Covering Baltimore politics some 45 years ago, I was struck by how newly empowered ethnic groups used political power to acquire economic power, often dodging city laws and rules to benefit favored constituencies with city contracts, engineering and architectural awards, bond counsel, and so forth. These deals made headlines. But there was a degree of ambiguity to this so-called corrupt activity – it might even be called “good” corruption, which it famously was by George Washington Plunkitt, the turn of the century Tammany Hall enthusiast who coined the phrase “honest graft.” Politicians representing ascendant ethnic constituencies skirted legal and regulatory systems purposely designed by powerful entrenched interests to block emerging competitors.
We use data on corruption convictions and economic growth between 1975 and 2007 across the U.S. states to test this hypothesis. Although no state approaches the level of government intervention found in many developing countries, we still find evidence for the “weak” form of the grease-the-wheels hypothesis. While corruption is never good for growth, its harmful effects are smaller instates with more regulation.
Note: I still think the earmark ban is a good thing.