Economist: Cut VA governor’s ability to favor firms to prevent future scandals

Kathryn Watson
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Sep 01, 2014 5:00 AM
Economist: Cut VA governor’s ability to favor firms to prevent future scandals
 Photo by Kathryn Watson

CORRUPTION TRIAL: Former Virginia Gov. Bob McDonnell, center, is the subject of a federal corruption trial.

By Kathryn Watson | Watchdog.org, Virginia Bureau

RICHMOND, Va. — For the past few weeks, much of former Gov. Bob McDonnell’s defense in his federal corruption trial has been pretty simple — what he did for businessman Jonnie Williams, and what Williams did for him, was all just business as usual.

In arguing his innocence by showing the jury his relationship with Williams was perfectly normal, McDonnell and his defense team are also pinpointing how detrimental it can be to Virginia when the governor views it as part of his job description to give privilege to particular firms, one economist says.

“If you leave the honey jar out, you can expect ants,” Matt Mitchell, an economist with the Mercatus Center at George Mason University in Fairfax, told Watchdog.org. “… If you’re a rational business person and you know that one person has complete discretion in favoring your firm or not, it makes sense that you’ll try to curry favor with him.”

Several weeks ago, McDonnell’s defense team began its testimony with videos of McDonnell attending events promoting a couple other Virginia businesses, too, trying to show how typical it was for the governor to promote a particular business. McDonnell testified he’d “much rather have studies done in Virginia” than anywhere else, referring to studies of Williams’ nutraceutical product Anatabloc.

After all, “Bob’s for jobs,” as McDonnell’s 2009 campaign slogan went. It was normal for the governor to pick and choose Virginia businesses to promote.

Photo credit George Mason University

GOVERNOR’S PRIVILEGE: Virginia economist Matt Mitchell says the governor’s power to privilege particular firms just invites the sort of scandal of the McDonnell family.

“Like most Virginia business people, I wanted to see him succeed,” McDonnell said of Williams while testifying on the stand.

It was normal for the governor, as the state’s highest elected official, to be courted with lavish gifts because of his powerful position. It was also normal for the governor to have a list of 15-20 different wealthy business people or companies willing to offer him plane rides when he needed them, with a company representative on board to promote a product or program, McDonnell testified. Wealthy business leaders offered him private vacations and dinners all the time, he said.

Whatever the jury decides in the coming week, those interactions hit at the heart of part of the underlying problem of the entire McDonnell scandal and the Virginia political system itself, Mitchell said.

“In the state of Virginia, as in most states, the governor, part of his job description is to privilege particular firms or industries,” Mitchell said.

When he has the power to do so, this sort of thing is bound to happen, Mitchell said.

Virginia has an entire agency devoted to targeting incentives for particular businesses and industries, called the Virginia Economic Development Partnership.

The governor alone has the discretionary power over the Governor’s Opportunity Fund, which offers incentives to a business location or expansion project he thinks would benefit Virginia.

“I think a constructive conversation should be had in Virginia now whether the Governor’s Opportunity Fund should exist,” Mitchell said.

The governor also has complete say over the Governor’s Agriculture and Forestry Industries Development Fund and the Governor’s Motion Picture Opportunity Fund, which uses cushy incentives to lure Hollywood-sized films to the commonwealth. McDonnell was able to get a hushed-up lunch with Steven Spielberg out of that one.

The problem with the governor’s discretion over so many powerful tools and money pots is simple, Mitchell said.

“The privilege also invites corruption,” Mitchell said. “You can’t have a quid pro quo scandal without a pro quo.”

It doesn’t appear so far from testimony in the McDonnell trial that Williams obtained any of the specific money pots at the governor’s discretion.

But scandals — and even more indictments —could rear their ugly heads in the future as long as Virginia’s top elected official has the ability to privilege businesses and industries at his choosing, something that erodes trust both in corporate entities and in government, Mitchell said.

“I would put this as one of the many hosts of problems that arise when government is able to privilege particular firms or industries,” Mitchell said.

As dramatic and unsettling as the former governor’s trial has been thus far, many negative consequences of government privileging particular firms are forgotten.

“There’s very little evidence these things provide widespread prosperity, and in fact we know it’s bad for the economy,” Mitchell said. “ And now we know we invite problems like this.”

In a study of 79 peer-reviewed academic papers considering the effectiveness of state economic development strategies and targeted incentives for firms, only 9 percent of cases actually benefited the state’s overall economy, Mitchell said. Another 14 percent had a negative effect on the state’s economy. The rest had no measurable impact.

“Does company X that receives funds from Virginia do better than other companies in Virginia? Well, it’s sort of a miraculous failure if they didn’t do better,” Mitchell said. “A more relevant and practical question is, does Virginia do better when Virginia uses money to privilege a particular firm?”

The answer, Mitchell said, is almost always no, and everyone who isn’t the politician or the company suffers.

“If you’re not the privileged firm, you may end up paying higher taxes in order to make up for it,” Mitchell added. “You may end up making higher prices if the industry in which the firm operates is less competitive. More importantly, it means the economy is less dynamic and less agile because resources aren’t designated for the most efficient use.”

So why do elected officials use targeted incentives for a particular firm or industry?

It’s an easy way to boost job creation, no mater how ineffective, Mitchell said.

In 2008, the state granted roughly $12.5 billion in tax breaks alone, while it raked in roughly $14.3 billion in total tax revenue, as a November 2011 report by the Joint Legislative Audit and Review Commission found.

“When you privilege a particular firm, you can easily point to the jobs created,” Mitchell said. “But what’s unseen is the jobs that would have been created if taxes had been lower or the resources you’d used if they’d been in taxpayers’ pockets.”

Everyone believes justice should be blind, Mitchell said, but the same needs to be true of economic incentives — by eliminating the discretionary pot, Mitchell said.

“Even before you get to economics, there’s a strong moral case of equal treatment by the law and equal treatment by policy,” Mitchell said.

Until something changes, the honey jar will likely continue to get pretty crowded.

— Kathryn Watson is an investigative reporter for Watchdog.org’s Virginia Bureau, and can be found on Twitter @kathrynw5.