I’m sharing this article that was sent to me by an FB friend. Sounds pretty much like how they do it back home I guess.

This is a throwaway account (I’m a longtime redditor under another login). /r/economics might not be the correct place to put this, but it was the best I could think of. I’m a mid-career guy in a business that does a lot of work with governmental and quasi-governmental agencies. I’ve never ripped anyone off personally, but I have seen and occasionally been an incidental beneficiary of quite a bit of patronage, insider dealing, nepotism, misuse of taxpayer money, and outright corruption. While I have always been honest in my own dealings on a case-by-case basis, I have refrained from many opportunities to be a “whistleblower”.

A lot of stuff on reddit misunderstands the relationships between wealth, power, and influence. For starters, all the above three are always and have always been inter-related, and probably always will be. And that might not always be a bad thing: those who have risen to high levels of wealth are often pretty smart, and surprisingly often exceptionally honest. Those who rise to high levels of influence usually have some pretty good insight and talent in their area of expertise. Those who have acquired a lot of power tend to be good at accomplishing things that lots of people want to see happen.

None of which is purely democratic, nor even purely meritocratic, but there is a certain dose of both kind of baked into the cake: stuff like wealth or family connections only gets you so far in modern, developed, and relatively open and transparent societies such as the US. And while that can be pretty far by normal standards, at some point sunlight does shine through any crack, and outright robbery or complete incompetence is difficult to sustain indefinitely.

But there is an awful lot of low-level waste, patronage, and corruption that happens both in the private and in the public sector.

Without going ideological, the private sector in a free-ish market has a more immediate system of checks and balances if only because you have to actually persuade the end users to keep buying your stuff for the price you’re charging: if it’s no good, or if you are grossly over-charging, your customers will tend to catch on sooner or later.
But in the public sector, the “consumer” often has little choice… so-called “market discipline” is a lot more diffuse when you have a former-schoolteacher-or-real-estate-broker-turned city councilman whose job it is to disburse a multi-million-dollar street-paving contract or whatever. And neither the schoolteacher nor the real-estate broker has any clue how to write or evaluate a road-paving contract…

Let’s say that there are three credible bidders for that street-paving contract:

Bidder 1 is “Paver Joe”, a local guy with a driveway-paving company and three trucks who sees this as a big opportunity to expand his business and get the city to pay for five new trucks. He puts in a dirt-cheap bid that he wrote up himself with the help of his estate attorney. The cost to taxpayers is very low, but the certainty that he will complete it on schedule and as specified is a little iffy. Paver Joe plans to work overtime and bust his tail on the job, not for profits, but to grow his business. He’s offering the taxpayers a great deal, but a slightly risky one.

Bidder 2 is “Muni Paver Inc”, a company who has the experience and expertise to do the job, who knows what’s involved and who has done this work before. They already have the trucks, their workers are all unionized and paid “prevailing wage”, everything will be done by the book, all their EPA certifications are in place, etc… The bid is a lot more expensive than Paver Joe, but it’s credible and reliable. They are offering the taxpayers a degree of certainty and confidence that Paver Joe cannot match.

Bidder 3 is me, “Corruptocorp”. Instead of Paver Joe’s 2-page contract with typos, or Muni-Paving’s 20-page contract, I’m offering the city council a full package of videos, brochures, and a 40-page contract with a price just a tad higher than Paver Joe (my quoted price is meaningless, as we will see). Moreover, I’m inviting the city council to Corruptocorp-owned suites in a golf resort near my headquarters to give my presentation (all expenses paid, of course, and of course, bring your spouses). There the city council members will, after the first day of golf, dinner, dancing, and cocktails, see a slideshow and chorus-line of smiling multi-ethnic faces and working mothers talking about how much Corruptocorp’s paving improved their town and their lives. I’ll then stand up and tell a self-effacing joke about being one of those corporate guys trying to get their money, and then I’ll wax a bit emotional about my small-town roots and how Corruptocorp was started by a man with a simple dream to make life better for everyone, and to do well by doing good in local communities, and that we actually plan to hire local contractors such as Joe’s Paving to do the work, backed our economies of scale and reliability. I’ll mention that paragraph 32 subsection B of our proposal mandates twice-yearly performance reviews by the city council, to of course be held at the golf resort, at Corruptocorp’s expense, (“so I hope to see you all back here every February and August!”), and of course I make sure that each of them has my “personal” cell phone and home numbers in case they have any questions….

So needless to say I get the bid, and six months later it’s time for our review at the golf resort. After dinner and cocktails I step up to the podium and announce that there is both good news and bad news:

“The bad news is that our subcontractor has found over 1,000 rocks in the road. And as I’m sure you know, paragraph 339 subsection D.12 specifies that any necessary rock removal will be done at prevailing wages, currently $1,500 per rock, for a total cost overrun of $1.5 million. But the good news is (and believe me, I had to fight long and hard for this with the board of directors), Corruptocorp has agreed to remove those rocks for only $1,000 apiece! So even though there have been some cost overruns, your smart decisions have saved your taxpayers half a million dollars! Give yourselves a round of applause!”

“Now, the other situation is that there has been some ‘difficult terrain’ as described in subsection 238b, which I’m sure you’re all familiar with. And as you know, ‘difficult terrain’ is not covered by the contract, which is for paving, not for turning mountains into flat roads… (wistful chuckle). Now, technically, according to the contract, we should be charging your town prevailing rates for these sections, but I’ve worked it so that you will be allowed to re-bid them, if you wish, since our contract doesn’t specifically include terrain as described in subsection 238b.”

Now the contract price has doubled, and Corruptocorp has completely sidestepped all of the difficult and costly work, taking profits only on the easy stuff. The city council members can either admit that they were duped and bought (political suicide), or can simply feed corruptocorp’s line to the voters. Which do you think will happen?

And it gets even worse on smaller scales: look up your local building or electrical inspector. Ten-to-one he is a relative, friend, or campaign donor to the mayor or city council. What’s in it for him? Every single construction or home improvement project not only has to pay him a fee, it also has to pass his inspection. Guess which contractors are most likely to pass his inspection? His brothers, friends, family… or the cheapest guy who for some reason has a hard time finding work in this town? Guess how the local inspector feels about homeowner self-improvements: does he think they are a great way for regular people to improve their wealth with a little elbow grease, or does he see them as stealing work from his friends and family?

The US military is by far the most wasteful customer I’ve ever had. I’ll talk about that if this topic gets any interest.

edit: as promised, here’s the post about military spending:

http://www.reddit.com/r/Economics/comments/c84bp/how_realworld_corruption_works/c0qrt6i

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reynz is one Uragon and a Filipino-American, has many years of public accounting & auditing, broadcast investments, housing tax credits and equity investments as his background. Based in the US, he maintains his personal and humor blog at reyna elena dot com. A graduate of Aquinas U, he went to GWU and Temple U in the United States.