How public corruption squeezes taxpayers

Each state, much like individual consumers, is assigned a credit rating according to its use of resources. If a state official takes bribes or awards contracts in return for favors, this directly affects taxpayers by lowering the state’s credit rating.

When a state wants to issue a bond, financial institutions rate the offering in part on the market’s expectation that the state can repay the debt. This rating determines the interest rate, generally with “A” being the highest rating and “C” the lowest. High levels of public corruption may mean high odds that the state will default on the loan, so the state won’t obtain the lowest rate available.

Economics Associate Professor Craig Depken and Assistant Professor Courtney LaFountain discovered that public corruption lowers a state’s bond rating, which in turn increases the interest the state must pay on its debt.

“When officials make inefficient use of state resources, and the state borrows, say, $80 million, the money won’t go as far in a state with a high amount of corruption as it will in a state with less corruption,” Dr. Depken said.

Officials spending money based on favoritism usually aren’t looking to maximize the taxpayer’s investment, he added, and taxpayers eventually pay more for less service when officials aren’t pursuing the best deal. While conducting their research, Depken and LaFountain uncovered other areas they plan to address, including whether corruption in the United States originates above or below the corruptee.

“Some think that because elected officials are from the common population that people elect politicians with similar ideals,” Depken said.

Depken has focused only on the United States so far, but he envisions an international context, applying his research to individual countries and their credit ratings.

Can an extra-government entity such as the United Nations use moral persuasion or trade sanctions to motivate a country to reduce corruption? Depken and LaFountain want to know.

“If someone loans money to another country, it is to the country’s federal government. Unlike the analysis of the various United States, in the case of national credit ratings there is no additional level of government to enforce laws on corruption,” Depken said. “In our research in the United States, there is a federal government to enforce anti-corruption policies. Our initial findings suggest that multinational organizations might have a role in reducing public corruption and improving international bond ratings.”

Depken believes that his study of state credit ratings and public official corruption is just the beginning of this kind of research. The average person reading a newspaper article about corruption doesn’t understand how deep the impact can be.

During his research into each state’s credit rating, Depken did discover one encouraging bit of news: Texas has an “A” rating.

“The state of Texas’ credit rating isn’t the highest in the nation,” he said. ”But it’s pretty high and has been for many years.”

— Kim Pewitt-Jones