The cost of corruption

Speakers
Roger Dunaway, assistant director of public relations, Tulane Communications and Marketing
Gary Hoover, executive director of The Murphy Institute and professor of economics, Tulane School of Liberal Arts

Dunaway
Hello and welcome to On Good Authority, the podcast by Tulane University, where we bring you leading experts to talk about issues of the day and ideas that shape the world. I'm your host, Roger Dunaway. White-collar crime and corruption continue to plague our society and erode public trust. As citizens, we are consumed by the amount of taxes we pay on both the local and state levels, and let's not forget what we owe Uncle Sam. But have we ever stopped to think about where our dollars are really going, especially at the local level, and why we sometimes pay the same taxes repeatedly? Who really ends up with our money, and are we all victims of corruption? I am joined today by renowned economist Gary “Hoov” Hoover. Hoov is executive director of Tulane’s Murphy Institute and affiliate professor of law. His research areas include policy analysis of income, distribution and poverty, public finance, and ethics and economics. Hoov, welcome to On Good Authority.

Hoover
Thank you very much for having me here.

Dunaway
Alright Hoov, let's jump right in. What is economic corruption, and can you illustrate some examples for our audience?

Hoover
Well, basically, when we're talking about economic corruption, we're talking about public officials engaged in activity for their own personal gain. This could be things like bribery, for instance, or it could be fraud of a sort. And we see it quite often from elected or appointed government officials.

Dunaway
Well, let's go ahead and get the big question out of the way. When corruption occurs, where does the money go? Do we know?

Hoover
That's the most insidious part about this whole discussion. Let's say that, for instance, I'm just making this up, that the intended use of the money was for a school. Now, if we wanted to have a school built, and there were funds appropriated for it, but somehow an amount of public corruption took place, and those funds weren't applied. Either we're going to have an inadequate school, which is going to hurt the school children, or we're going to have to go back to the taxpayers again to get even more funds. So in essence, the recipients of those funds, or the intended funds, are those who are hurt. But more so than that, the entire economy, the entire society, is hurt because there's also an erosion of public trust. And once the trust is eroded, and people don't feel that those funds were, were adequately used, we're going to have a very hard time getting any amount of funding passed that are going to do the types of things that we'd like to see done as a society.

Dunaway
Hoov, can you tell us about the invisible ripple effects of corruption?

Hoover
So it's not always the big splashy parts of a corruption scandal that we see, the parts that are making the headlines, that does the most damage to us. It's typically those things that we didn't see. It's when something didn't get done as a consequence of the public corruption. That's when it becomes most insidious. When we see that we've still got a major portion of our city or state that is homeless, and we say to ourselves, “Well, those people are homeless because they haven't engaged in activities that will get them off the streets.” Not realizing that there were these ripple effects that happened when public corruption took place. Because of public corruption, the funds appropriated for this activity didn't take place. Because those activities didn't take place, a job training program didn't take place. Because the job training program didn't take place, we ended up with more homelessness. Sometimes it's very hard for the citizens to connect the dots, to see that public corruption actually led to this poor school system. Public corruption actually led to this amount of homelessness. Public corruption led to this amount of poor infrastructure.

Dunaway
So you've just touched on it, but can you break down, as an economist, the layers of corruption from the top all the way down to the bottom, or what's left when it gets to the bottom?

Hoover
That's sort of the problem. Let's say that you've got large-scale corruption that happens with a major or very large corporation. We say to ourselves, “Well, that type of corruption is just a cost of doing business.” But what we don't realize is that that type of corruption also impacts the small business owner. Because the small business owner isn't able to compete on a level with the large firms that might have been beneficial for the entire economy. You mentioned before about this multiplier effect. And what we would find is that the small business owner wasn't able to hire because the small business owner wasn't able to pay the bribes or the kickbacks. Because of that, the small business owner was left out, was not at the table. This also impacts the small person, not even a business owner, but just the average citizen in our day-to-day lives, when we end up with not having sufficient funds to carry out our daily activities. It's all over the place. And by the time it gets to us, we barely recognize it from where it was. We barely see the connection to where it was. But let me be clear about something, that's not by accident. It's purposefully hidden from our view. Because, as I said before, with all criminal activities, we don't want people to know that we've engaged in this activity.

Dunaway
You have a term in economics called “willful ignorance” ¬– that people are willfully ignorant and go out of their way not to know what's going on. Can you expand on this?

Hoover
It's the concept that, if I don't know it, then it's not happening. And as I told you, since I don't see public corruption, since I don't hear much about public corruption, then public corruption must not be a very serious issue. So therefore, I won't educate myself on the types of public corruption that are taking place. I won't educate myself on the techniques that I can use as an everyday citizen to fight against this type of corruption. And let's be clear about it, I'm using the term “public corruption” to be polite. But really what we're talking about here is criminal activity. Public corruption is a crime, it's a different form of crime. We can call it white-collar crime if we want to.

Dunaway
It's been said that corruption is not the disease. In fact, corruption is a symptom that we see as a result of the disease. The disease is the complacency that allows it to exist. How does this affect you as an economist?

Hoover
It really baffles me, as an economist. And the idea that we aren't more engaged in understanding what's happening here is really amazing because of what we as economists talk about as inefficiencies. It is inefficient to pay a sum of money for an activity or for a service or for a good, and then pay for it again. That just seems to be counterintuitive to common reasoning. Yet, in this case, we seem to allow this without fail. Which is really surprising, given that the reason that we say that this is the symptom and not the crime itself, is that there has to be a systemic or systematic process in place for this to happen. You don't see this happening without a system of corruption that exists. That's where we run into problems, in that we have a system that is somehow mismanaged, not functioning properly, causing all types of problems. And yet, the very few times that we see it actually being exposed to us, we’re amazed that it's there, when it's always there, we're just not always seeing it. That's when we say that it must be a symptom of a very serious underlying problem that needs to be addressed.

Dunaway
Let's speculate on something together. What if today, we could root out large-scale and small-scale corruption? Would this help reduce, maintain, or even eliminate certain taxes?

Hoover
It would absolutely, 100 percent, without a doubt, unequivocally reduce your tax burden. We would be so much better off. There's a term we have in economics called “excess burden.” So there's a burden that taxes put on you, then there's an extra burden put on you by a tax. We could help to reduce that excess burden that is caused through corruption. And there's a multiplier today. So now that our taxes are being properly applied, what could we also do with the excess? We could also tackle some of the problems that, up until now, we were left, just saying that there was nothing we could do about it. Think about the implications of this, of hitting whether corruption. And actually, we can think of corruption as a corruption tax. It's an extra tax that we pay. What could we have done with those monies? We could have tackled major infrastructure problems. We could have tackled major deficiencies in our school system. We could have tackled some of the very pressing issues with homelessness, with mental illness.

Dunaway
Hoov, let's talk about the accountability of auditors. So a lot of times, the tax money is usually coming down to the auditors, right? But in some instances, the auditors actually work for the people controlling the money. How does that work?

Hoover
It's always tricky. And it's always a very, very bad idea, when the person being audited is paying the very auditor themselves. Especially if we're talking about a system where the person, or entity rather, being audited is one subject to corruption. The last thing you want to do is have an entity that is prone to corruption being audited by someone that they're paying. It would be the same as if a criminal in criminal court case got to pick their own judge, and then paid their judge. Well, how many convictions are you likely to see, when you're paying the judge that is going to convict you? Knowing full well that if you find anything that is off, I'll make sure never to hire you again. We need independent and separate auditing of accounts, especially in local governments.

Dunaway
Let's back up a little. America's history is filled with individuals and corporations who have knowingly defrauded the public, and Louisiana certainly has its place in the discussion. But how does long-term and large-scale corruption from individuals or companies affect the future of a city and its growth from a national perspective?

Hoover
One thing that it does is there are what we call reputational effects. So not all businesses will use what we call “pay for play,” meaning that they're willing to engage in public corruption to get certain things done. So now, that city or that region has missed out on some major players. That city or that region will not have certain companies willing to come and deal with them because they have a reputation for being pay-for-play cities or states. That alone is enough to really diminish a lot of economic growth. But let's take it one step further. What about the companies that do want to engage in pay for play, who do want to engage in some type of public corruption? Are those the best companies that you want to have representing your city? Think about what that means.

Dunaway
From a large-scale standpoint, those individuals within the group are taking all the money. And then the public suffers. And then eventually the city suffers.

Hoover
Not just the city, but everyone in the city. Even the public officials themselves end up suffering, because, to some extent, there is some accountability, a term used before, in that you can actually end up going to prison. Public corruption, as I said before, is a crime. And this region does have its history of elected officials who have found themselves going from behind the podium to behind bars.

Dunaway
But Hoov, I'm sure in your profession, you would argue that doesn't happen enough to set the precedent to make people stop doing this?

Hoover
Well, that would be one. And I would think that the other part about it is that there just has not been enough public accountability. In that if you go to a debate between candidates, if you go to a press conference of someone running for political office, how often is this even an issue that's brought up? How often is this an issue that says, “Hey, before you ask me for more tax dollars, or less tax dollars, what are you going to do about the level of public corruption?” That's a key question asked at every political debate, at every political press conference. And I can count on one hand the number of times, other than when there's a public scandal that breaks out, that this even comes up. So clearly, we're not investing enough. And that being us when I say we, I mean us as citizens in holding our public officials accountable. Yes, we're all going to be in some way damaged by this and public officials will be damaged by this also. But none of us will come out of this unscathed.

Dunaway
Do you believe that we'll ever see a point where public corruption will diminish enough to where we can see the fruit of our labors and have lower taxes?

Hoover
Absolutely. One of the things we know is that people have a tolerance, or what you might call a “tipping point.” And there's only so much public corruption, white-collar crime if you want to call it that, that people are going to tolerate, because there's a pooling of wealth around a few individuals while the rest of the citizenry is suffering. We're only going to be able to stand so much of this. There will be a reckoning. I do believe that there will be a tipping point to where people's appetite, or even their patience, with this type of activity will reach an end. And as such, I think that things will change.

Dunaway
Hoov, is there anything else you would like to share with the audience about corruption?

Hoover
Only that you are not alone, and that you are not helpless. There are others who feel the same way, I think that movement is growing. And there are effective steps that can be taken in the interim to combat this issue. The only thing that we have to do is remain vigilant and keep our eyes open. Now, here is the thing about public corruption. It's like a mushroom. It wants to stay in the dark, and it wants to stay hidden. It is incumbent upon us to bring it to the light.

Dunaway
Hoov, thanks so much for joining us today.

Hoover
Really appreciate the time.

Dunaway
And thank you for listening to the latest edition of On Good Authority.