Improper Payments and American Financial Mismanagement

Sound government fiscal management requires, among other things, ensuring that government payments are made accurately—to the right payee, in the correct amount, and with sufficient documentation. Failure to implement effective systems to prevent improper payments leaves the government checkbook at risk of fraud, corruption, and other forms of abuse. Alas, the magnitude of improper payments in the United States is astounding: in 2016, the US reported $144 billion in improper payments—nearly the double the budget for the Department of Education. Improper payments for Medicaid alone are more than ten times the total size of the Community Development Block Grants that the Trump Administration intends to cut – allegedly to save money, even though eliminating this program would have disastrous consequences for programs such as Meals on Wheels.

While improper payments in other contexts are part of corruption schemes, such as the “ghost soldiers” in Afghanistan that Sarah his discussed in this post, improper payments under domestic U.S. programs like Medicaid are more likely to be the result of fraud or simple mismanagement than public corruption. That said, we have no idea how much corruption contributes to the massive improper payments problem. In either case, the most effective policy responses are largely similar, regardless of the underlying cause of the problem.  However, the U.S. response to the improper payments problem has so far been inadequate.

President Obama signed two related laws, the Improper Payments Elimination and Recovery Acts of 2010 and 2012, that were designed to curb improper payments. These acts, which were themselves follow-ups to a 2002 law of the same name, mandated that individual government agencies report on their improper payments and develop plans for reducing these improper payments in the future. The reporting requirement has gotten federal agencies to do a better job tracking improper payments, but it has not solved the underlying problem. There have been minimal declines in improper payment rates over the past decade, with the 2016 government-wide improper payment rate exceeding the rate from 9 of the last 12 years. In short, existing federal legislation promotes transparency, but without genuine accountability; though agencies must develop plans to address the problem, there are no serious adverse consequences if those plans prove ineffective.

Rather than mandate each agency to do a better job with its own improper payments, the government should instead focus on techniques proven to work:

  • First, oversight needs to be centralized. The Government Accountability Office has a $555 million budget and 3,000 employees, but a $63 billion return on its efforts. For scale, the entire GAO budget is about one-fourth of what the improper payments under the Federal Pell Grant Program in one year. Increased spending on the GAO could in fact be revenue neutral or even improve government revenues, if their current bang for buck could be maintained with greater spending.
  • Second, there need to be real consequences for agencies—and agency officials—who fail to perform acceptable accounting. In extreme cases, employees of agencies that consistently fail to perform adequately should lose their jobs. This would provide strong incentives for better performance, though at the cost of less stable tenure of governmental middle management.

Despite constant complaints about wasteful government spending, particularly in the current political climate, efforts to make the government operate more efficiently have been neglected and implemented poorly. Rather than reform government spending through massive fiscal overhaul, implementing effective accountability measures to reduce improper payments could bolster the financial health of the government and provide an important mechanism by which to limit real fraud and abuse of power.

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