Study: Corruption increases and distorts spending by U.S. states

News Release from Indiana University, June 9, 2014

BLOOMINGTON, Ind. -- A new study by researchers at Indiana University and City University of Hong Kong identifies the most corrupt and least corrupt states in the United States and calculates that government corruption costs American taxpayers tens of billions of dollars a year.

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The study demonstrates that corruption goes hand-in-hand with excessive state spending. In the 10 most corrupt states, simply reducing corruption to an average level would lower annual state spending by $1,308 per person -- or 5.2 percent of state expenditures. Corrupt states also spend more on construction and capital projects and less on services, including education.

"The Impact of Public Officials' Corruption on the Size and Allocation of U.S. State Spending" will appear in the May/June 2014 issue of Public Administration Review and can be read now online. It presents the first research on the impact of public officials' corruption on spending by U.S. states.

Authors are Cheol Liu, assistant professor in the Department of Public Policy at City University of Hong Kong, and John Mikesell, Chancellor's Professor in the School of Public and Environmental Affairs at Indiana University Bloomington. Liu earned his Ph.D. from SPEA at IU Bloomington.

"Policy makers should pay close attention that public resources are not used for private gains of the few but rather distributed effectively and fairly for various purposes," they write, arguing that reducing corruption can be a tool to restrain spending as when states struggle to balance their budgets.

To establish which states are most corrupt, the researchers examined more than 25,000 convictions for violations of federal anti-corruption laws between 1976 and 2008 and created a "corruption index" by comparing convictions with the number of government employees. Convictions were not correlated to state differences in police, prosecution and court resources, suggesting they were a reflection of the extent of corruption, not of law enforcement effort.

The 10 most corrupt states were Mississippi, Louisiana, Tennessee, Illinois, Pennsylvania, Alabama, Alaska, South Dakota, Kentucky and Florida. The 10 least corrupt states were Oregon, Washington, Minnesota, Nebraska, Iowa, Vermont, Utah, New Hampshire, Colorado and Kansas.

In addition to spending more than expected, corrupt states spent more on government activities and services that are susceptible to manipulation for private gain and less on other activities. For example:

• More corrupt states spent more money on construction, capital and highway projects. That type of spending often involves large expenditures, small numbers of contractors and clients and a lack of transparency, making it vulnerable to bribes, kickbacks and extortion.
• More corrupt states spent more on high wages, which benefit government employees. And they were more likely to engage in deficit financing, which tends to conceal the true cost of government spending from the public.
• More corrupt states spent more on law enforcement and on prisons, reflecting both the legal costs of corruption and the fact that prison construction and operation are potentially lucrative.
• More corrupt states spent less on education at all levels, public welfare, health and hospitals, areas that offer fewer opportunities for public corruption.

"The harmful impact of corruption on education persists even after expenditures on education are divided into subcategories: elementary and secondary education and higher education," the paper says. "These results imply that public officials' corruption reduces states' investment in education overall."

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