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Blame the system, not the governor

Blame the system, not the governor

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Key players  Bob McDonnell (copy)

Virginia Gov. Bob McDonnell

When scandals play out, our tendency is to identify some nefarious person who is obviously to blame and hold them accountable. However psychologically satisfying this may be, it rarely offers a constructive solution to avoid future scandal, and so we continue to see the same types of problems again and again. Instead of blaming the players, we should blame the game.

Consider the unfolding story involving Virginia Gov. Bob McDonnell and his ties to a major donor, Star Scientific CEO Jonnie R. Williams Sr. Williams, described by McDonnell as a close family friend, reportedly has made a number of gifts to the governor and members of the governor’s family over the past few years.

Over the same time period, the governor and the first lady appear to have given Williams’ company, Star Scientific, some free promotion. In August of 2011, McDonnell appeared at an event promoting Star Scientific at the Executive Mansion. And in June of 2011, the first lady flew to Florida to tout the company’s dietary supplement.

The inquiry apparently began out of concern for the possibility of a quid pro quo, with some asking if the governor and the first lady offered their free promotion in exchange for political and personal favors. For their part, the governor and first lady have maintained that it is their job to promote Virginia businesses.

Indeed, the state legislature seems to agree that Virginia business promotion is part of the governor’s job. Over the years, legislators have given the governor a host of tools that make it possible for him to offer exclusive privileges to particular businesses. For example, the Governor’s Opportunity Fund “is a discretionary incentive available to the Governor to secure a business location or expansion project for Virginia.” There’s also the Governor’s Agriculture and Forestry Industries Development Fund. This fund permits monetary grants “at the discretion of the Governor.”

These and other programs are explained in the “business incentives” section of the Virginia Economic Partnership website. The site outlines a variety of taxpayer-supported privileges including subsidies, matching grants, in-kind donations such as training, corporate and individual income tax credits, sales and use tax exemptions, property tax exemptions and various financing programs.

In the case of Star Scientific, the governor seems not to have availed himself of any of these programs. Instead, he and his wife seem to have simply talked favorably about the company, just as they frequently talk favorably about other Virginia businesses.

Presumably, legislatures give governors the authority to grant special favors to firms because they believe these favors attract and support businesses that will benefit the state. But the evidence that targeted incentives lead to any sort of widespread prosperity is quite scant. And as my research has emphasized, privileges lead to a host of economic problems because they undermine competition, encourage wasteful privilege-seeking, and put politicians rather than consumers in charge of allocating capital and resources. (Full disclosure: A few years ago, Governor McDonnell appointed me to serve on Virginia’s Joint Advisory Board of Economists. Once a year I travel to Richmond and offer my opinion on the state’s economic and fiscal forecasts. I am not compensated for my participation.)

Virginia’s current story illustrates another cost of government-granted privileges for special interests: These privileges inevitably invite questions of impropriety. The fact is it is very difficult to devise objective criteria for dispensing privileges to particular firms. So one doesn’t have to look very hard to find apparently subjective decisions. Was Solyndra awarded half a billion taxpayer dollars because it had a superior business model? Or was it given money because green energy is politically popular and the vice president wanted to host a ribbon-cutting ceremony there? Did the Obama administration offer trade protection to domestic solar-panel makers because the Chinese were engaged in “unfair competition” or because domestic solar-panel manufacturers are politically powerful and well-connected? There is no easy way to answer these questions. But maybe they aren’t the right questions to begin with.

Here’s a better one: How might we change the rules of the game so that we don’t ever see scandals like this again? My answer is that we should stop presuming an elected official’s job description includes the promotion of any particular business. It’s fine if a governor or a president wants to tout the economic environment of his or her region – to cite its modest taxation, superior services, or hassle-free regulations. But so long as we ask them to pick winners and losers we shouldn’t be surprised if scandals erupt over whom they pick.

Matthew Mitchell is a senior research fellow at the Mercatus Center at George Mason University and the lead scholar on the Project for the Study of American Capitalism. He blogs at Neighborhood Effects. Contact him at (703) 993-4930.


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