and less money is spent on human-capital investments such as education and health care.

Of course, an earlier study found one other major way a corruption can shape a local economy: through its subsidies. According to that 2011 analysis from researchers at the Federal Reserve Bank and the University of Michigan, “Cities and counties in states with troubled political cultures demonstrate the greatest willingness to offer business development incentives.”

According to the watchdog group Good Jobs First, Tennessee is at the top of the list of states offering so-called “megadeal” subsidies to corporations. Likewise, the Nashville City Paper reports that in the name of economic development, the capital city has been dramatically increasing its subsidies to corporations, including most recently a $65 million outlay for a minor league baseball stadium.

Do those subsidies tend to create technology and innovation hubs? While many locales ramping up their subsidies certainly hope so, the jury is still out. Indeed, there’s plenty of evidence that subsidies do not create the economic development their boosters promise, and that they merely cannibalize already-existing economies. Meanwhile, as we’ve previously documented, a lot of those subsidies end up being awarded to politically connected firms, calling into question whether they are really designed with any kind of coherent economic development plan - technology focused or otherwise.

None of this is black and white, including in Tennessee. The state is, after all, the home of Chattanooga. That city developed a publicly-owned fiber optic system that delivers some of the world’s fastest Internet speeds - and does so at relatively affordable rates for businesses and consumers. As a result, Fortune calls Chattanooga “a center for innovation” and Wired says it may be the next Silicon Valley.

Any state with that potential in its midst can have a bright economic future, and the encouraging news is that what corruption there might be in Tennessee didn't stop Chattanooga's efforts. But the important point is this: while corruption may seem like a purely political problem, it's actually a force that can make or break an entire local economy.

[Editor's note: A previous version of this piece was published early, before completing our full editorial process.]

[Photo by Rob Shenk]