Rules designed to thwart corruption have a huge cost, too.
Is there too little corruption in New York City? Don’t laugh; it’s a serious question.
According to NYU’s Transit Costs Project, the average cost per mile for an underground transit project is four times higher in the U.S. than in the rest of the world, and New York City is the capital of absurdly expensive infrastructure, like the $7 billion-per-mile East Side Access project. America’s high costs reflect an incredibly rigid system that cannot adopt the practices of low-cost countries such as Sweden or Spain, and that rigidity is the legacy of fighting corruption by reducing the autonomy of public servants.
The great challenge is that if there are too few rules, corruption can run amok, but if there are too many rules, it becomes impossible to use local knowledge and innovate. The anti-corruption regulations that were enacted in the 19th century were typically sensible and simple. The extra 20th century rules were unnecessary — since most instances of corruption were already illegal — and bound New York City in a regulatory straitjacket that stymies cost-cutting reform.
Public procurement can be a gigantic font of corruption, as epitomized by the infamous Tweed Courthouse. This magnificent edifice still stands behind New York’s City Hall and now houses the City’s Department of Education. Construction on the courthouse began in 1861 with a budget of $300,000.The building would take 20 years to complete, and its total cost would exceed $12 million, which is about $310 million in current dollars. It cost 66% more to build the courthouse than it did for the United States to buy the state of Alaska.
Unlike today’s overpriced infrastructure, the courthouse cost so much because of corruption. In 1866, The New York Times reported that “one of the Supervisors” of the courthouse project (Tweed himself) “purchased for the sum of $1,250, the exclusive right of taking marble from a quarry in the town of Sheffield, Massachusetts.” While there had been low bids of $125,000 and $158,000 to supply all the marble for the structure, the “Supervisors” instead “made a contract with the Sheffield Quarry to supply the marble at certain stipulated prices per foot.” When the article was being written, the City had already spent $420,000 on marble and seemed sure to spend at least another $100,000. One estimate is that $9 million of the courthouse’s cost was lost to corruption.
On July 20, 1871, The New York Times published an article, “Proofs of Theft,” that contained data from the secret accounts of New York City Comptroller Richard “Slippery Dick” Connolly. The story contained juicy tidbits, like the fact that one John H. Keyser had been paid two checks, totaling more than $60,000, on the same day for “plumbing in several National Guard Armories.” Tweed went to prison, where he died in 1878, and New York tried to make it harder to extract bribes by overpaying for government purchases. The 1873 City Charter specified that all contracts “except as herein otherwise provided, be founded on sealed bids or proposals,” and “all such contracts, when given, shall be given to the lowest bidder.”
But there are other means of extracting bribes when serving in government, such as giving away City assets or providing regulatory relief. Charlie Murphy, who led Tammany Hall from 1902 to 1924 and liked the look of honesty, was a Dock Commissioner. He was also widely believed to be his brother’s partner in the New York Contracting and Trucking company, which rented piers from the City at bargain-basement rates and sold access to them at far higher prices. In his book “The Shame of the Cities,” the great muckraker Lincoln Steffens wrote: “These docks should pay the city handsomely. Mr. Murphy says they shouldn’t.” Steffens also described a Buildings Department that would “wink at most profitable violations” of building rules in exchange for a bribe equal to the “department’s estimate of a fair half of the value of the saving in time or bad material.”
Murphy’s protégé Mayor Jimmy Walker resigned in 1932 amid a flurry of evidence suggesting that he had been paid by a taxi company for supporting regulation that would curb “low-rate ‘taxicab racketeers,’” and by a bus company for supporting “a grandiose but fruitless scheme to get a city franchise, start a bus line, swap stock and concessions with other municipal services and ultimately control the city’s entire privately-owned transit system.” Walker’s downfall would lead to the election of Fiorella La Guardia, and another City Charter, with another set of rules regulating procurement and franchises.
This new Charter would also create a Department of Investigation (DOI), with the power to “make any study or investigation, which in the [Commission of Investigation’s] opinion may be in the best interest of the city, including but not limited to investigations of the affairs, functions, accounts, methods, personnel or efficiency of any agency.” The DOI would later run “stings” like its 1983 operation “Norton,” in which an undercover sewer inspector met with 24 contractors and reported that “21 of them had paid him bribes on 47 occasions.” The name “Norton” pays homage to Art Carney’s character in “The Honeymooners,” whose “Song of the Sewer” contains the unforgettable lyric, “I work down the manhole with a guy named Bruce and we are in charge of all the refuse.”
In 1986, legendary Daily News columnist Jimmy Breslin reported that Queens Bureau President Donald Manes had extorted $36,000 over an 18-month period from a debt-collection agency belonging to Michael Dowd, who claimed that “in order to get work from the city’s Parking Violations Bureau, he had to pay the Queens politicians.” The City’s procurement rules were skirted by somewhat implausibly claiming that there was only “one source” who could handle debt collection.
In 1996, the scholars Frank Anechiarico and James Jacobs wrote that a 1983 DOI sting operation had accumulated enough evidence to convict Herb Ryan, a lower-level official, but “it was reluctant to act” because it hoped that continued surveillance of Ryan would lead to “catching a bigger fish — Donald Manes.” Mayor Koch demanded “Ryan’s immediate arrest,” perhaps for the sound reasons of maintaining “public confidence” and “morale,” but that decision allowed Manes to operate for another three years. (Manes would end up committing suicide.)
Readers will not be surprised that yet another City Charter shortly followed this scandal, and once again, the rules around procurement were stiffened: “The agency letting the contract may reject all bids if it shall deem it for the interest of the city so to do; if not, it shall, without other consent or approval, award the contract to the lowest responsible bidder, unless the mayor shall determine in writing, justifying the reasons therefor, that it is in the best interest of the city that a bid other than that of the lowest responsible bidder shall be accepted.” A complex process of determining who were “responsible bidders” was put in place that eventually became the paperwork-intensive and often arbitrary VENDEX system. Before beginning any procurement over $100,000, any “agency shall determine whether such contract will directly result in the displacement of any city employee,” and if the procurement will displace anyone, then “the agency shall determine the costs incurred and the benefits derived in performing the service … with city employees.” They then had to submit their analysis to the Comptroller’s Office. All this bureaucracy was to be administered by a new Procurement Policy Board, while the DOI continued its investigations.
The somewhat odd thing is that steering collection contracts to friendly firms was already illegal under the old rules. Yet the City decided that the right approach was to double down on micromanaging the bureaucracy. Limiting public discretion has costs, such as reducing the ability to do smart things, like working with a general contractor to save money or favoring a company that is known for meeting deadlines and high quality. If the lowest bidder always wins, then an experienced bureaucrat can’t prefer a company that is known to deliver quickly without renegotiation over a firm that has repeatedly figured out how to bend the rules without ever breaking them.
Steering collection contracts to friendly firms was already illegal under the old rules. Yet the City decided that the right approach was to double down on micromanaging the bureaucracy.
Thirty years ago, Frank Anechiarico and James B. Jacobs wrote a terrific book, “The Pursuit of Absolute Integrity: How Corruption Control Makes Government Ineffective,” which discusses the downsides of obsessing about corruption. In their view, the fight for zero corruption leads to “more command-and-control, even at the expense of administrative efficiency.” As “advocating overthrow of civil service is not only regarded as heresy, but as being soft on corruption,” public managers “must struggle to gain control over agencies with incompetent employees whom they cannot fire, demoralized and underpaid professionals whom they cannot reward, and vacant position which they cannot fill.” The “exhaustive and ongoing” financial disclosure required of public officials can “[deter] people from taking government jobs,” as these officials are “likely to feel as if others regard them as potential criminals.” The rise of the Department of Investigation may mean that bureaucrats are “constantly looking over their shoulders trying to anticipate how their decisions will be perceived by DOI investigators.”
Anechiarico and Jacobs identify the ways in which the anti-corruption crusade hobbles procurement in New York City. Rigidly following the lowest-bidder rule eliminates the chance of selecting better builders, because “even a contractor that does a shoddy job must be awarded future contracts if it is the lowest bidder, unless it is found non-responsible,” and consequently, “many firms with terrible performance records continue to be awarded city contracts.” The challenge of dealing with the system means that “many contractors refuse to subject themselves to the red tape and onerous VENDEX questionnaires” and “refuse to bid on public contracts because they cannot compete with unscrupulous contractors.” They note that 49% of a sample of 798 Human Resources Administration contracts “were awarded with fewer than three bids,” suggesting “the system fails to generate competition.” If the anti-corruption crusade makes it harder to hire capable public managers, then procurement projects will face poor oversight.
In 2022, I published, together with Erica Bosio, Simeon Djankov and Andrei Shleifer, a paper documenting procurement practices around the world. A module had been added to the World Bank’s erstwhile Doing Business Report, which asked local correspondents (lawyers, construction companies, government procuring entities) about a hypothetical $2.5 million road-maintenance projects. We asked questions about laws and practices, such as “Do Tender Documents and Technical Specifications need to be made available by the Procuring Entity?” We asked about the integrity of the process, such as the frequency of noncompetitive auctions or favoritism toward particular bidders, and especially about bribery. We also asked about the frequency of cost overruns, lengthy time delays and shoddy work.
We found that regulatory laws generally reduce bribery, but that these laws don’t generally improve outcomes. Indeed, some of the best-functioning countries, like Australia, Denmark and Singapore, regulate their procurement managers least. We found that poorer countries have tougher rules on the books, but these are much less likely to be followed. Richer countries had fewer laws, but better practices and outcomes. In less-educated countries that are typically more poorly governed, extra regulations are associated with better outcomes, probably because they reduce corruption just as the limited lowest-bidder rule, adopted in 1873, probably also improved New York City’s outcomes. In better-educated, better-governed places, regulations are associated with worse outcomes — probably because, as Anechiarico and Jacobs write, “By removing the public official’s discretion over choice of contractor, competitive bidding eliminates the official’s ability to obtain superior goods and services.”
We found that regulatory laws generally reduce bribery, but that these laws don’t generally improve outcomes. Indeed, some of the best-functioning countries, like Australia, Denmark and Singapore, regulate their procurement managers least.
Across the world, well-functioning procurement agencies hire good people, reward them for success and let them change the rules as they see fit. Singapore’s government pays well, offers excellent career paths and punishes corruption ferociously. The city-state trusts its workers and sees good results. New York City’s rules straitjacket their officials, which stymies the changes needed to reduce the City’s extraordinarily high costs of building.
Eric Goldwyn, Alon Levy, Elif Ensari and Marco Chitti, of the aforementioned Transit Costs Project, have written an excellent report, “Understanding Transit Infrastructure Costs in American Cities.” Every taxpaying New Yorker should be interested in their analysis of why “Phase 1 of New York’s Second Avenue Subway is 8 to 12 times more expensive than [their] composite baseline case.” They highlight four forces: “Stations and Tunneling,” “Systems and Standardization,” “soft procurement costs” and “labor costs.” Across the world, station digs are only 5% longer than their platforms, but Second Avenue’s stations can be more than twice as long as their platforms. Low-cost infrastructure providers, like Sweden, standardize their stations to get scale economies. New York custom designs each station.
Goldwyn and his co-authors claim that New York’s soft-procurement problems add 85% to costs. These problems include “a pervasive culture of secrecy and adversarialism between agencies and contractors, a lack of internal capacity at agencies to manage contractors, insufficient competition, and a desire to privatize risk that leads private contractors to bid higher.” These problems seem directly related to the anti-corruption crusade. Labor costs in New York are not so high because America pays its manual workers so much more than Sweden does, but because we use labor so much less efficiently.
New York City’s rules straitjacket their officials, which stymies the changes needed to reduce the City’s extraordinarily high costs of building.
What could fix things? Among their recommendations are to “award contracts based on technical merit and not just price,” and to “ensure the change order process is flexible and lawsuit-free, anchored by the itemized contract, with an allowance for a midproject change in itemized costs due to changes in market wages or global commodity prices.” That flexibility is only possible with a “substantial in-house design review team to respond to change orders quickly.” They favor adaptability and competence over a regulatory straitjacket. This would require the City to adopt a system with well-paid public officials who are trusted to make decisions.
The benefits of mass production have been known since Adam Smith, yet our procurement systems seem designed to minimize economies of scale. The report recommends that the City should “standardize regulations to ensure that national and international contractors can understand and comply with them without having to hire local bundlers or subcontractors” and “standardize designs so that they can be repeated between different expansion projects, without the urge to tweak the design every time based on small changes in taste or law.” My work with Lea Bou Sleiman and Julia Shephard has put together data on public bus purchases throughout the U.S. In our data, the typical agency spends over $1 million per electric bus. Hyundai’s mass-produced Elec City bus costs about $300,000 in South Korea. Rather than obsessing about eliminating corruption in procurement, the City should focus far more on buying commercially available products.
The late, great economist George Stigler famously quipped, “if you never miss a plane, you’re spending too much time at the airport,” and the same thing is true about corruption control. If we gear the system to ensure that there is never the slightest hint of favoritism, then we have acted as if eliminating one dollar of bribery is more important than eliminating one million dollars of waste. In the days of the Tweed Courthouse, graft caused the cost of a public building to increase by 300%, but there is little evidence from the past 75 years that corruption played a meaningful role in driving the City’s procurement costs so high.
New York’s clunky, overregulated procurement system adds billions to the City’s costs. If we are going to get reforms that pull us closer to the lower-cost Swedish model, then we must allow the system to become more flexible. I, for one, would be comfortable with a few thousands of dollars of graft if it saved the City billions of dollars of waste.