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Corruption and “Economic Development” in New York State

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Corruption and “Economic Development” in New York State

April 4, 2018
Economy, finance, and budgets
New York

E.J. McMahon and Seth Barron discuss recent corruption cases in New York and how the state government in Albany is attempting to revitalize struggling areas with “economic-development” programs.

Last month, Joseph Percoco, a former top aide to Governor Andrew Cuomo, was found guilty on corruption charges for accepting more than $300,000 in bribes from two companies. Percoco’s conviction reinforces the perception that New York politics operates on a “pay-to-play” model.

Allegations of bid-rigging and other corrupt practices have dogged Albany ever since Governor Cuomo launched his signature economic-development plan, which provides subsidies to private firms to operate businesses in the state. Despite these efforts, New York continues to lose residents to other states every year.

Edmund J. McMahon is founder and research director of the Empire Center for Public Policy, based in Albany. Follow him on Twitter @EjmEj.

Audio Transcript

Seth Barron:  Hi everyone.  Welcome back to 10 Blocks, the official podcast of City Journal.  This is your host for today, Seth Barron.  Our show is coming to you from the Manhattan Institute near Grand Central Terminal, and our guest today is E. J. McMahon.  E. J. is the founder and research director of the Empire Center for Public Policy.  He is a noted expert on fiscal policy, labor relations and budget trends in New York State.  E. J. is published widely, including many pieces for City Journal, as well as in The Wall Street Journal, The New York Times, the New York Post and Daily News, Barron’s, and elsewhere.  Thanks for joining us, E. J.

E. J. McMahon: You are welcome.  Thank you.

Seth Barron: So, last week a key aide and associate of Governor Cuomo, named Joseph Percoco, was convicted on federal bribery charges.  E. J., can you explain what these charges were?

E. J. McMahon: Well, what it boiled down to was he was convicted of supposedly accepting $300,000 in bribes.  In part largely in the form of a no-show, what was called a low-show job for his wife with a company that was seeking the state’s help or his help in getting the state to move on with a project for a natural gas fired energy plant.  Also, he was accused with a couple of, pardon me, Syracuse area developers in connection with a state-funded project in Syracuse.  One of the two private developers on trial with him was convicted of charges related to that allegation, the other was not.  But, basically, they said that he had used his position as the governor’s top closest aide to basically seek to enrich himself and he was convicted of some of those charges – I think three counts.

Seth Barron: Now there is a lot, I mean, New York State has a pretty large budget and Governor Cuomo has put a lot of money into economic development Upstate.  Did these charges pertain to any of those?

E. J. McMahon: There are other cases still pending pertaining more centrally to those.  But, yes, it pertained to some of them.  I think the Syracuse project was part of the Governor’s broader economic development portfolio if you will.  The next case coming up involves allegations of bid rigging in connection with the so-called Buffalo Billion.  The centerpiece project in the so-called Buffalo Billion initiative is a $750 million factory that the state has basically built and handed over the keys for to Elon Musk to manufacture solar panels or actually assemble solar panels, which is not actually open and in full operation yet.  But, that really is the biggest, literally and figuratively, the biggest project in the governor’s Upstate agenda, the notion that you can kind of force-feed a new era of growth and tech-oriented growth into parts of Upstate New York by dumping a lot of state money into private projects, which essentially benefit private companies based on the promise that they are going to open up a big new facility and employ a lot of people.

Seth Barron: Well, we are getting into a lot of territory here, but let me ask you, so when the governor or the state puts a bunch of money into a program, how is it that the governor’s friends or associates get to choose who gets the money?  Isn’t there any kind of procurement process or…?

E. J. McMahon: Well, one of the controversies here, one of the few reforms that have been talked about as being necessary in the wake of these cases that actually would be an actual beneficial reform that might have actually had an effect, or at least slowed, some of this is procurement reform.  Because actually back in 2011, the type of projects, some of the projects involved in these cases, particularly those done with an affiliate of the State University of New York as the developer, which did not figure in the case that Percoco was just convicted in.

Seth Barron: Right.

E. J. McMahon: They were taken out of the audit purview of the state comptroller.  And, so, the argument at the time which the legislature accepted was well, we need to move faster.  So, we need to just move the, pick our developers and get going with these projects and hurry on toward the projects we want.  And I think now that it has been realized that there needs to be a procurement reform that puts these things back under the purview of the state comptroller.  Now, beyond that, this is where there is a divide on this, yes, the economic development projects have figured or allegedly figured in some of the corruption cases to come and peripherally to the Percoco case that just completed, but a lot of the good government groups are goo-goos, as Al Smith dubbed them decades ago.  Their attitude on this is transparency.

Seth Barron: Sure.

E. J. McMahon: And we are all about, where I come from, I am all about transparency and accountability.  Transparency is a good thing.  I think this leaps over the question of whether the state should even be doing much of this stuff.  There is actually a clause in the state constitution that is over a century old, a provision known as the Gifts and Loans provision, that basically is designed and fairly explicitly prohibits gifts and loans of state money to private companies.

Seth Barron: Okay.

E. J. McMahon: You may be surprised to hear that because you are thinking if such a thing exists how did any of this come about?

Seth Barron: Indeed.

E. J. McMahon: It basically, like some other provisions of the constitution, for instance the limitation on state debt, was over the years gradually turned into a dead letter.  There was all sorts of corner cutting that ultimately produced court decisions that narrowed it to the point of near disappearance.  I think it needs to reappear.  I think a lot of the stuff that the state does won’t be cured by greater transparency.  It won’t be any better just because it is done according to a better process and nobody is actually sent to jail for having tried to rig a bid.  It is stuff the state shouldn’t be doing.  So…

Seth Barron: It sounds like you don’t think that economic development programs are necessarily a good use of taxpayer money, but how else is the state supposed to promote growth in Upstate and on the Western Tier, Southern Tier?  I mean, what is the…

E. J. McMahon: Well, I mean, almost everything that governments almost everywhere do in the name of “economic development,” especially state governments, is almost by definition the wrong thing.  Because what they do is, and they use a new favored word, “invest,” meaning they target money to favored companies with the hope that they will do stuff.  This isn’t limited to New York.  I mean, Wisconsin just threw a ton of money at a company, at a tech company there, in a very controversial way.  It has been done in the South with auto manufacturers, etc.  What we really need is climate change, the right kind of climate change economically.  The economic climate Upstate is the problem and is, I think, the thing that is really hindering growth the most.  Now, different parts of Upstate New York have different problems.  The Southern Tier, which is economically the weakest part of Upstate New York, it’s the part of Upstate New York that actually is sinking fairly rapidly, it’s losing people, it’s losing jobs, it’s really in bad shape.  The Southern Tier is the part of the lower part on the map from Binghamton running out across all the way west to Jamestown, so you have Elmira in there and basically everything along the Pennsylvania border.  That is the region that would benefit most from shale gas exploration, including hydraulic fracturing, which the governor has banned.  Therefore, there is no benefit occurring from that.  It would also benefit from expansion of capacity and pipeline capacity of just transmitting natural gas to the industries that are still there, which it lacks sufficient capacity to serve.  In fact, one of the governor’s own regional economic development councils successfully pushed for state approval to run gas lines to two of the largest surviving manufacturers in the Southern Tier only to learn a few months later that the governor had blocked the pipeline itself from being built.  So, this would be spurs to nothing.  So natural gas and energy policy is the problem for the Southern Tier that could be solved by better state policy.  Generically in all of Upstate, the problem Upstate has is not even principally taxation other than property taxes, it’s regulatory.  The state’s labor laws and the way the state enforces them, the state’s public works contracting laws, the state’s environmental regulations, its development regulations, all of these things hinder growth in Upstate New York.  A lot of what has happened in Upstate New York and a lot of the problems Upstate New York suffers from are similar to those afflicting other parts of the interior of you know, the Northern United States.  But if you compare the Great Lakes, the other Great Lakes basin states, and Upstate New York is really a Great Lakes basin state along with Pennsylvania, Ohio, Illinois, Indiana, Wisconsin, Minnesota, Michigan, that’s the peer group for Upstate New York, they are all doing better than Upstate New York.  They are not doing great necessarily, but for instance they are all doing better in terms of manufacturing employment than Upstate New York.  I think that while they all struggle at varying degrees they have also got better prospects and have demonstrated better prospects than Upstate New York has.  And I think one key reason for that is that state policy is worse as it affects Upstate New York than it is in any of those states.  And that’s not, you know, those states do more to throw money, throw economic development money at potential employers, it’s that those states have better climates in general. 

Seth Barron: But isn’t – I feel like Governor Cuomo is pursuing a policy of smart investment by moving away from classic sort of rust belt industrial era policy, you know, industrial policy, and trying to invest in solar and wind power and all of these, you know, the future of the American...

E. J. McMahon: Right.  I mean that’s kind of like the sort of faddish thing he is trying to do.  Even taken on its own terms, the problem is – and there is research, you know there is a lot of research in this area – when you try to plant and start out of nothing a tech sector in say Utica, which is one of the things he is doing, where it just hasn’t existed, you just kind of take a hunk of money, do a deal with (in this case G.E. or some other company), and say if you do one project that we will give you a lot of money from in this area, we will also subsidize you doing more in say Utica.  But Utica is not a naturally occurring tech cluster; you are basically attempting to transplant.  It is like this sort of hothouse theory.  In Albany, successfully to a certain degree so far, sustainability is another question, the state over a period of twenty years created this sort of intense greenhouse that became the State University Polytechnic Institute.  Huge injections – picture a greenhouse with, you know, the huge trays of exotic plants that although the climate is not necessarily favorable otherwise they are kept under intense light, they get a lot of fertilizer, lots of money is spent to make it flourish, and they are flourishing in the greenhouse.  That is what has happened with the tech sector in Albany where in fact the state has spent billions of dollars, hunks of it have been invested in the SUNY Polytechnic Institute, another big hunk went to what is now the GlobalFoundries Chip Fab plant, one of the largest in the world, in southern Saratoga County, and those things began or had their most intense period of spending actually under Governor Pataki, a Republican.  Which goes to prove among other things that first of all that if you have your academic establishment under the control of a true visionary, who this President of SUNY Polytechnic, Alain Kaloyeros, who now is the central figure in the next corruption trial for allegedly involved in bid rigging, but if you have a brilliant visionary and marketing and promotion guy who also is a scientist, like Alain Kaloyeros, involved in an institution like Polytechnic and give them enough…

Seth Barron: Dr. Nano.

E. J. McMahon: Dr. Nano or Dr. K., give him infusions of money to go out and gather up partners among private companies who are enticed to the campus because they are going to get basically grad students basically becoming sort of like the free research auxiliaries that that kind of public-private partnership if you design it shrewdly and spend enough money on it can produce results.  GlobalFoundries was simply a case of throwing money at a company that was originally AMD’s manufacturing subsidiary and is now owned by the sovereign wealth fund of, I think, it is Abu Dhabi.  I get my gulf principalities mixed up, but one of those.  And that is a huge multibillion-dollar tech fit, one of the few in the world, but also in a very competitive industry.  Having done that there, the theory was, well we can do this everywhere.  In fact, the governor is very enamored of Alain Kaloyeros, and said Alain Kaloyeros’ model included creating not technically private, non-profit affiliates of the State University of New York through which they could rush procurement and contracts and control who was picked to do different work.  And it was much easier and more convenient than having to go through the whole bureaucratic process that is normally required of state agencies.  So, the appeal for the governor is, well, this guy Kaloyeros gets things done.  That model is a great fast model.  Let’s do it.  Let’s scale it all over the place.  Let’s do it all over Upstate New York and plant, create these hothouses all over the place, these greenhouses if you will.  Let’s take the money and plant.  So, you’ve got Elon Musk, basically they have given Elon Musk a $750 million factory.  Now Elon Musk, in fact, who owns Solar City, who acquired Solar City, or Solar City acquired the technology that was originally mixed up with this plant, basically has now merged Solar City with Tesla, but the plant is actually being co-owned now, or co-managed, by Panasonic because Panasonic actually knows how to assemble solar panels and the small detail is that Elon Musk doesn’t know.  Solar City had never actually run a large-scale manufacturing plant when we gave them $750 million.  So, now with Panasonic they are about to open this plant.  Everything about the governor’s energy policy is meant to promote and subsidize solar panels as well as wind.  But the notion that you can kind of make New York into this, basically this array of thriving tech clusters by simply throwing enough money at them so far has not panned out.  The word nano, for instance, figures in a lot of these things and you may have heard of the Syracuse Nano Film Hub?

Seth Barron: Yes.

E. J. McMahon: All right.  Which had the word nano in it for reasons I forget.  But it is basically a multimillion-dollar, brand-new facility that sits empty near Syracuse because somehow nobody was all that interested in producing films, nano, or otherwise, in a huge state-of-the-art facility in Syracuse.  And it is sounds derisive of Syracuse for me to say this, but the point is all of these Upstate metro areas have at least the vestiges of strong traits and characteristics that can be appealing.  For instance, they are very affordable.  Many of these cities are very appealing places to live although they have lost many of their jobs.  The surrounding rural and suburban areas are very nice.  Again, they are inexpensive except for their relatively high property taxes.  And they, in a properly groomed climate and an economic climate that was more favorable to growth, they would have a chance of doing better with a whole different approach, I think.  But that’s not the approach the state has taken.

Seth Barron: Well, so, for instance with Solar City, I mean is there a chance, will it employ thousands of New Yorkers?

E. J. McMahon: It’s not going to employ that many.  I think the employment target has been taken down.  I hesitate to say what the target is now.  It is over a thousand ultimately, directly or indirectly.  It is not going to be a very employment-intensive plan, actually.  So, the idea is the theory behind it is, that once you have something that gigantic, a high-tech manufacturing plant that is as gigantic as Solar City – and it is gigantic – in a site known as RiverBend, which was formerly a steel plant, that this will be the critical mass out of which other things grow.  We will see.  That’s the theory.  Now, again, there has actually been research into these theories, the theory that you can kind of transplant an agglomeration rather than having to have it grow naturally, the founding theory was Research Triangle Park in North Carolina, but Research Triangle Park took decades to grow before with luck, like SAS came out of it.  I think was one of these firms.  The theory is that you can sort of transplant these shoots.  I’m dubious.  So far it has not produced much results.  The good things that have happened in Buffalo, and the economic actual measures are not tremendously impressive, but to the extent there is some growth in Buffalo, it is not related to the Buffalo Billion.  There is a big, most of these Upstate cities, like many interior cities that are struggling in other ways, their strongest sectors are eds and meds.  That is, often higher ed-related med.  That is, a university medical center or a research center.  Buffalo is.  Roswell Park, which is a state cancer research institute is in Buffalo.  There is a huge new health sciences center that has been built in Buffalo that is a state-related facility.  That is not part of the governor’s Buffalo Billion.  The problem with eds and meds, especially in the cities themselves, is that they are principally government or non-profit.  So, they don’t pay taxes.  They are enormous employers, often with enormous footprints in communities for which they pay little or nothing in taxes.  So, there’s that.  And the question is can you build a sustainable future based on eds and meds alone?  It certainly helps.  I mean, Rochester, for instance, quite apart from anything the governor has done, remember Rochester was the headquarters of KodakKodak in the space of the last twenty-plus years has disappeared, has all but disappeared.  The brand survives, they were making crypto currency was the last thing they were known to be doing for sure.  They are a brand that owns patents now.  They used to be a massive employer.  It was a huge worldwide corporation based in Rochester.  It’s now gone.  If I had told you in the late 1990s that Kodak would essentially disappear and that the presence in Rochester companies like Bausch & Lomb would shrink and that regionally prominent manufacturers of other sorts would shrink or be bought up or leave, you would not expect Rochester to have held its own the way it has.  So, in other words Rochester is not a boomtown, but Rochester is not actually a dustbowl either.  Rochester again has two very good universities.  The University of Rochester and RIT have actually stepped into the void.  And that’s a strong higher-ed sector with a technical bent that on its own, that nobody from the state came in and planned, with some government involvement has actually done fairly well.  The biggest success story in agriculture in New York, or one of the biggest, has tended to be in the food-related, I mean, is the manufacturing side of agriculture and food processing.  And it had to do with Greek yogurt.  Well, if you had asked somebody from the State of New York what are we going to do to help the dairy industry and farmers in Upstate New York?  What is going to be the next big thing in food that you know, that somehow we can get a piece of?  Nobody would have said Greek yogurt, nobody.  Well there are several yogurt plants in Upstate New York.  I mean Greek yogurt became a big thing.  So, you can’t always see the next thing coming, you just need to be positioned to do it.  Was there an economic development role in that?  Yes, to an extent there was an empty former Kraft Foods plant, I think it was Kraft, in Norwich, New York, that was in good shape, not terribly old, that the local economic development agency basically had the keys to.  And when the guy who founded Chobani Yogurt was looking for a place to manufacture it – I’m over-simplifying it – but when he came by basically and said, you know, what do we have here, they said, let’s show you the old plant.  So, that’s economic development at its most basic.  So, here point you to the opportunity.

Seth Barron: Opening the door.

E. J. McMahon: And they opened the door and the rest is history.  That’s the kind of thing that’s luck, but luck is the residue of design and is the design to go out and pick winners and make the state government a venture capitalist or is it to basically try to essentially, to use the overused phrase, leverage the assets the region already has, and to create a climate, a climate in which businesses and the economy can naturally grow as opposed to this sort of hothouse into which you funnel lots of money.

Seth Barron: Sure.  And then you have to keep up.

E. J. McMahon: Then you have to keep it going, yeah.

Seth Barron: So, let me ask you.  I mean New York State, I’m not sure about where it ranks in the country in terms of corruption, but, there is a lot of corruption and I don’t know if it’s set from the top or if it bubbles up.  But, you know, what is going on, and the Percoco trial certainly reflects this, now we have heard a lot about ethics reform and it seems like that’s really the way to go.  Like we need to have term limits.  We need to have public financing of campaigns.  We need to make the legislature a full-time job.  Where do you stand on this?

E. J. McMahon: Well, I mean, this is the, there ought to be a law approach, that there ought to be a law against.  There are laws against all the things that go wrong.  New York – if what you knew about corruption in New York was limited to what you read in the New York media, you would think this is just notoriously the most corrupt state in the country.  And that’s true for the same reason that Derek Jeter was a very good shortstop.  But he wasn’t just a very good shortstop.  He played for the Yankees.  He was the greatest shortstop of his generation.  Haven’t you heard?  Because he was, all right, if you get the picture.  I mean it’s in New York, so it’s got to be better.  Look, two governors of Illinois in a row went to federal prison.  Over a fifty-year period, four Illinois governors went to prison.  The governor of Connecticut, one of the recent governors of Connecticut went to jail.  Three Massachusetts House Speakers in a row were convicted of felonies.  There has been a big corruption scandal in the legislature in Pennsylvania.  I mean, this is not unique to New York.  There was a large number, at one point the body count was going on, and a fairly large number of state lawmakers had been indicted on different charges.  And did that testify to a certain sort of venality and just sort of general, something in the water in Albany?  Yeah.  It’s not something uniquely in the water in Albany, and a lot of the problem in New York State is not because we don’t have good enough ethics laws, it is because when you have a big, sprawling, overweening government that gets its hands into everything, and arms its selves with large pots of discretionary cash, you create an opportunity for this to flourish.  Remember the famous George Washington Plunkitt Tammany Hall guy quote was “I seen my opportunities and I took ‘em.”  When you run government, when government operates the way New York government does, it is a huge pot of opportunity.  That’s the problem.  And the thing is just making it more transparent that you can sort of spot when George Washington Plunkitt obeying all the laws walks off with another piece doesn’t make it any better.  For instance, Sheldon Silver, the assembly speaker who is about to be retried on charges that were overturned in light of a recent Supreme Court decision, but that have to do with supposedly using his office to steer business to basically make money off of asbestos cases…

Seth Barron: Yeah.

E. J. McMahon: …ultimately that had to do with his control of a big discretionary grant program.  Well, they have created a whole new enormous discretionary grant program just in the last few years.  It’s this billion-and-a-half-dollar pot of money called the State Municipal Facilities Program.  Now, they say that oh, we are being much more careful with this.  The question is they don’t need it.  There is no need for this thing.  It is simply another big pot of money for them to hand out and basically it serves as a form of capital project pork.  And what needs to be done in the long-term is we don’t need a full-time legislature.  California has had corruption cases with a full-time legislature.  If anything, we need a more part-time legislature.  They actually hang around Albany for six months a year, and for four of those months are up to almost no good.  They have no public hearings on big issues that require careful study analysis and a weighing of pros and cons, they almost never ever have a public hearing.  But, for instance, they jump to and had a big publicity show in Westchester this past week because Con Ed didn’t do a good enough job of getting the power turned on in Westchester.  And by gosh, they had to investigate that and have a hearing, and everybody just sit round and furrow their brows for a while.  But the legislature’s power does not come from how much its members are paid or how long it is there.  It has real power that it could exercise effectively if it actually got its act together institutionally and focused.  And that does not require more time on task, it requires better use of their time.  So that’s part of the problem.  You don’t need a full-time legislator.  Yes, you need better disclosure of what people are doing.  But ultimately if you think that there’s laws, that there is some set of laws that are going to make all these people honest, you’re not living on the same planet as the rest of us.  That’s just not going to happen.

Seth Barron: So, it’s idle hands for the devil’s workshop? 

E. J. McMahon: Well, it is.  Corruption you are always going to have with you, unfortunately, to some degree or another.  It would be nice, though, to reduce the opportunities that are created by this vast government we have that gets its hooks into everything.  One other example, one of the points of leverage Sheldon Silver had as speaker on a key industry, and this was brought up in his trial, ultimately was created because we have rent control laws in New York City.  In fact, we have a uniquely, we have unique rent control regulation laws on a scale unseen elsewhere in the you know, the hemisphere.  And that was another point of leverage.  That’s why legislators like that program continuing to exist, because it gives you a way to, gives you more leverage over a very well-healed industry that is desperate not to have the regulations made worse.

Seth Barron: Ah-ha.

E. J. McMahon: Yeah.

Seth Barron: Fascinating discussion, E. J.  Thanks for coming in.  Don’t forget to check out E. J.’s excellent work at empirecenter.org and follow him on Twitter, @EjmEj.  We would also love to hear your comments about today’s episode on Twitter, @CityJournal.  Lastly, if you like our show and want to hear more of it, please leave ratings and reviews on iTunes.  This is your host, Seth Barron.  E. J., thanks so much for joining us.

E. J. McMahon: Thanks, Seth.

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