Exactly how much of your money is the government blowing?

"Only in government could such calamitous neglect be considered business as usual."

This statement comes from an amazing Bloomberg News editorial slamming $200 billion or more in suspected COVID-19 assistance fraud.  It's fraud detected in unemployment benefits, Payment Protection Act loans, and charitable assistance.  It's fraud that Congress knew was going to happen...and, as Bloomberg's editors noted, didn't really do a whole lot about, because shoveling money out the door was the first priority, not making sure that the money was actually used as intended.

Some might excuse this as the result of responding to a worldwide pandemic that shut down the world's economy.  But Medicare and Medicaid are nearly 60 years old and may lose at least $100 billion annually to fraud, if one 2012 estimate holds true today.  Taxpayers were and are defrauded in Iraq and Afghanistan, during the Great Recession's bailouts, and when the IRS sends earned income tax credits to illegal aliens.  

Taxpayers should be outraged, because the costs of fraud don't end with stolen money.  That's just the beginning of the waterfall of financial waste that comes with criminals — from doctors to defense contractors to mobsters — stealing your hard-earned money.

There are at least seven costs to government fraud:

  • The initial money that is stolen.  The larger the state grows, the more difficult and costly it becomes to monitor the allocation of taxpayer money, especially when it's pushed out far faster than anyone could possibly track.
  • Re-issuing of money to fund what was halted by criminal activity.  When government projects are left incomplete, more of your money has to be spent to actually get the job done.  This is in addition to projects with budget overruns due to incompetence, bureaucratic regulation, and other costly problems.
  • Prosecution of fraudsters.  In 2009, CBS reported that the mob had made a transition from "drug trafficking and robbery" to Medicare fraud because the money is easier and the prison sentences are shorter.  Going after those folks takes a lot of work, and often years, before money is recouped...but prosecution sometimes costs more than the fraud itself cost, according to a 2014 Congressional Budget Office report on federal health care fraud.  Most of us want criminals prosecuted and jailed, but why couldn't we have a system that provides, monitors, and protects our money in the first place?
  • Imprisoning said fraudsters.  It's probably worth celebrating a fraudster being tossed in prison, but the fact is that taxpayers are still funding his room and board.
  • Increased acceptance of fraud and other government waste by lawmakers and taxpayers.  Fraud warnings abounded before, during, and after Congress approved trillions for the CARES Act, and a host of inspectors general were brought on board to prosecute wrongdoing.  What this means is that Congress, prosecutors, and others aren't willing to do the up-front work to stop fraud — they'll just play catch-up down the road and expect you to be okay with that.

    We see this acceptance all the time in the health care and defense sectors.  The same politicians who brag about Medicare and Medicaid conveniently forget that each of those programs loses tens of billions of dollars to fraud and simple human error.  One estimate in 2012 found that 10% of your money in those programs is lost to fraud — $98 billion last year, and $130 billion in 2020 if the percentages stayed the same — and the Government Accountability Office estimates that the programs lose an addition $100 billion to simple human error.

    The Pentagon has likewise often shut its eyes to the harms of fraud.  Airbus, which won relatively modest contracts before it was hit with a $4-billion international bribery fine in 2020, is actually in the running to receive a multi-billion-dollar Pentagon contract despite earning $1 billion from a seven-year, multi-national bribery scandal that hurt U.S. interests.  It would be best for Congress and the Pentagon to be responsible stewards of your money by not sending billions of tax dollars to such a corrupt company.
  • Lower economic growth.  A 2011 study analyzed by the think-tank Just Facts showed that greater transparency and accountability create more economic growth...which means that every time the federal government shovels money out the door without considering the quality of the shovel or where the money is going, your wallet takes two hits: one from the money lost and one from the money you'll never see.

Money wasted is money that will never go toward a productive use in society, but it is hard to envision something that will never exist.  The broken window fallacy reveals that destruction and waste may induce further spending, but this spending should not be seen as positive economic growth.  With every instance of fraud, every failed program, and every fraudulent company handed taxpayer money, the economy is deprived of a productive activity or product that will never exist.

How much does fraud cost taxpayers?  A 2018 McKinsey fraud prevention analysis cited several third-party sources to estimate that defrauding federal taxpayers costs about $150 billion per year.  That's $454 per American, not including the other costs laid out above or the massive expansion of federal spending related to pandemic relief.  And that doesn't include the costs to investors who naïvely trusted fraudulent companies, like the investors who sued Airbus for over $300 million over its bribery scandal.

When markets fail, the government's answer is government.  But when governments fail, Congress's answer is also more government — never a reconsideration of safety nets, our military engagements, or even the technological and process changes Bloomberg's editors recommended.

Preventing all fraud is impossible, but it can be limited when bureaucrats recognize their responsibility to the wealth-creators who ultimately pay the real costs of fraud.  Government owes taxpayers the utmost care when it comes to allocating their wealth in aid next door, across the country, or around the globe.

Image via Max Pixel.

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