Laying Waste to Abusive Government Fraud

The Department of Justice recently charged 455 defendants with $6.5 billion in healthcare fraud, one of a spate of recent revelations of fraud, waste, and abuse (FWA) tied to government programs. The insight of Nobel Laureate economist Gary Becker, the experience of America’s Framers, and the wisdom of an ancient guru from India reveal that the route forward entails a combination of tighter auditing and greater punishment.

People, even the most virtuous ones, drawn to public service, respond to incentives. Good governance recognizes that universal truth and deliberately constructs incentive systems designed to catch and punish wrongdoers. The mere establishment of well-designed incentive systems stops most FWA in its tracks by creating an expectation that crime will not pay.

Although Kautilya (Chanakya) composed his opus of political economy, the Arthaśāstra, centuries before the birth of Christ, the governance problems he faced (as adviser to Chandragupta Maurya) were fully modern, as was his approach to them. For example, his concept of danda, or the rod of punishment, imposes penalties on wrongdoers sufficient to offset the probability that a fraudulent act will go undetected, so that the expected payoff of fraudulent behavior remains negative.

Like Kautilya, America’s Framers held that all people, especially those who hold government offices, should be assumed capable of bad behavior in the right circumstances. Following the precepts of the Scottish Enlightenment, they recognized that government officials need incentives to monitor one another and that heavy punishments sometimes had to be imposed on corrupt or incompetent officials.

Third parties, especially the free press and informants, were also incentivized to monitor government officials, the former with reputation and subscription increases and the latter with cash when they won qui tam cases. When all else failed, jury nullification meant that common citizens could hang wrongdoers in effigy, tar and feather them, or pull their houses down without fear that their peers would convict them. While modern sensibilities recoil at the thought of extralegal violence, such incidents reminded officials of their ultimate accountability to the people whose resources they stole or destroyed. The biggest deterrent of all long remained the threat of eternal damnation implicit in solemn oaths sworn on Bibles.

Unfortunately, older informal sanctions—reputational, communal, and religious—have weakened. Doxxing and swatting are poor substitutes because they rarely target actual financial misconduct by officials. The result is that government actors face little personal downside for FWA. Government officials today are rarely held personally responsible for their (in)actions in office. They can transfer millions, even billions, to false claimants and suppliers with little expectation of being punished, even if exposed.

And, until recently, the probability of a government official’s waste or abuse being discovered had become astonishingly small. The Department of War and other executive departments fail audits without accountability; few journalists today have the skills or resources to thoroughly investigate the $7 trillion federal budget. Moreover, because the government measures success by expenditures, not the results produced by its expenditures, egregious instances of FWA have become alleged instances of “good government.”

Just as Becker predicted, decreased punishment and risk of exposure increased expected payoffs and hence the prevalence of such behaviors. The Feeding Our Future fraud, which cost taxpayers approximately a quarter of a billion dollars, occurred because the perpetrators reasoned that they were not likely to get caught and, if they did, that they would not be punished commensurate with their gains. Ditto the perpetrators, private individuals and government officials, in the Minnesota daycare and other programmatic frauds.

To reduce FWA in the future, the expected costs of engaging in malfeasance must rise due to some combination of greater scrutiny and greater punishment for those involved. In some situations, stricter auditing will be the least expensive path. In others, where auditing is especially costly, treating offenders as harshly as possible under the Constitution will prove more efficient.

The False Claims Act, especially strengthening its qui tam provisions, would be a start. The Inspectors General need more independence and clawback authority. Government officials also need to be made personally liable for negligent disbursements. Most importantly, though, Washington should shift budgeting from dollars spent to real-world outcomes. Taxpayers want to see actual achievements, not the unaccountable, extractive officialdom that helped to bring about the independence movement a quarter millennium ago.